<PAGE>   1
                                                                  EXHIBIT 10.12



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


                         MASTER REIMBURSEMENT AGREEMENT


                            DATED AS OF JULY 1, 1996


                                  BY AND AMONG



                     FEDERAL NATIONAL MORTGAGE ASSOCIATION

                                      AND

                            AVALON COLLATERAL, INC.
                            AVALON CHASE RIDGE, INC.
                                      and
                            AVALON CHASE LEA, INC.,
                                  AS BORROWERS



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                         MASTER REIMBURSEMENT AGREEMENT

                 THIS MASTER REIMBURSEMENT AGREEMENT is made and entered into
as of this 1st day of July, 1996, by and among AVALON COLLATERAL, INC., a
corporation duly organized and existing under the laws of Maryland ("COLLATERAL
INC."), AVALON CHASE RIDGE, INC., a corporation duly organized and existing
under the laws of Maryland ("CHASE RIDGE INC."), AVALON CHASE LEA, INC., a
corporation duly organized and existing under the laws of Maryland ("CHASE LEA
INC."; each of Collateral Inc., Chase Ridge Inc. and Chase Lea Inc. sometimes
being referred to herein as a "BORROWER" and collectively as the "BORROWERS")
and the FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FANNIE MAE"), a corporation
duly organized and existing under the Federal National Mortgage Association
Charter Act, 12 U.S.C. Section 1716 et. seq..  The meanings of initially
capitalized terms used herein and not defined are set forth in section 1.2.

                                    RECITALS

                 WHEREAS, Collateral Inc. owns each of the five (5) multifamily
housing projects described in Section A and Section B of Exhibit A (the
"INITIAL BOND PROPERTIES"), which Initial Bond Properties are currently
financed by five (5) existing issues of tax-exempt housing bonds (the "EXISTING
BOND ISSUES") in accordance with five (5) trust indentures (the "EXISTING
INDENTURES");

                 WHEREAS, each of the Existing Bond Issues is supported by a
first priority mortgage, deed of trust or deed to secure debt (the "EXISTING
SECURITY INSTRUMENTS") and mortgage note secured thereby (the "EXISTING
MORTGAGE NOTES");

                 WHEREAS, each Issuer with respect to the three (3) Initial
Bond Properties described in "Section A: Floating Rate Bond Properties" of
Exhibit A (the "FLOATING RATE BOND PROPERTIES") has received a request from
Collateral Inc. to issue new bonds under the Related Act in order to (a)
provide purchase money financing with respect to the Floating Rate Bond
Property identified as Avalon Pointe, Stafford County, Virginia and (b)
refinance the Floating Rate Bond Properties identified as Avalon at Hampton I,
City of Hampton Virginia and Avalon Meadows, Howard County, Maryland, in each
case by the current refunding of the Existing Bond Issue with respect to each
such Floating Rate Bond Property through the simultaneous issuance of new
variable-rate, tax-exempt refunding housing bonds (the "FLOATING RATE BOND
TRANSACTIONS");

                 WHEREAS, each Issuer with respect to the two (2) Initial Bond
Properties described in "Section B: Fixed Rate Bond Properties" of Exhibit A
(the "FIXED RATE BOND PROPERTIES") has received a request from Collateral Inc.
to issue new bonds under the Related Act in order to refinance each such Fixed
Rate Bond Property by the current refunding of the Existing Bond Issue with
respect to each such Fixed Rate Bond Property through the simultaneous issuance
of new fixed-rate, tax-exempt refunding housing bonds (the "FIXED RATE






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BOND TRANSACTIONS"; the Floating Rate Bond Transactions and the Fixed Rate Bond
Transactions are referred to herein, collectively, as the "BOND TRANSACTIONS");

                 WHEREAS, each Issuer has determined that the issuance of the
Related Bonds with respect to the related Bond Transaction and the application
of the proceeds thereof to fund the Mortgage Loan relating thereto will promote
and serve the intended purposes of, and in all respects will conform to the
provisions and requirements of, the Related Act;

                 WHEREAS, in order to provide funding for the Mortgage Loan
with respect to each such Bond Transaction, the respective Issuer is issuing
and selling the Related Bonds and depositing the proceeds of the Related Bonds
with the Related Trustee, to be used to fund the Mortgage Loan with respect to
each such Initial Bond Property;

                 WHEREAS, the Mortgage Loan with respect to each Bond
Transaction will be (a) made in accordance with the requirements of Fannie Mae
and the Issuer, (b) evidenced by the Related Mortgage Note, (c) secured by the
Related Bond Mortgage, and (d) otherwise secured by the other Related Bond
Documents;

                 WHEREAS, the Related Mortgage Note, the Related Bond Mortgage
and the other Related Bond Documents with respect to each Initial Bond Property
will be executed by Collateral Inc. in favor of the Issuer with respect to such
Initial Bond Property;

                 WHEREAS, immediately following the origination of the Mortgage
Loan with respect to each Floating Rate Bond Transaction, the Issuer with
respect to each such Floating Rate Bond Transaction will, pursuant to an
Assignment, assign the Mortgage Loan, the Related Mortgage Note and the Related
Bond Mortgage, together with certain other collateral, to the Related Trustee
and Fannie Mae as their interests may appear;

                 WHEREAS, immediately following the origination of the Mortgage
Loan with respect to each Fixed Rate Bond Transaction, the Issuer with respect
to each such Fixed Rate Bond Transaction will, pursuant to an Assignment,
assign the Mortgage Loan, the Related Mortgage Note and the Related Bond
Mortgage, together with certain other collateral, to Fannie Mae;

                 WHEREAS, Collateral Inc. has requested that Fannie Mae provide
credit enhancement and liquidity support for each issue of Related Bonds with
respect to the Bond Transactions by issuing (i) a Related Fannie Mae Collateral
Agreement with respect to each Floating Rate Bond Transaction for the benefit
of the Related Trustee and (ii) a Related Fannie Mae Pass-Through Certificate
with respect to each Fixed Rate Bond Transaction for the benefit of the Related
Trustee;

                 WHEREAS, (i) Chase Ridge Inc. owns the multifamily housing
project described as Avalon Ridge, Montgomery County, Maryland, in "Section C:
Custodial Receipts Properties"






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of Exhibit A (the "AVALON RIDGE PROPERTY") and (ii) Chase Lea Inc. owns the
multifamily housing project described as Avalon Lea, Baltimore County,
Maryland, in "Section C: Custodial Receipts Properties" of Exhibit A (the
"AVALON LEA PROPERTY"; each of the Avalon Ridge Property and the Avalon Lea
Property sometimes being referred to herein as a "CUSTODIAL RECEIPTS PROPERTY"
and collectively as the "CUSTODIAL RECEIPTS PROPERTIES").  Each Custodial
Receipts Property is currently financed by an existing issue of tax-exempt
housing bonds (the "CUSTODIAL RECEIPTS BOND ISSUES") issued in accordance with
those certain Trust Indentures dated as of November 1, 1985, each by and
between Community Development Administration Department of Economic and
Community Development State of Maryland ("CDA") and Marine Midland Bank
(successor to Equitable Bank, National Association), as trustee (together with
its successors and assigns, the "CUSTODIAL RECEIPTS BOND TRUSTEE") (such trust
indentures, as amended, restated, supplemented or otherwise modified to the
date hereof and from time to time hereafter the "CUSTODIAL RECEIPTS BOND
INDENTURES");

                 WHEREAS, each of the Custodial Receipts Bond Issues is
supported by first priority mortgages, deeds of trust or deeds to secure debt,
dated as of November 11, 1985 (the "CUSTODIAL RECEIPTS FIRST SECURITY
INSTRUMENTS") by the related Borrower (or its predecessor-in-interest)
originally for the benefit of CDA and The Mutual Benefit Life Insurance Company
encumbering the related Custodial Receipts Property and securing the
obligations of the obligor under and with respect to the related mortgage note
(the "CUSTODIAL RECEIPTS MORTGAGE NOTES") and mortgage loan evidenced thereby
(the "CUSTODIAL RECEIPTS MORTGAGE LOANS");

                 WHEREAS, Guarantor (defined below) has (i) purchased the
Custodial Receipts Bond Issue with respect to each Custodial Receipts Property,
(ii) deposited such Custodial Receipts Bond Issues with Marine Midland Bank
(the "ORIGINAL CUSTODIAN") pursuant to that certain Amended and Restated
Custody Agreement dated as of June 1, 1995 between the Original Custodian, and
Guarantor as depositor (as amended, restated, supplemented or otherwise
modified to the date hereof and from time to time hereafter the "CUSTODIAL
RECEIPTS AGREEMENT"), and (iii) caused the issuance of the Related Custodial
Receipts in accordance with the Custodial Receipts Agreement (the "CUSTODIAL
RECEIPTS TRANSACTIONS");

                 WHEREAS, Guarantor, Collateral Inc., Fannie Mae and Crestar
Bank, not in its individual capacity but solely in its capacity as collateral
agent for Fannie Mae (in such capacity, together with its successors and
assigns the "C/R PLEDGE CUSTODIAN") have entered in to that certain Master
Assignment, Bond Pledge and Security Agreement, of even date herewith (as the
same may be amended, supplemented, otherwise modified or amended and restated
from time to time in accordance with its terms, the "CUSTODIAL RECEIPTS BOND
PLEDGE AGREEMENT") pursuant to which (a) Guarantor has assigned and conveyed
all of residual right, title and interest, if any, in and to, inter alia, the
Custodial Receipts Bond Issues to Collateral Inc., (b) Collateral Inc., and to
the extent that Guarantor is deemed to retain any residual interests, Guarantor
has pledged and granted to the C/R Pledge Custodian for the benefit of Fannie
Mae, all of its residual right, title and interest, if any, in and to, inter
alia, the Custodial Receipts Bond Issue as additional






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security for the Obligations, and (c) the C/R Pledge Trustee has acknowledged
and agreed that it shall hold such grant and pledge for the benefit of Fannie
Mae;

                 WHEREAS, (i) the Related Custodial Receipts with respect to
the Avalon Ridge Property are credit enhanced by a direct-draw letter of credit
(the "CHASE RIDGE CUSTODIAL RECEIPTS L/C") issued by Morgan Guaranty Trust
Company of New York ("MORGAN") in favor of the Custodial Receipts Custodian and
(ii) the Related Custodial Receipts with respect to the Avalon Lea Property are
credit enhanced by a direct-draw letter of credit (the "CHASE LEA CUSTODIAL
RECEIPTS L/C"; each of the Chase Ridge Custodial Receipts L/C and the Chase Lea
Custodial Receipts L/C sometimes being referred to herein as a "CUSTODIAL
RECEIPTS L/C" and collectively as the "CUSTODIAL RECEIPTS L/C'S") issued by
Morgan in favor of the Custodial Receipts Custodian;

                 WHEREAS, in consideration of Morgan's issuing the Custodial
Receipts L/C's, each of Chase Ridge Inc. and Chase Lea Inc. have entered into a
certain Reimbursement Agreement (the "CUSTODIAL RECEIPTS L/C REIMBURSEMENT
AGREEMENT"), dated as of July 1, 1996, with Morgan pursuant to which Chase
Ridge Inc. and Chase Lea Inc. have agreed to reimburse Morgan for all advances
made by Morgan pursuant to the terms of the Custodial Receipts L/C's;

                 WHEREAS, each of Chase Ridge Inc. and Chase Lea Inc. has
requested that Fannie Mae credit enhance their respective reimbursement
obligations to Morgan with respect to each Custodial Receipts Transaction by
issuing the Related Custodial Receipts Collateral Agreements for the benefit of
Morgan;

                 WHEREAS, each of Chase Ridge Inc. and Chase Lea Inc. has
agreed to secure its reimbursement obligations to Fannie Mae with respect to
any amounts advanced by Fannie Mae under each Related Custodial Receipts
Collateral Agreement and the other Obligations hereunder by, inter alia,
granting Fannie Mae second priority mortgages, deeds of trust or deeds to
secure debt encumbering the related Custodial Receipts Property;

                 WHEREAS, Fannie Mae has agreed to provide: (i) credit
enhancement and liquidity support for each issue of Related Bonds in a Floating
Rate Bond Transaction pursuant to and in accordance with the terms of a Related
Fannie Mae Collateral Agreement; (ii) credit enhancement for each issue of
Related Bonds in a Fixed Rate Bond Transaction pursuant to and in accordance
with the terms of a Related Fannie Mae Pass-Through Certificate; and (iii)
credit enhancement with respect to the respective reimbursement obligations of
Chase Ridge Inc. and Chase Lea Inc. to Morgan for certain amounts advanced by
Morgan under the Custodial Receipts L/C's, pursuant to and in accordance with
the terms of a Related Custodial Receipts Collateral Agreement;

                 WHEREAS, each Borrower is a direct, one hundred percent (100%)
subsidiary of Avalon Properties, Inc., a Maryland corporation ("GUARANTOR") and
will receive a material






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benefit from Fannie Mae's agreement to provide credit enhancement and liquidity
support to the other Borrowers;

                 WHEREAS, each Borrower has agreed, that the Borrowers be
jointly and severally liable for all of the Obligations;

                 WHEREAS, Collateral Inc. owns each of the four (4) multifamily
housing projects, including the real property and improvements located thereon,
described in Exhibit B (the "ADDITIONAL MORTGAGED PROPERTIES");

                 WHEREAS, in consideration of Fannie Mae agreeing to enter into
the Related Fannie Mae Credit Enhancement Instruments and in order to further
evidence and secure the obligations of each of the Borrowers to Fannie Mae,
Collateral Inc. and the other the Borrowers have agreed, among other things:
(i) to grant Fannie Mae second priority deeds of trust on the Bond Properties;
(ii) to grant Fannie Mae second priority deeds of trust on the Custodial
Receipts Properties; (iii) to grant Fannie Mae first priority deeds of trust on
the Additional Mortgaged Properties; (iv) to pay certain fees to Fannie Mae;
and (v) to reimburse Fannie Mae for amounts advanced pursuant to the Related
Fannie Mae Collateral Agreements and the Related Custodial Receipts Collateral
Agreements or otherwise advanced in accordance with this Agreement and the
other Transaction Documents;

                 WHEREAS, in order to further induce Fannie Mae to enter into
the Related Fannie Mae Credit Enhancement Instruments, Guarantor has agreed,
inter alia, to (a) grant a certain Guaranty for the benefit of Fannie Mae, and
(b) pledge, assign and grant Fannie Mae a security interest in all of its
remaining right, title and interest in the Custodial Receipts Bond Issues, if
any, as additional security for the Obligations, pursuant to the Custodial
Receipts Bond Pledge Agreement; and

                 WHEREAS, it is a condition to the execution and delivery of
the Related Fannie Mae Credit Enhancement Instruments by Fannie Mae that the
Borrowers enter into this Agreement.

                 NOW THEREFORE, in consideration of the mutual covenants and
undertakings set forth herein, the payment of certain fees to Fannie Mae, and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged by the parties hereto, Collateral Inc., Chase Ridge Inc., Chase
Lea Inc. and Fannie Mae agree as follows:






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I.                                DEFINITIONS

1                GENERAL INTERPRETATIVE PRINCIPLES.

                 For purposes of this Agreement, except as otherwise provided
or unless the context otherwise requires:

                 (a)       the terms defined in section 1.2 have the meanings
assigned to them in section 1.2 and include the plural as well as the singular,
and the use of any gender herein shall be deemed to include the other gender;

                 (b)      accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with GAAP;

                 (c)      references herein to "sections," "subsections,"
"paragraphs" and other subdivisions without reference to a document are to
designated sections, subsections, paragraphs and other subdivisions of this
Agreement;

                 (d)      a reference to a subsection without further reference
to a section is a reference to such subsection as contained in the same section
in which the reference appears, and this rule shall also apply to paragraphs
and other subdivisions;

                 (e)      a reference to an Exhibit or a Schedule without a
further reference to the document to which the Exhibit or Schedule is attached
is a reference to an Exhibit or Schedule to this Agreement;

                 (f)      a reference to Fannie Mae forms, guides, memos,
updates or announcements shall mean such Fannie Mae forms, guides, memos,
updates or  announcements as the same may be amended, supplemented, otherwise
modified, superseded or replaced from time to time;

                 (g)      the words "attorneys' fees and expenses," "legal fees
and expenses," "attorneys' fees and costs," "attorneys' fees and court costs,"
and other words of similar import are deemed to include any actual costs and
expenses incurred by Fannie Mae's in-house counsel;

                 (h)      the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular provision; and

                 (i)      the word "including" means "including, but not
limited to."






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2                DEFINED TERMS.

                 For all purposes of this Agreement, the following terms shall
have the respective meanings set forth below:

         "ACTIVITY FEE" shall have the meaning given that term in section
4.4(b).

         "ACTIVITY RATE" means the prime rate of interest as reported from day
to day in The Wall Street Journal as the base rate on corporate loans posted by
at least seventy-five percent (75%) of the nation's thirty (30) largest banks
plus two percent (2%) per annum.  The Activity Rate will be the rate reported
on the applicable publication date as determined above, notwithstanding the
fact that such reported rate shall be the prime rate for the preceding business
day.  If such rate is no longer available, then the Activity Rate shall mean
the base rate or prime rate of interest of any "Money Center" bank designated
by Fannie Mae, in its discretion, plus two percent (2%) per annum.

         "ADDITIONAL MORTGAGED PROPERTIES" shall have the meaning given to that
term in the recitals to this Agreement.  "ADDITIONAL MORTGAGED PROPERTIES"
shall also include each New Additional Property from and after the date of its
addition to the Fannie Mae Credit Facility, and shall exclude each Released
Property (which prior to such substitution or release, as applicable, was an
Additional Mortgaged Property), from and after the date of such substitution or
release.  "ADDITIONAL MORTGAGED PROPERTY" means any one of the foregoing,
individually.

         "ADVANCE" means the payment or deemed payment by Fannie Mae of any
monies, from the cash flow or the redemption of mortgages pledged by Fannie Mae
or otherwise, to either (i) a Related Trustee pursuant to the terms of a
Related Fannie Mae Collateral Agreement or (ii) to Morgan pursuant to the terms
of a Related Custodial Receipts Collateral Agreement.

         "AFFILIATE", as applied to any Person, means any other Person directly
or indirectly controlling, controlled by, or under common control with, that
Person.  For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling", "controlled by" and "under
common control with"), as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of that Person, whether through the ownership of voting
securities, partnership interests or by contract or otherwise.

         "AGGREGATE DEBT SERVICE COVERAGE RATIO" means, at any time, the ratio
of (a) the aggregate of the Net Operating Income for the applicable period for
all of the Properties plus the interest income actually accrued with respect to
the Release Price Cash Collateral, if any, held by Fannie Mae during the
applicable period, to (b) the aggregate Imputed Debt Service with respect to
all Bond Transactions and all Custodial Receipts Transactions, for the
applicable period.






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         "AGGREGATE FACILITY AMOUNT" means at any time the total amount of all
Facility Amounts.

         "AGGREGATE LOAN TO VALUE RATIO" means, at any time, the ratio
(expressed as a percentage) of (a) the Aggregate Facility Amount to (b) the
aggregate of the Values for all of the Properties plus the aggregate amount of
the Release Price Cash Collateral, if any, held by Fannie Mae at such time.

         "AGREEMENT" means this Master Reimbursement Agreement, as amended,
supplemented, or otherwise modified or amended and restated from time to time
in accordance with its terms.

         "ALLOCABLE FACILITY AMOUNT" means the portion of the Aggregate
Facility Amount allocated to a particular Property by Fannie Mae in accordance
with section 5.1.

         "ALLOCATED RELEASE PRICE CASH COLLATERAL" means, with respect to each
Floating Rate Bond Property, the portion of the aggregate amount of all Release
Price Cash Collateral allocable to such Floating Rate Bond Property on a pro
rata basis, as determined by Fannie Mae in its discretion.

         "ALTERATIONS" shall mean the meaning given to such term in section
2.2(o).

         "ALTERNATE CREDIT FACILITY", with respect to an issue of Related
Bonds, shall have the meaning given that term in the Related Indenture.

         "ALTERNATIVE DSC SHORTFALL COLLATERAL" shall have the meaning given to
such term in section 3.1(c).

         "APPLICABLE LAW" means (a) all applicable provisions of all
constitutions, statutes, rules, regulations and orders of all governmental
bodies, all Governmental Approvals and all orders, judgments and decrees of all
courts and arbitrators, (b) all zoning, building, environmental and other laws,
ordinances, rules, regulations and restrictions of any Governmental Authority
affecting the ownership, management, use, operation, maintenance or repair of
any Property, including the Americans with Disabilities Act (if applicable),
the Fair Housing Amendment Act of 1988 and Hazardous Materials Laws, (c) any
building permits or any conditions, easements, rights-of-way, covenants,
restrictions of record or any recorded or unrecorded agreement affecting or
concerning any Property including planned development permits, condominium
declarations, and reciprocal easement and regulatory agreements with any
Governmental Authority, (d) all laws, ordinances, rules and regulations,
whether in the form of rent control, rent stabilization or otherwise, that
limit or impose conditions on the amount of rent that may be collected from the
units of any Property, and (e) all terms of any insurance policy that any
Borrower is required to maintain under the Mortgages, all requirements of the
issuers of any such policy, and all orders, rules, regulations and other
requirements of the National Board of Fire Underwriters (or any body exercising
similar functions) applicable to or affecting the






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operation or use of any Property or the consummation of the transactions to be
effected by this Agreement or any of the other Transaction Documents.

         "ASSIGNMENT" means, individually, any Assignment of Deed of Trust and
Other Loan Documents with respect to a Bond Transaction by an Issuer (a) with
respect to each Floating Rate Bond Transaction, to the Related Trustee and
Fannie Mae as their interests may appear, and (b) with respect to each Fixed
Rate Bond Transaction, to Fannie Mae, in each case as such Assignment may be
amended, supplemented or, otherwise modified or amended and restated from time
to time in accordance with its terms.  "ASSIGNMENTS" means every such
Assignment, collectively.

         "ASSIGNMENT OF MANAGEMENT AGREEMENT" means, individually, any
Assignment of Management Agreement with respect to a Property by a Borrower for
the benefit of Fannie Mae and consented to by Guarantor, as such Assignment may
be amended, supplemented or otherwise modified from time to time in accordance
with its terms.  "ASSIGNMENTS OF MANAGEMENT AGREEMENT" means every such
Assignment of Management Agreement, collectively.

         "ASSUMPTION AND DIRECTION AGREEMENT" means that certain Assumption and
Direction Agreement by and among Crestar Bank, not in its individual capacity
but solely in its capacity as trustee with respect to the Custodial Receipts
Bond Issues, Guarantor and Collateral Inc., as such agreement may be amended,
supplemented otherwise modified or amended and restated from time to time.

         "AVALON LEA PROPERTY" shall have the meaning given that term in the
Recitals to this Agreement.

         "AVALON POINTE PROJECT" means the Bond Property identified on Exhibit
A as Avalon Pointe Project, Stafford County, Virginia.

         "AVALON POINTE RESTRICTIVE COVENANTS AGREEMENT" shall mean that
certain Amended and Restated Declaration of Restrictive Covenants dated as of
October 1, 1989, and recorded on October 31, 1989 in the real estate records of
Stafford County, Virginia at Deed Book 705, Page 246, as amended by Amendment
to Declaration of Restrictive Covenants dated as of January 16, 1991 and
recorded on April 30, 1991 in the real estate records of Stafford County,
Virginia at Deed Book 794, Page 581, and as such agreement may be amended,
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms.

         "AVALON RIDGE PROPERTY" shall have the meaning given that term in the
Recitals to this Agreement.

         "BOND DOCUMENTS" means, collectively, the Related Bond Documents for
all Bond Properties financed by the Bond Transactions, and "BOND DOCUMENT"
means any one of the foregoing, individually.






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         "BOND FEES" shall mean: (i) with respect to each issue of Related
Bonds in a Floating Rate Bond Transaction, the ongoing fees and expenses of the
Issuer, the Related Trustee, the Remarketing Agent, any tender agent and any
rebate analyst, each as set forth on Exhibit A attached hereto; (ii) with
respect to each issue of Related Bonds in a Fixed Rate Bond Transaction, any
fees payable by any Borrower in connection with such Related Bond and not
included in the actual fixed rate of interest set forth in the Related Mortgage
Note; and (iii) with respect to each issue of Related Custodial Receipts, any
fees payable by any Borrower in connection with such Related Custodial Receipts
and not included in the actual fixed rate of interest set forth in the
applicable Custodial Receipts Mortgage Note.

         "BONDHOLDERS" (a) with respect to any Related Bonds, shall have the
meaning given that term in the Related Indenture and (b) with respect to any
Related Custodial Receipts, shall have the meaning given to the term "Holder"
in the Custodial Receipts Agreement with respect to such Related Custodial
Receipts.

         "BOND MORTGAGE" means the first priority Security Instrument on each
Bond Property in a Bond Transaction securing the obligations of the related
Borrower under and with respect to the Related Mortgage Note and the related
Mortgage Loan, and "BOND MORTGAGES" means every such Bond Mortgage,
collectively.

         "BOND PROPERTIES" means the Initial Bond Properties and the Custodial
Receipts Bond Properties, collectively.  "BOND PROPERTIES" shall also include
each New Bond Property from and after the date of its addition to the Fannie
Mae Credit Facility, and shall exclude each Released Property (which prior to
its substitution or release, as applicable, was a Bond Property), from and
after the date of such substitution or release.  "BOND PROPERTY" means any one
of the foregoing, individually.

         "BOND PROPERTY LOAN DOCUMENT" means with respect to each Bond
Transaction, any of the documents, agreements or instruments granting,
evidencing or securing the Mortgage Loan with respect to such Bond Transaction,
including the Related Mortgage Note, the Related Mortgages, the title policy,
UCC fixture filings and UCC financing statements (in each case relating to such
Mortgage Loan) and the assignment of such Mortgage Loan by the prior holder
thereof to the Related Trustee, as each such document, agreement or instrument
may be amended, supplemented, otherwise modified or amended and restated from
time to time in accordance with its respective terms, and "BOND PROPERTY LOAN
DOCUMENTS" means every such Bond Property Loan Document with respect to such
Mortgage Loan, collectively.

         "BONDS" means, collectively, the Related Securities for all Bond
Properties.






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         "BOND TRANSACTION CLOSING DATE" with respect to a particular Bond
Transaction, means the date the Related Bonds are issued and paid for.

         "BOND TRANSACTIONS" shall have the meaning given to such term in the
recitals to this Agreement.  "BOND TRANSACTIONS" shall also include each Fixed
Rate Bond Transaction and each Floating Rate Bond Transaction that becomes part
of the Fannie Mae Credit Facility after the date hereof.  "BOND TRANSACTION"
means any one of the foregoing, individually.

         "BORROWER" AND "BORROWERS" shall have the meaning given that term in
the Introduction to this Agreement.

         "BORROWER ORGANIZATIONAL DOCUMENTS" means Collateral Inc.'s
Organizational Documents, Chase Ridge Inc.'s Organizational Documents and Chase
Lea Inc.'s Organizational Documents, collectively.

         "BUSINESS DAY" means any day other than (a) a Saturday or a Sunday,
(b) any day on which banking institutions located in the City of New York, New
York are required or authorized by law to close, (c) any day on which The New
York Stock Exchange is closed, or (d) any day on which Fannie Mae is closed.

         "CAP" means an interest rate cap, and includes an interest rate cap
which has an initial "calculation period" that begins on the last day of a
Reset Period which commences on or after the date such cap was obtained (i.e. a
"future" cap).

         "CASH MANAGEMENT ACCOUNT" means a deposit account or accounts with a
financial institution or institutions acceptable to Fannie Mae into which the
Borrowers shall cause Gross Cash Flow from the Properties to be deposited on a
daily basis upon the occurrence of a Cash Management Triggering Event or a
Lock-Box Triggering Event, as more particularly described in the Cash
Management Agreement.

         "CASH MANAGEMENT AGREEMENT" means a Cash Management, Security Pledge
and Assignment Agreement among the Borrowers, Fannie Mae and, at Fannie Mae's
option, the Servicer, for the benefit of Fannie Mae and substantially in the
form of Exhibit G (subject to modifications approved by Fannie Mae), as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.

         "CASH MANAGEMENT NOTICE" shall have the meaning given to such term in
section 3.1(b).

         "CASH MANAGEMENT SYSTEM COLLATERAL" shall have the meaning given to
the term "Collateral" in the Cash Management Agreement.

         "CASH MANAGEMENT TEST" shall have the meaning given to such term in
section 3.1(b).






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<PAGE>   13
         "CASH MANAGEMENT TEST SHORTFALL" shall have the meaning given to such
term in section 3.1(c).

         "CASH MANAGEMENT TRIGGERING EVENT" shall have the meaning given to
such term in section 3.1(b).

         "CASUALTY", with respect to any Property, means any damage to, or
destruction or loss of, all or any portion of the Property, whether by fire or
other cause.

         "CDA" shall have the meaning given to such term in the Recitals to
this Agreement.

         "CHASE LEA CUSTODIAL RECEIPTS L/C" shall have the meaning given that
term in the Recitals to this Agreement.

         "CHASE LEA INC." means Avalon Chase Lea, Inc., a Maryland corporation.

         "CHASE LEA INC.'S ARTICLES OF INCORPORATION" shall have the meaning
given that term in section 2.1(a).

         "CHASE LEA INC.'S ORGANIZATIONAL DOCUMENTS" shall have the meaning
given that term in section 2.1(a).

         "CHASE LEA ISSUER " means the issuer with respect to the Permanent
Chase Lea Refunding Bonds.

         "CHASE LEA TERMINATION FEE" means a commitment termination fee equal
to, (i) $693,135.00 if such termination fee is required to be paid on or before
July 31, 1997, (ii) $643,299.00 if such termination fee is required to be paid
after July 31, 1997 but on or before July 31, 1998, (iii) $589,904.00 if such
termination fee is required to be paid after July 31, 1998 but on or before
July 31, 1999, (iv) $532,696.00 if such termination fee is required to be paid
after July 31, 1999 but on or before July 31, 2000, (iv) $471,404.00 if such
termination fee is required to be paid after July 31, 2000 but on or before
July 31, 2001 and (v) $405,736.00 if such termination fee is required to be
paid on or after the Final Chase Ridge/Chase Lea Conversion Date.

         "CHASE RIDGE CUSTODIAL RECEIPTS L/C" shall have the meaning given that
term in the Recitals to this Agreement.

         "CHASE RIDGE INC." means Avalon Chase Ridge, Inc., a Maryland
corporation.

         "CHASE RIDGE INC.'S ARTICLES OF INCORPORATION" shall have the meaning
given that term in section 2.1(a).






                                       12
<PAGE>   14
         "CHASE RIDGE INC.'S ORGANIZATIONAL DOCUMENTS" shall have the meaning
given that term in section 2.1(a).

         "CHASE RIDGE ISSUER" means the issuer with respect to the Permanent
Chase Ridge Refunding Bonds.

         "CHASE RIDGE TERMINATION FEE" means a commitment termination fee equal
to, (i) $1,110,626.00 if such termination fee is required to be paid on or
before July 31, 1997, (ii) $1,030,283.00 if such termination fee is required to
be paid after July 31, 1997 but on or before July 31, 1998, (iii) $944,308.00
if such termination fee is required to be paid after July 31, 1998 but on or
before July 31, 1999, (iv) $852,305.00 if such termination fee is required to
be paid after July 31, 1999 but on or before July 31, 2000, (iv) $753,851.00 if
such termination fee is required to be paid after July 31, 2000 but on or
before July 31, 2001 and (v) $648,945.00 if such termination fee is required to
be paid on or after the Final Chase Ridge/Chase Lea Conversion Date.

         "CODE" means the Internal Revenue Code of 1954, as amended (herein the
"1954 CODE") and the Internal Revenue Code of 1986, as amended (herein the
"1986 CODE"), in each case to the extent made applicable to matters relating to
the Related Bonds and the Properties by Section 1313(a) of the Tax Reform Act
of 1986, and with respect to a specific section thereof such reference shall be
deemed to include (a) the applicable regulations promulgated or proposed under
such section or any previous corresponding section, (b) any successor provision
of similar import hereafter enacted, (c) any corresponding provision of any
subsequent Internal Revenue Code and (d) the applicable regulations promulgated
or proposed under the provisions described in (b) and (c).

         "COLLATERAL" means all cash, Government Obligations, assets and
property, real and personal (including the Bond Properties, the Additional
Mortgaged Properties, the Release Price Cash Collateral, the Replacement
Reserve Accounts and all funds contained in such accounts, and cash and any
investments in the Principal Reserve Funds, the Shortfall Cash Collateral, the
Alternative DSC Shortfall Collateral, the Cash Management Account, the Cash
Management System Collateral, the Hedges and the Hedge Documents), pledged by
any of the Borrowers or the Guarantor pursuant to any Bond Document or any
Mortgage Document or any other Transaction Document and the Proceeds thereof.

         "COLLATERAL INC." means Avalon Collateral, Inc., a Maryland
corporation.

         "COLLATERAL INC.'S ARTICLES OF INCORPORATION" shall have the meaning
given that term in section 2.1(a).

         "COLLATERAL INC.'S ORGANIZATIONAL DOCUMENTS" shall have the meaning
given that term in section 2.1(a).






                                       13
<PAGE>   15
         "CONDEMNATION", with respect to any Property, means (a) any action or
proceeding for the taking of the Property, or any part thereof or interest
therein, for public or quasi-public use under the power of eminent domain, by
reason of any public improvement or condemnation proceeding, or in any other
similar manner or (b) the conveyancing of any Property under the threat or
contemplation of any action or proceeding described in clause (a).

         "CONDEMNATION PROCEEDS" means the proceeds of any Condemnation.

         "CONTINGENT OBLIGATION" as to any Person (the "GUARANTEEING PERSON"),
means any obligation of (a) the guaranteeing person or (b) another Person
(including any bank under any letter of credit) to induce the creation of which
the guaranteeing person has issued a reimbursement, counterindemnity or similar
obligation, in either case, guaranteeing or in effect guaranteeing any
indebtedness, leases, dividends or other obligations (the "PRIMARY
OBLIGATIONS") of any other third person (the "PRIMARY OBLIGOR") in any manner,
whether directly or indirectly, including any obligation of the guaranteeing
person, whether or not contingent, (i) to purchase any such primary obligation
or any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such primary
obligation or (2) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, (iii) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (iv)
otherwise to assure or hold harmless the owner of any such primary obligation
against loss in respect thereof; provided, however, that the term Contingent
Obligation shall not include endorsements of instruments for deposit or
collection in the ordinary course of business.  The amount of any Contingent
Obligation of any guaranteeing person shall be deemed to be the lesser of (a)
an amount equal to the stated or determinable amount of the primary obligation
in respect of which such Contingent Obligation is made and (b) the maximum
amount for which such guaranteeing person may be liable pursuant to the terms
of the instrument embodying such Contingent Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Contingent Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrowers in good
faith.

         "CONTROLLED GROUP" means all members of a group of corporations and
all trades or businesses (whether or not incorporated) under common control
which, together with the Borrowers, are treated as a single employer under
Section 414 of the Code.






                                       14
<PAGE>   16
         "COUNTERPARTY" shall have the meaning given that term in section
3.2(d).

         "CREDIT ENHANCEMENT COMPONENT" means the portion of the Facility Fee
payable by a Borrower with respect to the Facility Amount of each issue of
Related Securities after subtracting (i) amounts on deposit from time to time
in the Principal Reserve Fund, if any, with respect to such issue of Related
Securities and (ii) Allocated Release Price Cash Collateral deposited with
Fannie Mae from time to time, if any, with respect to such issue of Related
Securities.  With respect to each issue of Related Securities as of the date
hereof the "CREDIT ENHANCEMENT COMPONENT" shall be the percentage identified as
the Credit Enhancement Component with respect to such Related Securities on
Exhibit C.  For each New Bond Property added to the Fannie Mae Credit Facility
pursuant to section 5.4 or section 5.5, the "CREDIT ENHANCEMENT COMPONENT"
shall be the amount set forth in the New Property Confirmation with respect to
such New Bond Property.

         "C/R PLEDGE CUSTODIAN" shall have the meaning given to such term in
the Recitals to this Agreement.

         "CUSTODIAL ACCOUNT" shall have the meaning given that term in section
3.2(g).

         "CUSTODIAL RECEIPTS AGREEMENT" shall have the meaning given to such
term in the recitals to this Agreement.

         "CUSTODIAL RECEIPTS BOND ISSUES" shall have the meaning given to such
term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS BOND ISSUE" means
any one of the foregoing, individually.

         "CUSTODIAL RECEIPTS BOND INDENTURES" shall have the meaning given to
such term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS BOND
INDENTURE" means any one of the foregoing, individually.

         "CUSTODIAL RECEIPTS BOND PLEDGE AGREEMENT" has the meaning given to
that term in the Recitals to this Agreement.

         "CUSTODIAL RECEIPTS BOND TRUSTEE" shall have the meaning given to such
term in the recitals to this Agreement.

         "CUSTODIAL RECEIPTS CUSTODIAN" means Crestar Bank, not in its
individual capacity but solely in its capacity as the custodian under the
Custodial Receipts Agreement.

         "CUSTODIAL RECEIPTS DOCUMENTS" means, collectively, the Related
Custodial Receipts Documents for each of the Bond Properties financed by the
Custodial Receipts Transactions, and "CUSTODIAL RECEIPTS DOCUMENT" means any
one of the foregoing, individually.






                                       15
<PAGE>   17
         "CUSTODIAL RECEIPTS FIRST SECURITY INSTRUMENTS" shall have the meaning
given to such term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS
FIRST SECURITY INSTRUMENT" means any one of the foregoing, individually.

         "CUSTODIAL RECEIPTS GUARANTY" means each Guaranty issued by Avalon
Properties, Inc. for the benefit of Morgan, with respect to the obligations of
either Chase Ridge, Inc. or Chase Lea, Inc. under the Custodial Receipts
Reimbursement Agreement, and Custodial Receipts Guarantees means every such
Custodial Receipts Guaranty, collectively.

         "CUSTODIAL RECEIPTS L/C REIMBURSEMENT AGREEMENT" shall have the
meaning given to such term in the recitals to this Agreement.

         "CUSTODIAL RECEIPTS L/C'S" shall have the meaning given to such term
in the recitals to this Agreement.  "CUSTODIAL RECEIPTS L/C" means any one of
the foregoing, individually.

         "CUSTODIAL RECEIPTS MORTGAGE LOANS" shall have the meaning given to
such term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS MORTGAGE
LOAN" means any one of the foregoing, individually.

         "CUSTODIAL RECEIPTS MORTGAGE NOTES" shall have the meaning given to
such term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS MORTGAGE
NOTE" means any one of the foregoing, individually.

         "CUSTODIAL RECEIPTS PROPERTIES" shall have the meaning given to such
term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS PROPERTY" means
any one of the foregoing, individually.

         "CUSTODIAL RECEIPTS TRANSACTIONS" shall have the meaning given to such
term in the recitals to this Agreement.  "CUSTODIAL RECEIPTS TRANSACTION" means
any one of the foregoing, individually.

         "DETERMINATION DATE" means the first (1st) day of October of each year
during the term of this Agreement.

         "DUS GUIDE" means the Fannie Mae Multifamily Delegated Underwriting
and Servicing (DUS) Guide, as such DUS Guide may be amended, supplemented or
otherwise modified from time to time, including by Lender Memos, Guide Updates
and Guide Announcements (all references to Parts, Chapters, Sections and other
subdivisions of the DUS Guide shall be deemed references to (a) the Parts,
Chapters, Sections and other subdivisions in effect on the Fannie Mae Facility
Closing Date and (b) any successor provisions to such Parts, Chapters, Sections
and other subdivision).






                                       16
<PAGE>   18
         "ENVIRONMENTAL CLAIM" means any notice of violation, claim, demand,
abatement, order or other order or direction (conditional or otherwise) by any
person or entity for any damage, including personal injury (including sickness,
disease or death), tangible or intangible property damage, contribution,
indemnity, indirect or consequential damages, damage to the environment,
pollution, contamination or other adverse effects on the environment, removal,
cleanup or remedial action or for fines, penalties or restrictions, resulting
from or based upon (a) the existence or occurrence, or the alleged existence or
occurrence, of a Hazardous Substance Activity or (b) the violation, or alleged
violation, of any Hazardous Materials Laws in connection with any Property.

         "ENVIRONMENTAL REPORTS" means any Phase I environmental report meeting
the requirements of the DUS Guide, and any additional environmental report
delivered to Servicer or Fannie Mae with respect to any Property.

         "ERISA" means the Employee Retirement Income Security Act of 1974 as
amended from time to time.

         "EVENT OF DEFAULT" shall have the meaning given that term in section
7.1.

         "EXISTING BOND ISSUES" shall have the meaning given that term in the
recitals to this Agreement.

         "EXISTING INDENTURES" shall have the meaning given such term in the
recitals to this Agreement.

         "EXISTING MORTGAGE NOTES" shall have the meaning given such term in
the recitals to this Agreement.

         "EXISTING SECURITY INSTRUMENTS" shall have the meaning given such term
in the recitals to this Agreement.

         "FACILITY", with respect to an issue of Related Securities, means (i)
the credit enhancement and liquidity support of the Related Bonds in a Floating
Rate Bond Transaction as provided by Fannie Mae subject and pursuant to the
Related Fannie Mae Collateral Agreement, (ii) the credit enhancement of the
Related Bonds in a Fixed Rate Bond Transaction as provided by Fannie Mae
subject and pursuant to the Related Fannie Mae Pass-Through Certificate and
(iii) the credit enhancement of Chase Ridge Inc.'s and Chase Lea Inc.'s
reimbursement obligations to Morgan under the Custodial Receipts L/C
Reimbursement Agreement as provided by Fannie Mae subject and pursuant to the
Related Custodial Receipts Collateral Agreement.

         "FACILITY AMOUNT", with respect to particular Related Securities,
means the aggregate principal amount of such Related Securities then
outstanding.






                                       17
<PAGE>   19
         "FACILITY FEE" shall have the meaning set forth in section 4.4(a).

         "FALKLAND CHASE BOND TRANSACTION" shall have the meaning set forth in
section 5.4(b).

         "FALKLAND CHASE CREDIT ENHANCEMENT" shall have the meaning set forth
in section 5.4(b).

         "FALKLAND CHASE PROJECT" shall have the meaning set forth in section
5.4(b).

         "FALKLAND CHASE REFUNDING DOCUMENTS" shall have the meaning set forth
in section 5.4(b).

         "FANNIE MAE CREDIT FACILITY" means all of the Facilities,
collectively.

         "FANNIE MAE FACILITY CLOSING DATE" means July 31, 1996.

         "FINAL CHASE RIDGE/CHASE LEA CONVERSION DATE" means August 31, 2001.

         "FINANCING LEASE" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee or to be otherwise
disclosed as such in a note to such balance sheet.

         "FIXED RATE", with respect to an issue of Related Bonds in a Floating
Rate Bond Transaction, shall have the meaning given that term in the Related
Indenture.

         "FIXED RATE BOND PROPERTIES" shall have the meaning given that term in
the recitals of this Agreement.  "FIXED RATE BOND PROPERTIES" shall also
include each New Bond Property added as a Fixed Rate Bond Property from and
after the date of its addition to the Fannie Mae Credit Facility, and shall
exclude each Released Property (which prior to its substitution or release, as
applicable, was a Fixed Rate Bond Property), from and after the date of such
substitution or release.  "FIXED RATE BOND PROPERTY" means any one of the
foregoing, individually.

         "FIXED RATE BOND TRANSACTIONS" shall have the meaning given to such
term in the recitals to this Agreement.  "FIXED RATE BOND TRANSACTIONS" shall
also include the bond transaction with respect to each New Bond Property added
to Fannie Mae Credit Facility as a Fixed Rate Bond Property after the date
hereof, and shall exclude the bond transaction with respect to each Released
Property (which prior to its substitution or release, as applicable, was a
Fixed Rate Bond Property), from and after the date of such substitution or
release.  "FIXED RATE BOND TRANSACTION" means any one of the foregoing,
individually.






                                       18
<PAGE>   20
         "FLOATING RATE BOND PROPERTIES" shall have the meaning given that term
in the recitals of this Agreement.  "FLOATING RATE BOND PROPERTIES" shall also
include each New Bond Property added as a Floating Rate Bond Property from and
after the date of its addition to the Fannie Mae Credit Facility, and shall
exclude each Released Property (which prior to its substitution or release, as
applicable, was a Floating Rate Bond Property), from and after the date of such
substitution or release.  "FLOATING RATE BOND PROPERTY" means any one of the
foregoing, individually.

         "FLOATING RATE BOND TRANSACTIONS" shall have the meaning given to such
term in the recitals to this Agreement.  "FLOATING RATE BOND TRANSACTIONS"
shall also include the bond transaction with respect to each New Bond Property
added to Fannie Mae Credit Facility as a Floating Rate Bond Property after the
date hereof, and shall exclude the bond transaction with respect to each
Released Property (which prior to its substitution or release, as applicable,
was a Floating Rate Bond Property), from and after the date of such
substitution or release.  "FLOATING RATE BOND TRANSACTION" means any one of the
foregoing, individually.

         "FRAUDULENT TRANSFER LAWS" shall have the meaning given that term in
section 8.21(b).

         "GAAP" means generally accepted accounting principles in effect in the
United States from time to time.

         "GOVERNMENT OBLIGATIONS" means direct obligations of, and obligations
on which the full and timely payment of principal and interest is
unconditionally guaranteed by the full faith and credit of the United States of
America; provided that Government Obligations shall not include (a) any
investments with a final maturity or any agreements with a term greater than
365 days from the date of the investment (except obligations that provide for
the optional or mandatory tender, at par, by the holder thereof at least once
within 365 days of the date of purchase and any obligations that are
irrevocably deposited with a Related Trustee for payment of the Related Bonds
pursuant to and in accordance with the Related Indenture), (b) mortgage backed
securities, (c) interest-only or principal-only stripped securities, and (d)
investments which may be prepaid or called at a price less than its purchase
price prior to stated maturity.

         "GOVERNMENTAL ACTION" means any pending or, to the actual knowledge of
any Borrower, threatened suit, proceeding, order, or governmental inquiry or
opinion involving any Property that alleges the violation of any Hazardous
Materials Law.

         "GOVERNMENTAL APPROVAL" means an authorization, permit, consent,
approval, license, registration or exemption from registration or filing with,
or report to, any Governmental Authority.






                                       19
<PAGE>   21
         "GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.

         "GROSS CASH FLOW" means, for any period, with respect to any of the
Properties, all gross rents collected from or on behalf of tenants at such
Property (other than unforfeited tenant security deposits), any other income,
receipts or reserves (but only to the extent such reserves were included as
Operating Expenses at the times they were set aside) derived from such Property
(including from the use or operation thereof) without regard to its source,
including tenant reimbursements for utilities, services and supplies, security
deposit forfeitures, parking rents or fees, concessions and vending fees and
laundry income and proceeds from rental interruption insurance, but excluding
Insurance Proceeds (other than proceeds from rental interruption insurance),
Condemnation Proceeds, proceeds from the sale of the Related Securities,
unearned portions of prepaid rent, other refundable items, interest on any
account established for the deposit of refundable items, and proceeds from the
sale or other disposition of all or any portion of a Property.

         "GUARANTY" means that certain Payment Guaranty of even date herewith
executed by Guarantor for the benefit of Fannie Mae, as it may be amended,
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms.

         "GUARANTOR" means Avalon Properties, Inc., a Maryland corporation.

         "HAZARDOUS MATERIALS" means petroleum and petroleum products,
flammable explosives, radioactive materials (excluding radioactive materials in
smoke detectors), polychlorinated biphenyls, lead, asbestos in any form that is
or could become friable, hazardous waste, toxic or hazardous substances or
other related materials whether in the form of a chemical, element, compound,
solution, mixture or otherwise and shall also include those materials defined
as "hazardous substances," "extremely hazardous substances," "hazardous
chemicals," "hazardous materials," "toxic substances," "solid waste," "toxic
chemicals," "air pollutants," "toxic pollutants," "hazardous wastes,"
"extremely hazardous waste," or "restricted hazardous waste" by Hazardous
Materials Law or regulated by Hazardous Materials Law in any manner whatsoever.

         "HAZARDOUS MATERIALS LAW" means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other binding
governmental requirements and any court judgments applicable to any Borrower or
any Property relating to industrial hygiene or to environmental or unsafe
conditions or to human health including, those relating to the generation,
manufacture, storage, handling, transportation, disposal, release, emission or
discharge of Hazardous Materials, those in connection with the construction,
fuel supply, power generation and transmission, waste disposal or any other
operations or processes relating to any






                                       20
<PAGE>   22
Property, and those relating to the atmosphere, soil, surface and ground water,
wetlands, stream sediments and vegetation on, under, in or about any Property.

         "HAZARDOUS SUBSTANCE ACTIVITY" means any storage, holding, existence,
release, spill, leaking, pumping, pouring, injection, escaping, deposit,
disposal, dispersal, leaching, migration, use, treatment, emission, discharge,
generation, processing, abatement, removal, disposition, handling or
transportation of any Hazardous Materials from, under, into or on any Property
in violation of Hazardous Materials Laws, including the discharge of any
Hazardous Materials emanating from any Property in violation of Hazardous
Materials Laws through the air, soil, surface water, groundwater or property
and also including the abandonment or disposal of any barrels, containers and
other receptacles containing any Hazardous Materials from or on any Property in
violation of Hazardous Materials Laws, in each case whether sudden or
nonsudden, accidental or nonaccidental.

         "HEDGE" means a Swap or a Cap.

         "HEDGE DOCUMENTS" means the documents evidencing and governing a
Hedge.

         "HEDGE PERIOD" means with respect to each Hedge the actual stated term
of such Hedge as provided in the applicable Hedge Documents.

         "HEDGE RATE", with respect to an issue of Related Bonds in a Floating
Rate Bond Transaction, means 5.7% per annum.

         "HEDGE SECURITY AGREEMENT" means, with respect to each Hedge, an
Interest Rate Hedge Security Agreement among a Borrower, Fannie Mae and the
Related Custodian, for the benefit of Fannie Mae and substantially in the form
of Exhibit F (subject to modifications approved by Fannie Mae), as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms, and "HEDGE SECURITY
AGREEMENTS" means every Hedge Security Agreement, collectively.

         "HEDGE TEST FAILURE" shall have the meaning given to such term in
section 3.1(a).

         "HEDGE TEST NOTICE" shall have the meaning given to such term in
section 3.1(a).

         "HEDGE TESTS"  shall have the meaning given to such term in section
3.1(a).






                                       21
<PAGE>   23
         "IMPOSITIONS" means, with respect to any Property, all real estate and
personal property taxes, water, sewer and vault charges and all other taxes,
levies, assessments, common charges and other similar charges, general and
special, ordinary and extraordinary, foreseen and unforeseen, of every kind and
nature whatsoever, which at any time prior to, at or after the execution of
this Agreement may be assessed, levied or imposed by, in each case, a
Governmental Authority or any other Person upon such Property or the rents or
the ownership, use, occupancy or enjoyment thereof, and any interest, costs or
penalties with respect to any of the foregoing.

         "IMPUTED DEBT SERVICE" with respect to each Property, means the
aggregate amount of the Imputed Interest Payments plus the Imputed Principal
Payments with respect to such Property for the applicable period.

         "IMPUTED INTEREST PAYMENTS" means with respect to each Mortgage Loan
and each Custodial Receipts Mortgage Loan, the total amount of all interest
that would be payable on the outstanding principal amount of such Mortgage Loan
or Custodial Receipts Mortgage Loan for the applicable period, at the
Underwriting Rate applicable to such Mortgage Loan or Custodial Receipts
Mortgage Loan.

         "IMPUTED PRINCIPAL PAYMENTS" means:

         (i)     with respect to each Mortgage Loan in a Fixed Rate Bond
                 Transaction, the aggregate amount of the scheduled principal
                 amortization on such Mortgage Loan for the applicable period;

         (ii)    prior to June 30, 2006, with respect to each Mortgage Loan in
                 a Floating Rate Bond Transaction the aggregate amount of
                 assumed monthly principal payments during the applicable
                 period that would be necessary to fully amortize such Mortgage
                 Loan over thirty (30) years assuming the interest rate with
                 respect to such Mortgage Loan is equal to the Hedge Rate;

         (iii)   on or after July 1, 2006, with respect to each Mortgage Loan
                 in a Floating Rate Bond Transaction the actual aggregate
                 amount of the monthly payments required to be made to the
                 Principal Reserve Fund with respect to such Mortgage Loan
                 during the applicable period; and

         (iv)    with respect to each Custodial Receipts Mortgage Loan, the
                 aggregate amount of assumed monthly principal payments during
                 the applicable period that would be necessary to fully
                 amortize such Custodial Receipts Mortgage Loan over three
                 hundred and fifty-nine (359) months assuming the interest rate
                 with respect to such Mortgage Loan is equal to the
                 Underwriting Rate.






                                       22
<PAGE>   24
         "INDEBTEDNESS" of any Person at any date means, without duplication,
(a) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (other than current trade liabilities
incurred in the ordinary course of business and payable in accordance with
customary practices), (b) any other indebtedness of such Person which is
evidenced by a note, bond, debenture or similar instrument, (c) all obligations
of such Person under Financing Leases, (d) all obligations of such person in
respect of acceptances issued or created for the account of such Person, (e)
all liabilities secured by any Lien on any property owned by such Person even
though such Person has not assumed or otherwise become liable for the payment
thereof, and (f) all Contingent Obligations.

         "INITIAL BOND PROPERTIES"  shall have the meaning given that term in
the recitals of this Agreement.

         "INITIAL CHASE RIDGE/CHASE LEA CONVERSION DATE" means November 1,
1997, provided, however, that if the Related Custodial Receipts have been
redeemed in full and all of Fannie Mae's obligations under the Related
Custodial Receipts Collateral Agreement have been terminated, then at the
request of the Borrowers such date shall be extended with respect to the
related Custodial Receipts Property until up to November 1, 1998, so long as
(a) Fannie Mae determines in its reasonable discretion that the Borrowers have
complied with their obligations under section 5.5(c)(ii) and (b) Borrower shall
agree to pay to Fannie Mae and Servicer on a monthly basis, pursuant to
documentation acceptable to Fannie Mae in its discretion, a commitment fee
equal to the Facility Fee that would be payable with respect to such Custodial
Receipts Transaction under section 4.4 if such Related Custodial Receipts were
still outstanding.

         "INSURANCE PROCEEDS" means, with respect to any Property, all
insurance proceeds, damages, claims and rights of action and the right thereto
under any insurance policies with respect to a Casualty insuring and relating
to any portion of such Property.

         "INTEREST ACCOUNT", with respect to each issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given that term in the
Related Indenture and "INTEREST ACCOUNTS" means every such Interest Account,
collectively.

         "INTEREST RESERVE REQUIREMENT", with respect to each issue of Related
Bonds in a Floating Rate Bond Transaction, shall have the meaning given that
term in the Related Indenture.

         "INTERIM REPLACEMENT CHASE LEA CREDIT ENHANCEMENT" shall have the
meaning given to such term in section 5.5(a).

         "INTERIM REPLACEMENT CHASE LEA CUSTODIAL RECEIPTS" means an issue of
custodial receipts (or other similar pass-through securitization instrument for
federal income tax purposes) supported by the Custodial Receipts Bond Issue
with respect to the Chase Lea Bond Property.






                                       23
<PAGE>   25

         "INTERIM REPLACEMENT CHASE LEA CUSTODIAL RECEIPTS TRANSACTION" means
the transaction with respect to the Interim Replacement Chase Ridge Custodial
Receipts to be credit enhanced by Fannie Mae's Interim Replacement Chase Lea
Credit Enhancement as contemplated in section 5.5.

         "INTERIM REPLACEMENT CHASE RIDGE CREDIT ENHANCEMENT" shall have the
meaning given to such term in section 5.5(a).

         "INTERIM REPLACEMENT CHASE RIDGE CUSTODIAL RECEIPTS" means an issue of
custodial receipts (or other similar pass-through securitization instrument for
federal income tax purposes) supported by the Custodial Receipts Bond Issue
with respect to the Chase Ridge Bond Property.

         "INTERIM REPLACEMENT CHASE RIDGE CUSTODIAL RECEIPTS TRANSACTION" means
the transaction with respect to the Interim Replacement Custodial Receipts to
be credit enhanced by Fannie Mae's Interim Replacement Chase Ridge Credit
Enhancement as contemplated in section 5.5.

         "INTERIM REPLACEMENT CUSTODIAL RECEIPTS DOCUMENTS" shall have the
meaning given to such term in section 5.5(c).

         "INTERIM REPLACEMENT CUSTODIAL RECEIPTS TRANSACTIONS" means the
Interim Replacement Chase Lea Custodial Receipts Transaction and the Interim
Replacement Chase Ridge Custodial Receipts Transaction, collectively, and
"INTERIM REPLACEMENT CUSTODIAL RECEIPTS TRANSACTION" means any one of
foregoing, individually.

         "ISSUER" means the issuer with respect to an issue of Related Bonds in
a Bond Transaction, and "ISSUERS" means every such Issuer, collectively.  As of
the date hereof, the Issuer with respect to each issue of Related Bonds is
listed on Exhibit A.

         "LEASE" means any lease, any sublease or subsublease, license,
concession or other agreement (whether written or oral and whether now or
hereafter in effect) pursuant to which any Person is granted a possessory
interest in, or right to use or occupy all or any portion of any space in any
Property, and every modification, amendment or other agreement relating to such
lease, sublease, subsublease or other agreement entered into in connection with
such lease, sublease, subsublease or other agreement, and every guarantee of
the performance and observance of the covenants, conditions and agreements to
be performed and observed by the other party thereto.






                                       24
<PAGE>   26
         "LIABILITIES" shall have the meaning set forth in section 4.5(a).

         "LIEN" means any mortgage, deed of trust, deed to secure debt, charge
(whether fixed or floating), pledge, lien, encumbrance, assignment,
hypothecation, security interest, conditional sale, capital lease or other
title retention, preferential right, trust arrangement or any other
encumbrance, security agreement or arrangement securing any obligation of any
Person.

         "LIQUIDITY COMPONENT" means the portion of the Facility Fee payable by
a Borrower with respect to the Facility Amount of each issue of Related
Securities in a Floating Rate Bond Transaction on account of Fannie Mae's
Liquidity Commitment.  With respect to each issue of Related Securities in a
Floating Rate Bond Transaction as of the date hereof the "LIQUIDITY COMPONENT"
shall be .125% per annum or 12.5 "basis points" as set forth on Exhibit C.  For
each New Bond Property added to the Fannie Mae Credit Facility pursuant to
section 5.4 or section 5.5, the "LIQUIDITY COMPONENT" shall be the amount set
forth in the New Property Confirmation with respect to such New Bond Property.

         "LIQUIDITY COMMITMENT", with respect to each issue of Related Bonds in
a Floating Rate Bond Transaction shall have the meaning given to that term in
the Related Fannie Mae Collateral Agreement.

         "LOCK-BOX NOTICE" shall have the meaning given to such term in section
3.1(b).

         "LOCK-BOX TEST" shall have the meaning given to such term in section
3.1(b).

         "LOCK-BOX TRIGGERING EVENT" shall have the meaning given to such term
in section 3.1(b).

         "MANAGEMENT AGREEMENTS" means each of the management agreements
between Borrower and Guarantor identified on Exhibit I.

         "MATERIAL ADVERSE EFFECT" means any circumstance, act, condition or
event of whatever nature (including any adverse determination in any
litigation, arbitration, or governmental investigation or proceeding), whether
singly or in conjunction with any other event or events, act or acts, condition
or conditions, or circumstance or circumstances, whether or not related, that
could reasonably be expected to have a material adverse change in or a
materially adverse effect upon any of (a) the business, operations, property or
condition (financial or otherwise) of any Borrower or Guarantor, (b) the
present or future ability of any Borrower to perform the Obligations, (c) the
validity, priority, perfection or enforceability of this Agreement or any other
Transaction Document or the rights or remedies of Fannie Mae under any
Transaction Document, or (d) the value of, or Fannie Mae's ability to have
recourse against, any Property.






                                       25
<PAGE>   27
         "MAXIMUM LTV PERCENTAGE" initially means 58.7%, and upon the addition
of a New Bond Property or an New Additional Property to the Fannie Mae Credit
Facility pursuant to section 5.4 or section 5.5, the "MAXIMUM LTV PERCENTAGE"
shall thereafter be the percentage set forth in the New Property Confirmation
delivered in connection with such New Property.

         "MAXIMUM RATE", with respect to each issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given that term in the
Related Indenture.

         "MINIMUM DSC RATIO" initially means 1.755:1, and upon the addition of
a New Bond Property or an New Additional Property to the Fannie Mae Credit
Facility pursuant to section 5.4 or section 5.5, the "MINIMUM DSC RATIO" shall
thereafter be the ratio set forth in the New Property Confirmation delivered in
connection with such New Property.

         "MINIMUM SUBSTITUTE PROPERTY VALUE" means, with respect to each
Released Property, the Allocable Facility Amount for such Released Property
divided by the Maximum LTV Percentage expressed as a decimal.

         "MODE" with respect to each Mortgage Loan in a Floating Rate Bond
Transaction, shall have the meaning given that term in the Related Indenture.

         "MOODY'S INVESTORS SERVICE" means Moody's Investors Service, Inc., a
corporation organized and existing under the laws of the State of Delaware, and
its successors and assigns, if such successors and assigns shall continue to
perform the functions of a securities rating agency.

         "MORGAN" shall have the meaning given to such term in the recitals to
this Agreement.
         "MORTGAGE" means any Bond Mortgage and any Reimbursement Mortgage,
individually, and "MORTGAGES" means every such Mortgage, collectively.
"MORTGAGE" shall include any Security Instrument in favor of Fannie Mae or a
Related Trustee on any New Property from and after the date of its addition to
the Fannie Mae Credit Facility, and shall exclude any Mortgage on a Released
Property released from the lien of such Mortgage, from and after the date of
release.

         "MORTGAGE DOCUMENTS" means, collectively, the Bond Property Loan
Documents for all Bond Properties in a Bond Transaction, the Reimbursement Loan
Documents and the Custodial Receipts L/C Reimbursement Agreement.

         "MORTGAGE LOAN" with respect to an issue of Related Bonds in a Bond
Transaction, shall have the meaning given that term in the Related Indenture,
and "MORTGAGE LOANS" shall mean every such Mortgage Loan, collectively.

         "MORTGAGE NOTE RATE", with respect to a Related Mortgage Note, shall
have the meaning assigned to such term in such Related Mortgage Note.






                                       26
<PAGE>   28
         "MORTGAGE RIGHTS" (i) with respect to each Floating Rate Bond
Transaction, shall have the meaning given such term in the Related Fannie Mae
Collateral Agreement and (ii) with respect to each Custodial Receipts
Transaction, shall have the meaning given such term in the Related Custodial
Receipts Collateral Agreement.

         "MULTIFAMILY RESIDENTIAL PROPERTY" means a residential property
containing five (5) or more dwelling units in which not more than twenty
percent (20%) of the net rentable area is or will be rented to non-residential
tenants.

         "NET OPERATING INCOME" means, for any period, with respect to any of
the Properties, the amount, if any, without duplication, by which the Gross
Cash Flow for such Property during such period exceeds the Operating Expenses
for such Property during such period.

         "NEW ADDITIONAL PROPERTY" means a Multifamily Residential Property
substituted for an Additional Mortgaged Property pursuant to section 5.2 or
otherwise added to the Fannie Mae Credit Facility by a Borrower as Collateral
for the Obligations.

         "NEW BOND PROPERTY" means a Multifamily Residential Property added to
the Fannie Mae Credit Facility in connection with Fannie Mae's issuance of a
new Related Fannie Mae Credit Enhancement Instrument.

         "NEW PROPERTY" means a New Additional Property or a New Bond Property.

         "NEW PROPERTY CONFIRMATION" shall have the meaning given that term in
section 5.4.

         "OBLIGATIONS" means the obligations of the Borrowers (i) to pay
principal, interest and fees and any other amounts on the Mortgage Loans and
the Custodial Receipts Mortgage Loans when due and payable, (ii) to pay all
amounts due under the terms of the Custodial Receipts L/C Reimbursement
Agreement, (iii) to make all required deposits into the Principal Reserve
Funds, Interest Accounts, the Replacement Reserve Accounts, the Cash Management
Account, the Custodial Accounts and any and all other loan funds, escrow funds,
revenue funds, debt service funds, reserve funds, redemption funds or other
funds or accounts required to be maintained under the Transaction Documents,
(iv) to reimburse Fannie Mae and Servicer for all Advances and for all other
sums advanced and costs and expenses incurred by Fannie Mae and Servicer in
accordance with the terms of this Agreement or any other Transaction Document,
(v) to pay all other amounts payable under the Transaction Documents, and (vi)
to observe and perform each of the terms, conditions and provisions of this
Agreement and the other Transaction Documents.






                                       27
<PAGE>   29
         "OFFICIAL STATEMENT" means with respect to each Bond Transaction the
Official Statement or any reoffering or remarketing circular approved by a
Borrower and issued in connection with the issuance or remarketing of an issue
of Related Bonds, as such statement may be amended, supplemented, otherwise
modified or amended and restated from time to time in accordance with its
terms, and "OFFICIAL STATEMENTS" means every such Official Statement,
collectively.

         "OPERATING EXPENSES" means, for any period, with respect to any of the
Properties, the aggregate of all direct, ordinary, normal, recurring and
necessary expenses thereof including, without duplication, (a) Impositions, (b)
property and liability insurance premiums, (c) wages, salaries and benefits of
personnel employed on site to manage, lease, maintain and operate such
Property, (d) costs or expenses of utility services to such Property and tenant
spaces to the extent payable by a Borrower, (e) costs or expenses of providing
security services to such Property, if any, (f) costs or expenses of in-house
or outside service arrangements for landscaping, janitorial, window washing and
cleaning, trash, debris, make ready units, cable and satellite television,
recreational services and other services, (g) expenses of maintaining,
repairing and cleaning the grounds, parking, amenities, exterior and interior
spaces of such Property, (h) expenses of repairing and maintaining in good
operable condition the mechanical, structural, electrical, elevator, heating,
ventilating, air conditioning and plumbing systems, (i) property management
fees payable to parties other than the Borrowers (and specifically including
management fees paid to any Affiliate of any Borrower), (j) administrative
expenses including advertising incurred at the site of such Property, (k) legal
fees associated with lease documentation and tenant matters and legal,
accounting and other professional fees relating to the operation of the
Properties, (l) (for all purposes hereunder other than the calculation of
Value) the replacement and repair amount with respect to such Property, (m)
costs for water and sewage fees, and (n) any other items that are treated as
noncapital expenses under GAAP.  All of the foregoing (including Impositions)
shall be computed on an accrual basis and in accordance with GAAP consistently
applied.  During any period the Properties are managed by an Affiliate of any
Borrower, Operating Expenses shall also include an amount equal to the
difference, if any, by which management fees paid by owners of similar
properties in the same geographic location exceed management fees then payable
by the Borrowers.  In addition, for all purposes Operating Expenses shall
exclude (i) payments on the Obligations and any other interest payments or
principal payments on any Indebtedness, (ii) depreciation and amortization,
(iii) all legal, accounting and professional fees not included in clause (k)
above, and (iv) items that would be treated as capital expenses under GAAP
consistently applied and calculated in accordance with Fannie Mae Form 4254.

         "ORIGINAL CUSTODIAN" shall have the meaning given to such term in the
recitals to this Agreement.

         "PASS-THROUGH RATE" with respect to each Mortgage Loan in a Floating
Rate Bond Transaction, shall have the meaning given such term in the Related
Mortgage Note.






                                       28
<PAGE>   30
         "PBGC"  means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

         "PERMANENT CHASE LEA CREDIT ENHANCEMENT" shall have the meaning given
that term in section 5.5(a).

         "PERMANENT CHASE LEA REFUNDING BONDS" means an issue of tax exempt
housing finance bonds issued by the Chase Lea Issuer in order to refinance (by
repurchase and a subsequent remarketing pursuant to an amended and restated
trust indenture and related bond documents) or refund (by the issuance of new
refunding bonds) the Related Custodial Receipts and the Custodial Receipts Bond
Issue with respect to the Chase Lea Bond Property.

         "PERMANENT CHASE LEA REFUNDING TRANSACTION" means the tax-exempt bond
issue and mortgage loan transaction to be credit enhanced by Fannie Mae's
Permanent Chase Lea Credit Enhancement as contemplated in section 5.5.

         "PERMANENT CHASE RIDGE CREDIT ENHANCEMENT" shall have the meaning
given that term in section 5.5(a).

         "PERMANENT CHASE RIDGE REFUNDING BONDS" means an issue of tax exempt
housing finance bonds issued by the Chase Ridge Issuer in order to refinance
(by repurchase and a subsequent remarketing pursuant to an amended and restated
trust indenture and related bond documents) or refund (by the issuance of new
refunding bonds) the Related Custodial Receipts and the Custodial Receipts Bond
Issue with respect to the Chase Ridge Bond Property.

         "PERMANENT CHASE RIDGE REFUNDING TRANSACTION" means the tax-exempt
bond issue and mortgage loan transaction to be credit enhanced by Fannie Mae's
Permanent Chase Lea Credit Enhancement as contemplated in section 5.5.

         "PERMANENT REFUNDING BOND ISSUE" means either the issue of Permanent
Chase Ridge Refunding Bonds or the issue of Permanent Chase Lea Refunding
Bonds, and "PERMANENT REFUNDING BOND ISSUES" means both such bond issues,
collectively.

         "PERMANENT REFUNDING DOCUMENTS" shall have the meaning given that term
in section 5.5.

         "PERMANENT REFUNDING MORTGAGE LOAN" and "PERMANENT REFUNDING MORTGAGE
LOANS" shall have meanings given such terms in section 5.5.

         "PERMANENT REFUNDING TRANSACTIONS" means the Permanent Chase Lea
Refunding Transaction and the Permanent Chase Ridge Refunding Transaction,
collectively, and "PERMANENT REFUNDING TRANSACTION" means any one of foregoing,
individually.






                                       29
<PAGE>   31
         "PERMITS" means all permits, or similar licenses or approvals issued
and/or required by an applicable Governmental Authority or any Applicable Law
in connection with the ownership, use, occupancy, leasing, management,
operation, repair, maintenance or rehabilitation of any Property or any
Borrower's business.

         "PERMITTED LIENS" means, with respect to each Property: (i) exceptions
to title contained in the marked-up title insurance commitments insuring the
lien of the Mortgage with respect to such Property (other than notes or other
informational items set forth therein) listed on Exhibit E; (ii) Liens created
by, or permitted by, the applicable Mortgage Documents, the applicable Bond
Documents and/or the applicable Custodial Receipts Documents with respect to
such Property; (iii) Liens created by the Leases with respect to such Property;
(iv) Liens approved by Fannie Mae; and (v) solely with respect to the Bond
Property commonly known as Avalon Meadows Apartments, Howard County Maryland,
the Shared Facilities Agreement.

         "PERMITTED TRANSFER" shall have the meaning given that term in section
5.6(b).

         "PERSON" means an individual, an estate, a trust, a corporation, a
partnership, a limited liability company or any other organization or entity
(whether governmental or private).

         "PLAN"  means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group or (ii)
maintained pursuant to a collective bargaining agreement or any other agreement
under which more than one employer makes contributions and to which a member of
the Controlled Group is then making or accruing an obligation to make
contributions or has within the preceding five (5) plan years made
contributions.

         "POTENTIAL EVENT OF DEFAULT" means any of the events specified in
section 7.1 which with the passage of time or giving of notice or both would
constitute an Event of Default.

         "PREPAYMENT PREMIUM", with respect to a Mortgage Loan, shall have the
meaning given such term in the Related Mortgage Note.

         "PRINCIPAL RESERVE FUND" with respect to any Floating Rate Bond
Property, shall have the meaning given that term in the Related Indenture, and
"PRINCIPAL RESERVE FUNDS" shall mean every such Principal Reserve Fund,
collectively.

         "PROCEEDS" mean all "proceeds" as such term is defined in Section
9-306(1) of the UCC and, in any event, shall include all interest, dividends or
other earnings, income or distributions from or in respect of, or from or in
respect of investments or reinvestments of, the Cash Management Account or the
Cash Management System Collateral, all collections and distributions with
respect to the Mortgage Loans and all other proceeds of Collateral.






                                       30
<PAGE>   32
         "PROHIBITED ACTIVITIES OR CONDITIONS", with respect to a particular
Mortgage, shall have the meaning given that term in such Mortgage.

         "PROPERTY" means any of the Bond Properties or any of the Additional
Mortgaged Properties, individually.  "PROPERTIES" means every such Bond
Property and Additional Mortgaged Property, collectively.

         "PROPOSED TRANSFER" shall have the meaning given that term in section
5.6(a).

         "PROPOSED TRANSFEREE" shall have the meaning given that term in
section 5.6(a).

         "RATING AGENCIES" means Standard & Poor's and Moody's Investors
Service, their successors in interest, or any other nationally recognized
rating agency acceptable to Fannie Mae.

         "REGULATORY AGREEMENT", with respect to each Bond Property, means the
Land Use Restriction Agreement, Tax Regulatory Agreement or similar instrument
to assure continuation of the exclusion of interest on the Related Securities
from gross income, each as defined in the Related Indenture, and "REGULATORY
AGREEMENTS" means every such Regulatory Agreement, collectively.

         "REIMBURSEMENT LOAN DOCUMENTS" means, collectively, the Reimbursement
Mortgages and each of the other documents, agreements and instruments granting,
evidencing or perfecting security interests granted in connection with the
obligations secured by the Reimbursement Mortgages, including the Hedge
Security Agreements, if any, the Cash Management Agreement, if any, the
Guaranty, the Replacement Reserve Agreements, the Assignment of Management
Agreement, title policies, UCC fixture filings and UCC financing statements, as
each such document, agreement or instrument may be amended, supplemented,
otherwise modified or amended and restated from time to time in accordance with
its respective terms, and "REIMBURSEMENT LOAN DOCUMENT" means any one of the
foregoing, individually.

         "REIMBURSEMENT MORTGAGES" means, collectively, (i) the first priority
Security Instruments on each of the Additional Mortgaged Properties securing
the obligations of the Borrowers under all of the Related Mortgage Notes and
under this Agreement, (ii) the second priority Security Instruments on each of
the Bond Properties other than the Custodial Receipts Properties, securing the
obligations of the Borrowers under all of the Related Mortgage Notes, other
than the Related Mortgage Note evidencing the Mortgage Loan secured by the
first priority Mortgage on such Bond Property, and under this Agreement, and
(iii) the second priority Security Instruments on each of the Custodial
Receipts Properties, securing the obligations of the Borrowers under all of the
Related Mortgage Notes and under this Agreement, and "REIMBURSEMENT MORTGAGE"
means any one of the foregoing, individually.






                                       31
<PAGE>   33
         "RELATED ACT" with respect to each issue of Related Bonds in a Bond
Transaction, shall have the meaning given to the term "Act" in the Related
Indenture.

         "RELATED BOND DOCUMENTS" means, with respect to an issue of Related
Bonds, the Related Bonds, the Related Indenture, the Related Fannie Mae Credit
Enhancement Instrument, the Regulatory Agreement (and any other agreement
relating to rental restrictions on the applicable Bond Property), the Related
Pledge Agreement, if applicable, the Related Financing Agreement, a Tax
Certificate (or other applicable agreement relating to arbitrage in connection
with the proceeds of such Related Bonds) and all other documents, instruments
and agreements executed and delivered in connection with the issuance, sale,
delivery and/or remarketing of the Related Bonds, as each such agreement or
instrument may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.

         "RELATED BOND MORTGAGE" with respect to a particular Bond Property in
a Bond Transaction, means the first priority Bond Mortgage encumbering such
Bond Property and securing the Related Mortgage Note.

         "RELATED BONDS" means with respect to each Floating Rate Bond Property
and each Fixed Rate Bond Property, the tax-exempt multifamily revenue bonds
issued pursuant to Applicable Law and the Related Indenture.

         "RELATED CUSTODIAL RECEIPTS" with respect to each Custodial Receipts
Property, the custodial receipts issued pursuant to the Custodial Receipts
Agreement with respect to such Custodial Receipts Property and evidencing an
interest in the underlying Custodial Receipts Bond Issue.

         "RELATED CUSTODIAL RECEIPTS COLLATERAL AGREEMENT" means, with respect
to a Custodial Receipts Transaction, the Credit Enhancement Agreement between
Fannie Mae and Morgan pursuant to which Fannie Mae has agreed to provide credit
enhancement of Chase Ridge Inc.'s or Chase Lea's Inc.'s, as the case may be,
reimbursement obligations to Morgan for advances made by Morgan under the terms
of the Custodial Receipts L/C with respect to such Custodial Receipts
Transaction and not reimbursed to Morgan pursuant to the terms of the related
Custodial Receipts L/C Reimbursement Agreement, as such Related Custodial
Receipts Collateral Agreement may be amended, supplemented, otherwise modified
or amended and restated from time to time in accordance with its terms, and
"RELATED CUSTODIAL RECEIPTS COLLATERAL AGREEMENTS" means every such Related
Custodial Receipts Collateral Agreement, collectively.

         "RELATED CUSTODIAL RECEIPTS DOCUMENTS" means, with respect to each
issue of Related Custodial Receipts, the Custodial Receipts Bond Indenture, the
Custodial Receipts Bond Issue, the Custodial Receipts Mortgage Note, the
Custodial Receipts First Security Instrument, the Regulatory Agreement (and any
other agreement relating to rental restrictions on the applicable Bond
Property), a Tax Certificate (or other applicable agreement relating to
arbitrage in






                                       32
<PAGE>   34
connection with the proceeds of such Related Custodial Receipts), the Custodial
Receipts Agreement, the Related Custodial Receipts, the Custodial Receipts L/C,
the Related Custodial Receipts Collateral Agreement, the Custodial Receipts L/C
Reimbursement Agreement, the Custodial Receipts Bond Pledge Agreement, the
Custodial Receipts Guaranty, the title policy, UCC fixture filings and UCC
financing statements (in each case relating to such Custodial Receipts
Transaction), and all other documents, instruments and agreements executed and
delivered in connection with the issuance, sale, delivery and/or remarketing of
all or any part of such Related Custodial Receipts, as each such agreement or
instrument may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.

         "RELATED FANNIE MAE COLLATERAL AGREEMENT" means, with respect to a
Floating Rate Bond Transaction, the Collateral Agreement between Fannie Mae and
the Related Trustee pursuant to which Fannie Mae has agreed to provide credit
enhancement and liquidity support for the Related Bonds, as such Related Fannie
Mae Collateral Agreement may be amended, supplemented, otherwise modified or
amended and restated from time to time in accordance with its terms, and
"RELATED FANNIE MAE COLLATERAL AGREEMENTS" means every such Related Fannie Mae
Collateral Agreement, collectively.

         "RELATED FANNIE MAE CREDIT ENHANCEMENT INSTRUMENT"  means any
individual Related Fannie Mae Collateral Agreement, Related Custodial Receipts
Collateral Agreement or Related Fannie Mae Pass-Through Certificate and
"RELATED FANNIE MAE CREDIT ENHANCEMENT INSTRUMENTS" means every such Related
Fannie Mae Credit Enhancement Instrument, collectively.

         "RELATED FANNIE MAE PASS-THROUGH CERTIFICATE" means, with respect to a
Fixed Rate Bond Transaction, the Guaranteed Mortgage Pass-Through Certificate
issued to and registered in the name of the Related Trustee by Fannie Mae or,
in the event a substitute Guaranteed Mortgage Pass-Through Certificate shall be
delivered to such Related Trustee pursuant to the Related Indenture, such
substitute Guaranteed Mortgage Pass-Through Certificate, and "RELATED FANNIE
MAE PASS-THROUGH CERTIFICATES" means every such Related Fannie Mae Pass-Through
Certificate, collectively.

         "RELATED FINANCING AGREEMENT", with respect to an issue of Related
Bonds in a Bond Transaction, shall have the meaning given that term in the
Related Bond Indenture and "RELATED FINANCING AGREEMENTS" means every such
Related Financing Agreement, collectively.

         "RELATED INDENTURE" means, (i) with respect to an issue of Related
Bonds, the indenture of trust between an Issuer and a Related Trustee pursuant
to which such Related Bonds were issued, (ii) with respect to each Custodial
Receipts Bond Issue, means the Custodial Receipts Bond Indenture with respect
to such Custodial Receipts Bond Issue and (iii) with respect to an issue of
Related Custodial Receipts, means the Custodial Receipts Agreement with respect
to such Related Custodial Receipts, in each case as such Related Indenture may
be amended,






                                       33
<PAGE>   35
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms. "RELATED INDENTURES" means every such Related
Indenture, collectively.

         "RELATED MORTGAGE" means (a) with respect to a particular Bond
Property in a Bond Transaction, the Related Bond Mortgage and the Related
Second Mortgage, collectively, encumbering such Bond Property, (b) with respect
to a particular Bond Property in a Custodial Receipts Transaction, the
Reimbursement Mortgage encumbering such Bond Property and (c) with respect to a
particular Additional Mortgaged Property, the Reimbursement Mortgage
encumbering such Additional Mortgaged Property.

         "RELATED MORTGAGE NOTE" means, with respect to an issue of Related
Bonds, the Multifamily Note (together with all addenda thereto) executed by a
Borrower in favor of an Issuer and secured by, among other things, one or more
Related Bond Mortgages, as such Related Mortgage Note may be amended,
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms, and "RELATED MORTGAGE NOTES" means every such
Related Mortgage Note, collectively.

         "RELATED PLEDGE AGREEMENT", with respect to an issue of Related Bonds
in a Floating Rate Bond Transaction, shall have the meaning given to the term
"Pledge Agreement" in the Related Indenture.

         "RELATED PURCHASED BOND", with respect to an issue of Related Bonds in
a Floating Rate Bond Transaction, shall have the meaning given the term
"Purchased Bond" in the Related Indenture, and "RELATED PURCHASED BONDS" means
every such Related Purchased Bond, collectively.

         "RELATED REMARKETING AGREEMENT", with respect to an issue of Related
Bonds in a Floating Rate Bond Transaction, shall have the meaning given to the
term "Remarketing Agreement" in the Related Indenture.

         "RELATED SECOND MORTGAGE", with respect to a particular Bond Property
in a Bond Transaction, means the second priority Reimbursement Mortgage
encumbering such Bond Property.

         "RELATED SECURITIES", with respect to any Bond Property, means either
the Related Bonds or the Related Custodial Receipts, as the case may be.

         "RELATED TRUSTEE" means (i) with respect to an issue of Related Bonds,
the entity designated as the "Trustee" under the Related Indenture, (ii) with
respect to an Related Custodial Receipts Bond Issue, means the Custodial
Receipts Bond Trustee and (iii) with respect to an issue of Related Custodial
Receipts, means the Custodial Receipts Custodian.  "RELATED TRUSTEES" means
every such Related Trustee, collectively.






                                       34
<PAGE>   36
         "RELEASE PRICE" shall have the meaning given to such term in section
5.3(a).

         "RELEASE PRICE CASH COLLATERAL" shall have the meaning given that term
in section 5.3(a).

         "RELEASED PROPERTY" means a Property released or proposed to be
released from the lien of a Mortgage pursuant to section 5.2 or section 5.3.

         "REMARKETING AGENT", with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given such term in the
Related Indenture.

         "RENT ROLL" shall have the meaning given that term in section 2.1(s).

         "REPLACEMENT RESERVE ACCOUNT", with respect to a particular Property,
means the replacement reserve account established pursuant to the Replacement
Reserve Agreement relating to such Property, and "REPLACEMENT RESERVE ACCOUNTS"
means every such Replacement Reserve Account, collectively.

         "REPLACEMENT RESERVE AGREEMENT", with respect to a particular
Property, means the Replacement Reserve and Security Agreement between a
Borrower and Fannie Mae relating to such Property and establishing such
Borrower's obligation to fund certain replacement reserve accounts, as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms, and  "REPLACEMENT
RESERVE AGREEMENTS" means every such Replacement Reserve Agreement,
collectively.

         "REQUIRED HEDGE TERM" means: (i) with respect to each Hedge that
Borrowers are required to obtain for a Hedge Period commencing on the Bond
Transaction Closing Date with respect to any Related Bonds, a term of seven (7)
years beginning on the applicable Bond Transaction Closing Date and ending on
the date which is the seventh (7th) anniversary of such Bond Transaction
Closing Date; (ii) with respect to each Hedge that the Borrowers are required
to obtain for an issue of Unhedged Bonds upon the occurrence of a Hedge Test
Failure, a term of five (5) years beginning on the date that the Borrowers are
required to obtain such Hedge under section 3.1(a) and ending on the date which
is the fifth (5th) anniversary of such date; and (iii) with respect to each
other Hedge, a term ending on the earliest of (a) the date which is the fifth
(5th) anniversary of the effective date of such Hedge, (b) the date on which
the Related Fannie Mae Collateral Agreement terminates or (c) the maturity date
of the Related Bonds; provided, however, that if either of the Permanent
Refunding Bond Issues is added to the Fannie Mae Credit Facility as Unhedged
Bonds in accordance with Section 5.5, the Required Hedge Term with respect to
such Permanent Refunding Bond Issues shall be five (5) years.

         "RESERVE COMPONENT" means the portion of the Facility Fee payable by
the Borrowers with respect to each issue of Related Bonds in a Floating Rate
Bond Transaction with respect to (i) amounts on deposit from time to time in
the Principal Reserve Fund, if any, with respect to






                                       35
<PAGE>   37
such issue of Related Bonds and (ii) the Allocated Release Price Cash
Collateral deposited by the Borrowers with Fannie Mae from time to time, if
any, with respect to such issue of Related Bonds.  With respect to each issue
of Related Bonds as of the date hereof the "RESERVE COMPONENT"  shall mean .30%
per annum, or 30 basis points.  With respect to each issue of Related Bonds
relating to a New Bond Property added to the Fannie Mae Credit Facility
pursuant to section 5.4 or section 5.5, "RESERVE COMPONENT" shall mean the
amount set forth in the New Property Confirmation with respect to such New Bond
Property.

         "RESET PERIOD", with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given such term in the
Related Indenture.

         "RESET RATE", with respect to an issue of Related Bonds in a Floating
Rate Bond Transaction, shall have the meaning given such term in the Related
Indenture.

         "SALEM STATION PROJECT" means the Additional Mortgaged Property
identified on Exhibit B as Salem Station I & II Apartments, Richmond,
Spotsylvania County, Virginia.

         "SALEM STATION RESTRICTIVE COVENANTS AGREEMENT" shall mean that
certain Declaration of Restrictive Covenants dated as of December 1, 1985, and
recorded on December 27, 1985 in the real estate records of Spotsylvania
County, Virginia at Book 671, Page 465 as Document Number 13018, and as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.

         "SECURITY INSTRUMENT" means a written instrument creating a valid lien
on a Property either in favor of or held by Fannie Mae and/or a Related
Trustee, as such instrument may be amended, supplemented, otherwise modified or
amended and restated from time to time in accordance with its terms.  A
Security Instrument may be in the form of a mortgage, deed of trust, deed to
secure debt or security deed.

         "SERVICER" means the independent contractor engaged to service the
Mortgage Loans, and the Mortgage Documents for Fannie Mae and any replacements
or successors engaged by Fannie Mae.  The initial Servicer pursuant to a
written contract with Fannie Mae is Washington Capital DUS, Inc.

         "SERVICING AGREEMENT"  means any agreement with respect to the
servicing of the Mortgage Loans and the Mortgage Documents, between Fannie Mae
and an independent contractor, if any, designated from time to time by Fannie
Mae as the Servicer of the Mortgage Loans, the Custodial Receipts Documents,
the Bond Documents and the Mortgage Documents, as any such Servicing Agreement
may be amended, supplemented, otherwise modified or amended and restated from
time to time in accordance with its terms; provided that the Servicing
Agreement may be a Fannie Mae guide or announcement made applicable to the
Mortgage Loans by an agreement between Fannie Mae and the Servicer.






                                       36
<PAGE>   38
         "SERVICING FEE COMPONENT" means with respect to each issue of Related
Securities .09% per annum or 9 basis points initially; provided, however, that
in the event a successor servicer is appointed to service the Mortgage Loans,
the Servicing Fee Component shall be adjusted (subject to section 6.1) to the
amount agreed upon among Fannie Mae and such successor servicer, but in any
event the average Servicing Fee Component for all Bonds shall not exceed .125%
or 12.5 basis points.

         "SHORTFALL CASH COLLATERAL" means either (i) a letter of credit in
form and substance and provided by a financial institution satisfactory to
Fannie Mae in its discretion or (ii) cash collateral deposited with Fannie Mae
or its designee and otherwise held in a manner approved by Fannie Mae in its
discretion.

         "SHORTFALL HEDGE" shall have the meaning given that term in section
3.2(e).

         "SINGLE-PURPOSE" means, with respect to a Person, that such Person at
all times since its formation: (i) has been a duly formed and existing limited
partnership or corporation, as the case may be; (ii) has been duly qualified in
each jurisdiction in which such qualification was at such time necessary for
the conduct of its business; (iii) has complied with the provisions of its
organizational documents and the laws of its jurisdiction of formation in all
respects; (iv) has observed all customary formalities regarding its partnership
or corporate existence, as the case may be; (v) has accurately maintained its
financial statements, accounting records and other partnership or corporate
documents separate from those of any other Person, provided, however, that the
Borrowers shall not be precluded from also preparing consolidated financial
statements with that of Guarantor so long as such consolidated financial
statements include notes indicating each Borrower's separate ownership of its
own assets; (vi) has not commingled its assets or funds with those of any other
Person; (vii) has accurately maintained its own bank accounts, payroll and
books and accounts separate from those of any other Person; (viii) has paid its
own liabilities from its own separate assets; (ix) has identified itself in all
dealings with the public, under its own name and as a separate and distinct
entity; (x) has not identified itself as being a division or a part of any
other Person (other than as a wholly-owned subsidiary of the Guarantor); (xi)
has not identified any other Person as being a division or a part of such
Person; (xii) has been adequately capitalized in light of its contemplated
business operations; (xiii) has not assumed, guaranteed or become obligated for
the liabilities of any other Person (except in connection with the endorsement
of negotiable instruments in the ordinary course of business) or held out its
credit as being available to satisfy the obligations of any other Person; (xiv)
has not acquired obligations or securities of any other Person; (xv) has not
made loans or advances to any other Person; (xvi) has not entered into and was
not a party to any transaction with any Affiliate of such Person, except in the
ordinary course of business and on terms which are no less favorable to such
Person than would be obtained in a comparable arm's-length transaction with an
unrelated third-party lender or issuer; (xvii) has conducted its own business
in its own name; (xviii) has paid the salaries of its own employees, if any,
and maintained a sufficient number of employees in light of its contemplated
business operations; (xix) has allocated fairly and reasonably any overhead for
shared office space; (xx) has used stationery, invoices and






                                       37
<PAGE>   39
checks separate from those of any other Person; (xxi) has not pledged its
assets for the benefit of any other entity or made any loans or advances to any
Person; (xxii) has not engaged in a non-exempt prohibited transaction described
in Section 406 of ERISA or Section 4975 of the Code; (xxiii) has not acquired
obligations or securities of its partners or Affiliates; (xxiv) has corrected
any actually known misunderstanding regarding its separate identity; and (xxv)
has not commingled its business functions with those of any other Person except
on an arms length basis and for fair consideration.

         "STANDARD & POOR'S" means Standard & Poor's, a Division of the
McGraw-Hill Companies, Inc. and its successors and assigns if such successors
and assigns shall continue to perform the functions of a securities rating
agency.

         "SUBSIDIARY" means, as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which
is otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by such Person.

         "SUBSTITUTION PERCENTAGE" shall have the meaning given that term in
section 5.2(a).

         "SWAP" means an interest rate swap, and includes an interest rate swap
which has an initial "calculation period" that begins on the last day of a
Reset Period which commences on or after the date such swap was obtained (i.e.
a "future" swap).

         "TAX CERTIFICATE", with respect to each issue of Related Bonds, shall
have the meaning given that term in the Related Indenture, and "TAX
CERTIFICATES" means every such Tax Certificate, collectively.

         "TAXES" shall have the meaning given that term in section 2.2(q).

         "TENDER AGENT" shall have the meaning given that term in the Related
Indenture.

         "TERMINATION FEE" means, either the Chase Lea Termination Fee or the
Chase Ridge Termination Fee as applicable under the circumstances.


         "TERMINATION PAYMENTS" shall have the meaning given that term in
section 3.2(i).






                                       38
<PAGE>   40
         "TRANSACTION DOCUMENTS" means, collectively, the Bond Documents, the
Mortgage Documents, the Custodial Receipts Documents, this Agreement, the Hedge
Documents, if any, and all other agreements, instruments or documents executed
by any Borrower in connection with the Bonds, the Mortgage Loans, this
Agreement or the transactions contemplated thereby or hereby, including those
listed in Exhibit D, and "TRANSACTION DOCUMENT" means any one of the foregoing,
individually.

         "UCC" or "UNIFORM COMMERCIAL CODE", with respect to a Property, means
the Uniform Commercial Code as in effect in the state where such Property is
located.

         "UNDERWRITING RATE" means:

         (i)     with respect to each Mortgage Loan in a Fixed Rate Bond
                 Transaction, 7.0%;

         (ii)    with respect to each Mortgage Loan in a Floating Rate Bond
                 Transaction and bearing interest at the Fixed Rate, the
                 Pass-Through Rate then in effect under the Related Mortgage
                 Note, plus the Facility Fee payable with respect to such
                 Floating Rate Bond Transaction, plus the Bond Fees payable
                 with respect to such Floating Rate Bond Transaction;

         (iii)   with respect to each Mortgage Loan in a Floating Rate Bond
                 Transaction and bearing interest at the Variable Rate or the
                 Reset Rate, the aggregate effective rate of interest that
                 would be payable on such Mortgage Loan for the applicable
                 period, assuming that the interest rate applicable to such
                 Mortgage Loan is comprised of the sum of the Facility Fee
                 payable with respect to such Floating Rate Bond Transaction,
                 plus the Bond Fees payable with respect to such Floating Rate
                 Bond Transaction, plus the higher of (a) 5.7% and (b) the
                 annualized statement of the average Pass-Through Rate in
                 effect under the Related Mortgage Note for each day of the
                 immediately preceding twelve (12) month period; and

         (iv)    with respect to each Custodial Receipts Mortgage Loan, 7.05%.

         "UNHEDGED BONDS" means the Related Bonds with respect to each Initial
Bond Property in a Floating Rate Bond Transaction and any Related Bonds with
respect to a New Bond Property that are designated as "Unhedged Bonds" in the
New Property Confirmation by Fannie Mae in its discretion.

         "VALUE" means, as of any date of determination, the value attributed
to any Property by Fannie Mae in accordance with the standards and procedures
utilized for underwriting purposes for similar Multifamily Residential
Properties in accordance with the applicable provisions of the DUS Guide as of
such date of determination, it being acknowledged that in evaluating the Value
of a Property, Fannie Mae may take into account all factors relevant to the
value of such






                                       39
<PAGE>   41
Property including the current condition of the Property, and in evaluating the
Value of a Property without an extended operating history, such Value shall be
based on projections and pro formas satisfactory to Fannie Mae.

         "VARIABLE RATE", with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, means the "Weekly Variable Rate", as such term
is defined in the Related Indenture.

         "WITHDRAWAL" means, with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, a withdrawal of funds from the Principal
Reserve Fund with respect to such Related Bonds in order to either (i)
reimburse Fannie Mae for an Advance or (ii) make any payment otherwise due from
a Borrower under the Related Bond Documents (including a payment to purchase
Related Purchased Bonds on behalf of a Borrower) other than a payment to redeem
any Related Bonds.

3                INTERPRETATION.

                 The parties to this Agreement acknowledge that each party and
their respective counsel have participated in the drafting and revision of this
Agreement and the other Transaction Documents.  Accordingly, the parties agree
that any rule of construction which disfavors the drafting party shall not
apply in the interpretation of this Agreement and the other Transaction
Documents or any statement or supplement or exhibit to this Agreement or to the
other Transaction Documents.

II.
                   REPRESENTATIONS, WARRANTIES AND COVENANTS

1                REPRESENTATIONS AND WARRANTIES OF BORROWERS.
To induce Fannie Mae to enter into this Agreement and to execute and deliver
the Related Fannie Mae Credit Enhancement Instruments, each Borrower represents
and warrants to Fannie Mae as follows:

                 (a)      DUE ORGANIZATION; OWNERSHIP STRUCTURE.

                          (i)     Collateral Inc. is a Single-Purpose
         corporation duly organized, validly existing and in good standing
         under the laws of the State of Maryland pursuant to those certain
         Articles of Incorporation dated February 29, 1996 and duly filed on
         March 1, 1996 with the Maryland State Department of Assessments and
         Taxation, as amended pursuant to the amendments listed on Schedule K
         hereto ("COLLATERAL INC.'S ARTICLES OF INCORPORATION").  Copies of
         Collateral Inc.'s Articles of Incorporation, By-Laws and other
         organizational documents, as amended pursuant to the amendments listed
         on Schedule K hereto ("COLLATERAL INC.'S ORGANIZATIONAL DOCUMENTS")
         certified as true,






                                       40
<PAGE>   42
         correct and complete by a duly authorized officer of Collateral Inc.,
         have been delivered to Fannie Mae.  Collateral Inc.'s Organizational
         Documents are in full force and effect and have not been otherwise
         supplemented, amended or modified.

                          (ii)    Chase Ridge Inc. is a Single-Purpose
         corporation duly organized, validly existing and in good standing
         under the laws of the State of Maryland pursuant to those certain
         Articles of Incorporation dated October 22, 1993 and duly filed on
         October 27, 1993 in the office of the Maryland State Department of
         Assessments and Taxation, as amended pursuant to the amendments listed
         on Schedule K hereto ("CHASE RIDGE INC.'S ARTICLES OF INCORPORATION").
         Copies of Chase Ridge Inc.'s Articles of Incorporation, By-Laws and
         other organizational documents, as amended pursuant to the amendments
         listed on Schedule K hereto ("CHASE RIDGE INC.'S ORGANIZATIONAL
         DOCUMENTS") certified as true, correct and complete by a duly
         authorized officer of Chase Ridge Inc., have been delivered to Fannie
         Mae.  Chase Ridge Inc.'s Organizational Documents are in full force
         and effect and have not been otherwise supplemented, amended or
         modified.

                          (iii)   Chase Lea Inc. is a Single-Purpose
         corporation duly organized, validly existing and in good standing
         under the laws of the State of Maryland pursuant to those certain
         Articles of Incorporation dated October 22, 1993 and duly filed on
         October 27, 1993 in the office of the Maryland State Department of
         Assessments and Taxation, as amended pursuant to the amendments listed
         on Schedule K hereto ("CHASE LEA INC.'S ARTICLES OF INCORPORATION").
         Copies of Chase Lea Inc.'s Articles of Incorporation, By-Laws and
         other organizational documents, as amended pursuant to the amendments
         listed on Schedule K hereto ("CHASE LEA INC.'S ORGANIZATIONAL
         DOCUMENTS") certified as true, correct and complete by a duly
         authorized officer of Chase Lea Inc., have been delivered to Fannie
         Mae.  Chase Lea Inc.'s Organizational Documents are in full force and
         effect and have not been otherwise supplemented, amended or modified.

                          (iv)    Each Borrower currently qualifies and is
         taxed as a "Qualified REIT Subsidiary" as defined in Subchapter M of
         the Code.  Guarantor is the record and beneficial owner of, and has
         good title to, 100 percent (100%) of the ownership interests in each
         Borrower, free and clear of all liens, security interests, options,
         rights of first refusal and adverse claims of title of any kind or
         character, and no portion of such interest is the subject of any
         agreement providing for the sale or transfer thereof.  Guarantor
         currently qualifies and is taxed as a real estate investment trust
         under Subchapter M of the Code.  The Diagram of Ownership Structure
         attached hereto as Exhibit J accurately depicts the legal and
         beneficial ownership interests in each Borrower as of the date hereof.

                          (v)     Each of Collateral Inc. and Guarantor is
         qualified to transact business and is in good standing in the
         Commonwealth of Virginia and the States of






                                       41
<PAGE>   43
         Maryland and in each other jurisdiction in which such qualification
         and/or standing is necessary to the conduct of its business and where
         the failure to be so qualified would adversely affect the validity of,
         the enforceability of, or the ability of any Borrower to perform the
         Obligations under this Agreement and the other Transaction Documents.
         Each of Chase Ridge Inc. and Chase Lea Inc. is qualified to transact
         business and in good standing in the State of Maryland and in each
         other jurisdiction in which such qualification and/or standing is
         necessary to the conduct of its business and where the failure to be
         so qualified would adversely affect the validity of, the
         enforceability of, or the ability of any Borrower to perform the
         Obligations under this Agreement and the other Transaction Documents.

                          (vi) Each Borrower's chief executive office and
         office where it keeps its books and records as to the Collateral is
         located at 5904 Richmond Highway, Suite 300, Alexandria, Virginia
         22303.

                 (b)      POWER AND AUTHORITY.  Each Borrower and Guarantor has
the requisite power and authority (i) to own its properties and to carry on its
business as now conducted and as contemplated to be conducted in connection
with the performance of the Obligations hereunder and under the other
Transaction Documents and (ii) to execute and deliver this Agreement and the
other Transaction Documents and to carry out the transactions contemplated by
this Agreement and the other Transaction Documents.

                 (c)      DUE AUTHORIZATION.  The execution, delivery and
performance of this Agreement and the other Transaction Documents have been
duly authorized by all necessary action and proceedings by or on behalf of
Guarantor and each Borrower, and no further approvals or filings of any kind,
including any approval of or filing with any Governmental Authority, are
required by or on behalf of any Borrower or Guarantor as a condition to the
valid execution, delivery and performance by any Borrower or Guarantor of this
Agreement or any of the other Transaction Documents.

                 (d)      VALID AND BINDING OBLIGATIONS.  This Agreement and
the other Transaction Documents have been duly authorized, executed and
delivered by each Borrower and Guarantor and constitute the legal, valid and
binding obligations of each Borrower and Guarantor, enforceable against each
Borrower and Guarantor in accordance with their respective terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles affecting
the enforcement of creditors' rights generally or by equitable principles or by
the exercise of discretion by any Court.

                 (e)      NON-CONTRAVENTION; NO LIENS.  Neither the execution
and delivery of this Agreement and the other Transaction Documents, nor the
fulfillment of or compliance with the terms and conditions of this Agreement
and the other Transaction Documents, the issuance of the Bonds nor the payment
of the Obligations:






                                       42
<PAGE>   44
                          (i)     does or will conflict with or result in any
         breach or violation of any Applicable Law, rule or regulation enacted
         or issued by any Governmental Authority or other agency having
         jurisdiction over any Borrower or Guarantor, any of the Properties or
         any other portion of the Collateral or other assets of any Borrower or
         Guarantor, or any judgment or order applicable to any Borrower or
         Guarantor or to which any Borrower or Guarantor, any of the Properties
         or other assets of either any Borrower or Guarantor are subject;

                          (ii)    does or will conflict with or result in any
         material breach or violation of, or constitute a default under, any of
         the terms, conditions or provisions of any of the Borrower
         Organizational Documents, any indenture, existing agreement or other
         instrument to which any Borrower or Guarantor is a party or to which
         any Borrower or Guarantor, any of the Properties or any other portion
         of the Collateral or other assets of any Borrower or Guarantor are
         subject;

                          (iii)   does or will result in or require the
         creation of any Lien on all or any portion of the Collateral or any of
         the Properties, except for the Permitted Liens; or

                          (iv)    does or will require the consent or approval
         of any creditor of any Borrower or Guarantor, any Governmental
         Authority or any other Person except such consents or approvals which
         have already been obtained.

                 (f)      PENDING LITIGATION OR OTHER PROCEEDINGS.  There is no
pending or, to the best knowledge of any Borrower, threatened action, suit,
proceeding or investigation, at law or in equity, before any court, board, body
or official of any Governmental Authority or arbitrator against or affecting
any Property or any other portion of the Collateral or other assets of any
Borrower or Guarantor, which, if decided adversely to such Borrower or
Guarantor, (i) would have, or may reasonably be expected to have, a Material
Adverse Effect or (ii) would adversely affect the exclusion of interest on the
Bonds from gross income for federal income tax purposes.  No Borrower is in
default with respect to any order of any Governmental Authority.

                 (g)      SOLVENCY.  None of the Borrowers or Guarantor is
insolvent or will be rendered insolvent by the transactions contemplated by
this Agreement or the other Transaction Documents and after giving effect to
such transactions, none of the Borrowers or Guarantor will be left with an
unreasonably small amount of capital with which to engage in its business or
undertakings, nor will any Borrower or Guarantor have incurred, have intended
to incur, or believe that it has incurred, debts beyond its ability to pay such
debts as they mature.  No Borrower received less than a reasonably equivalent
value in exchange for incurrence of the Obligations.  There (i) is no
contemplated, pending or, to the best of any Borrower's knowledge, threatened
bankruptcy, reorganization, receivership, insolvency or like proceeding,
whether voluntary or involuntary, affecting any Borrower or Guarantor or any of
the Properties and






                                       43
<PAGE>   45
(ii) has been no assertion or exercise of jurisdiction over any Borrower or
Guarantor or any of the Properties by any court empowered to exercise
bankruptcy powers.

                 (h)      RATIOS.  As of the Bond Transaction Closing Date for
each Bond Transaction, the Aggregate Debt Service Coverage Ratio for all
Properties for the twelve (12) month period ending on July 1, 1996 is not less
than the Minimum DSC Ratio, and the Aggregate Loan to Value Ratio is not
greater than the Maximum LTV Percentage.

                 (i)      TITLE.  Collateral Inc. has good, valid, marketable
and indefeasible title in fee to each Property, other than the Avalon Ridge
Property and the Avalon Lea Property, free and clear of all Liens whatsoever
except the Permitted Liens.  Chase Ridge Inc. has good, valid, marketable and
indefeasible title in fee to the Avalon Ridge Property free and clear of all
Liens whatsoever except the Permitted Liens.  Chase Lea Inc. has good, valid,
marketable and indefeasible title in fee to the Avalon Lea Property free and
clear of all Liens whatsoever except the Permitted Liens.  Each Bond Mortgage,
if and when properly recorded in the appropriate records, together with any
Uniform Commercial Code financing statements required to be filed in connection
therewith, will create a valid, perfected first priority mortgage or deed of
trust lien on the Bond Property intended to be encumbered thereby (including
the Leases of such Bond Property and the rents and revenues and all rights to
collect the rents and revenues under such Leases), subject only to Permitted
Liens.  Each Reimbursement Mortgage with respect to an Additional Mortgaged
Property, if and when properly recorded in the appropriate records, together
with any Uniform Commercial Code financing statements required to be filed in
connection therewith, will create a valid, perfected first priority mortgage or
deed of trust lien on the Additional Mortgaged Property intended to be
encumbered thereby (including the Leases of such Additional Mortgaged Property
and the rents and revenues and all rights to collect the rents and revenues
under such Leases), subject only to Permitted Liens.  Each Reimbursement
Mortgage with respect to a Bond Property, if and when properly recorded in the
appropriate records, together with any Uniform Commercial Code financing
statements required to be filed in connection therewith, will create a valid,
perfected second priority mortgage or deed of trust lien on the Bond Property
intended to be encumbered thereby (including the Leases of such Bond Property
and the rents and revenues and all rights to collect the rents and revenues
under such Leases), subject only to Permitted Liens.  Except for (i) any
Permitted Liens and (ii) claims for work, labor or materials affecting any
Property that will either (x) be paid in full in the ordinary course of
Borrowers' business or (y) if in dispute, be bonded over in the ordinary course
of Borrowers' business, and which in the aggregate for all Properties do not
exceed $100,000.00, there are no Liens or claims for work, labor or materials
affecting any Property which are or may be prior to, subordinate to, or of
equal priority with, the Liens created by the Mortgage Documents.

                 (j)      COMPLIANCE WITH EXISTING BOND ISSUES AND EXISTING
SECURITY INSTRUMENTS.  No event has occurred since the Borrowers acquired their
respective Properties and no condition currently exists with respect to any
Borrower or any Bond Property that would constitute an event of default or
which, with the lapse of time, if not cured, or with the giving of






                                       44
<PAGE>   46
notice or both, would become an event of default under any of the Regulatory
Agreements, any of the Existing Security Instruments any of the Custodial
Receipts Documents or any other document executed in connection with any of the
Existing Bond Issues or the Custodial Receipts Transactions.  Each Borrower has
complied in all material respects with the requirements of each loan agreement
executed in connection with the Existing Bond Issues.

                 (k)      COMPLIANCE WITH TAX CERTIFICATES.  No Borrower has
taken or will take any action, or permit any action that is within any
Borrower's control to be taken, that would impair the exclusion from gross
income for federal income tax purposes of the interest payable on any of the
Existing Bond Issues or the Bonds.  As of the Fannie Mae Facility Closing Date,
each Borrower is in compliance with all material requirements of all of the Tax
Certificates.  Each Borrower has complied and will comply with all the terms
and conditions of the Tax Certificates, including the terms and conditions of
the exhibits thereto, and the representations set forth in the Tax Certificates
pertaining to any Borrower are true and accurate in all material respects.

                 (l)      COMPLIANCE WITH REGULATORY AGREEMENTS.  Each of the
Bond Properties is in compliance with all material requirements of the
applicable Regulatory Agreement.  Each Borrower intends to cause the
residential units in each Bond Property to be rented or available for rental on
a basis which satisfies the requirements of the Regulatory Agreement with
respect to such Bond Property.  All Leases with respect to each Bond Property
will comply with all Applicable Laws and the Regulatory Agreement with respect
to such Bond Property.

                 (m)      TAXES.  The Borrowers have filed all property and
similar tax returns required to have been filed by it with respect to each
Property and have paid and discharged, or caused to be paid and discharged, all
installments for the payment of real estate, property or similar taxes due to
date, and all other material Impositions imposed against, affecting or relating
to each Property other than those which have not become due, together with any
fine, penalty, interest or cost for nonpayment pursuant to such returns or
pursuant to any assessment received by it.  No Borrower has knowledge of any
new proposed tax, levy or other governmental or private assessment or charge in
respect of any Property which has not been disclosed in writing to Fannie Mae.

                 (n)      ZONING.  Each Property complies in all material
respects with all Applicable Laws affecting such Property.  Without limiting
the foregoing, all material Permits, including certificates of occupancy, have
been issued and are in full force and effect. No Borrower nor, to the knowledge
of any Borrower, any former owner of any Property, has received any written
notification or threat of any actions or proceedings regarding the
noncompliance or nonconformity of any Property with any Applicable Laws or
Permits, nor is any Borrower otherwise aware of any such pending actions or
proceedings.

                 (o)      LIABILITY FOR HAZARDOUS SUBSTANCES.  No Borrower nor
Guarantor has any liability, contingent or otherwise, in connection with any
Hazardous Substance Activity on






                                       45
<PAGE>   47
or affecting any Property in violation of Hazardous Materials Laws, except for
potential claims for potential liability of Collateral Inc. or Guarantor with
respect to the presence of (i) radon gas on the Properties commonly known as
Avalon Knoll, Avalon at Carter Lake and Avalon at Gayton, and (ii) non-friable
asbestos located in the vinyl floor tiles of certain portions of the Property
commonly known as Avalon at Carter Lake, in each case, as such radon gas and
asbestos are disclosed in the Environmental Reports with respect to such
Properties, delivered to Fannie Mae prior to the date of this Agreement.
Notwithstanding the foregoing, the Borrowers and Guarantor represent and
warrant that as of the Fannie Mae Facility Closing Date no such claims have
been asserted or threatened.

                 (p)      PROHIBITED ACTIVITIES OR CONDITIONS.  Except as
disclosed in any Environmental Report delivered to Fannie Mae prior to the date
of this Agreement, or otherwise disclosed in writing by the Borrowers to Fannie
Mae prior to the date of this Agreement, (i) to the best knowledge of the
Borrowers, no Prohibited Activities or Conditions exist or have existed at,
upon, under or within any Property that have not been remedied and (ii) no
Borrower nor Guarantor has at any time caused or permitted any Prohibited
Activities or Conditions to exist at, upon, under or within any Property.

                 (q)      HAZARDOUS MATERIALS LAWS.  Except as disclosed in an
Environmental Report delivered to Fannie Mae prior to the date of this
Agreement, or otherwise disclosed in writing by the Borrowers to Fannie Mae
prior to date of this Agreement, (i) no Borrower nor, to the knowledge of any
Borrower, any other party has been or is involved in operations at any Property
which operations could reasonably be expected to lead to (x) the imposition of
liability on any Borrower or Guarantor under any Hazardous Materials Law in
effect as of the date of this Agreement, or on any subsequent or former owner
of any Property, or (y) the creation of a Lien with respect to a liability on
any Property under any Hazardous Materials Law in effect as of the date hereof;
(ii) no Borrower nor Guarantor nor to the best knowledge of any Borrower, any
predecessor-in-interest with respect to any Property has permitted any tenant
or occupant of any Property to engage in any activity that could reasonably be
expected to impose a claim or liability under any Hazardous Materials Law in
effect as of the date hereof on such tenant or occupant, on any Borrower or on
any other subsequent or former owner of any Property; and (iii) no Borrower nor
Guarantor has received, and no Borrower has knowledge of the issuance of, any
claim, citation or notice of any Governmental Actions.

                 (r)      LEASES.  Each Borrower has delivered to Servicer, on
behalf of Fannie Mae, true, complete and correct copies of its forms of
apartment leases for each Property, and each Lease with respect to such
Property is in the form thereof, with no material modifications thereto, except
as previously disclosed in writing to Servicer or Fannie Mae.  Except as set
forth in a Rent Roll, no Lease for any unit in any Property (i) is for a term
in excess of one year, including any renewal or extension period unless such
renewal or extension period is subject to termination by the Borrowers upon not
more than 30 days' written notice except to the extent that a longer term may
be required under Applicable Law, (ii) provides for prepayment of more






                                       46
<PAGE>   48
than one month's rent (other than as set forth on Exhibit M), or (iii) was
entered into in other than the ordinary course of business.

                 (s)      RENT ROLL.  Each Borrower has executed and delivered
to Servicer, on behalf of Fannie Mae, a Certification to Property Rent Roll
(the "RENT ROLL"), for each Property, each dated as of and delivered within
thirty (30) days prior to the Fannie Mae Facility Closing Date and otherwise in
the form promulgated by Fannie Mae.  Each Rent Roll sets forth each and every
unit subject to a Lease which is in full force and effect as of the date of
such Rent Roll.  The information set forth on each Rent Roll is true, correct
and complete as of its date and there has occurred no material adverse change
in the information shown on any Rent Roll from the date of each such Rent Roll
to the Fannie Mae Facility Closing Date.  Except as disclosed in the Rent Roll
with respect to each Property or otherwise previously disclosed in writing to
Servicer or Fannie Mae, no Lease is in effect as of the date of the Rent Roll
with respect to such Property.

                 (t)      STATUS OF LANDLORD UNDER LEASES.  Except for any
assignment of leases and rents which is a Permitted Lien or which is to be
released in connection with the consummation of the transactions contemplated
by this Agreement, each Borrower is the respective owner and holder of the
landlord's interest under each of the Leases of units in each Property owned by
such Borrower and there are no prior outstanding assignments of any such Lease,
or any portion of the rents, additional rents, charges, issues or profits due
and payable or to become due and payable thereunder which were not discharged
as of the Fannie Mae Facility Closing Date.

                 (u)      ENFORCEABILITY OF LEASES.  Each Lease constitutes the
legal, valid and binding obligation of the applicable Borrower and, to the
knowledge of the Borrowers, of each of the other parties thereto, enforceable
in accordance with its terms, subject only to bankruptcy, insolvency,
reorganization or other similar laws relating to creditors' rights generally,
and equitable principles, and except as disclosed in writing to Fannie Mae, no
notice of any default by any Borrower which remains uncured has been sent by
any tenant under any such Lease.

                 (v)      NO LEASE OPTIONS.  All premises demised to tenants
under Leases are occupied by such tenants as tenants only.  No Lease contains
any option or right to purchase, right of first refusal or any other similar
provisions.  No option or right to purchase, right of first refusal, purchase
contract or similar right exists with respect to any Property except such
options or purchase rights that are granted by Applicable Law.

                 (w)      INSURANCE.  The Borrowers have delivered to Servicer
or Fannie Mae true and correct certified copies of all policies of insurance
currently in effect as of the date of this Agreement with respect to the
Properties.  Each such insurance policy complies in all material respects with
the requirements set forth in the Mortgage Documents.






                                       47
<PAGE>   49
                 (x)      TAX PARCELS.  Each Property is on one or more
separate tax parcels, and each such parcel (or parcels) is (or are) separate
and apart from any other property.

                 (y)      ENCROACHMENTS.  Except as set forth in the marked-up
title insurance commitments identified on Exhibit E, none of the improvements
located on any Property encroaches upon the property of any other Person nor
lies outside of the boundaries and building restriction lines of such Property
and no improvement located on property adjoining such Property lies within the
boundaries of or in any way encroaches upon such Property.

                 (z)      INDEPENDENT UNIT.  Each Property is an independent
unit which does not rely on any drainage, sewer, access, parking, structural or
other facilities located on any property not included in such Property or on
public or utility easements for the (i) fulfillment of any zoning, building
code or other requirement of any Governmental Authority that has jurisdiction
over such Property (other than property which any Borrower has rights to
utilize pursuant to a recorded covenant or other agreement of record which is a
Permitted Lien and which is not subject to revocation without any Borrower's
consent), (ii) structural support, or (iii) the fulfillment of the requirements
of any Lease or other agreement affecting such Property.  The Borrowers,
directly or indirectly, have the right to use all amenities, easements, public
or private utilities, parking, access routes or other items necessary or
currently used for the operation of each Property.  All public utilities are
installed and operating at each Property and all billed installation and
connection charges have been paid in full.  Each Property is either (x)
contiguous to or (y) benefits from an irrevocable unsubordinated easement
permitting access from such Property to a physically open, dedicated public
street, and has all necessary permits for ingress and egress and is adequately
serviced by public water, sewer systems and utilities.  No building or other
improvement not located on a Property relies on any part of the Property to
fulfill any zoning requirements, building code or other requirement of any
Governmental Authority that has jurisdiction over the Property for structural
support or to furnish to such building or improvement any essential building
systems or utilities.

                (aa)      CONDITION OF THE PROPERTIES.  Each Property is in
good condition, order and repair, there exist no structural or other material
defects in such Property, whether latent or otherwise and no Borrower has
received notice from any insurance company or bonding company of any defects or
inadequacies in such Property, or any part of it, which would adversely affect
the insurability of such Property or cause the imposition of extraordinary
premiums or charges for insurance or of any termination or threatened
termination of any policy of insurance or bond.  No claims have been made
against any contractor, architect or other party with respect to the condition
of any Property or the existence of any structural or other material defect
therein.  No Property has been materially damaged by Casualty which has not
been fully repaired or for which Insurance Proceeds have not been received or
are not expected to be received except as previously disclosed in writing to
Fannie Mae or Servicer.  There are no proceedings pending for partial or total
Condemnation of any Property except as disclosed in writing to Fannie Mae or
Servicer.  The average term of each issue of Related Securities does






                                       48
<PAGE>   50
not exceed 120% of the average reasonably expected economic life of the
facilities of the Bond Property with respect to such Related Securities.

                (bb)      NO CONTRACTUAL DEFAULTS.  Except as otherwise set
forth in Exhibit L hereto, there are no defaults by any Borrower or Guarantor
or, to the knowledge of the Borrowers, by any other Person under any contract
to which any Borrower or Guarantor is a party relating to any Property,
including any management, rental, service, supply, security, maintenance or
similar contract, that either (i) individually or in the aggregate, would cause
a Material Adverse Effect, or (ii) involves, in any individual instance, an
actual or potential disputed amount that is equal to or in excess of
$10,000.00.  Except as otherwise set forth in Exhibit L hereto, no Borrower nor
Guarantor or to the knowledge of any Borrower, any other person has received
notice or has any knowledge of any existing circumstances in respect of which
it could receive any notice of default or breach in respect of any contracts
affecting or concerning any Property, that either (i) individually or in the
aggregate, would cause a Material Adverse Effect, or (ii) involves, in any
individual instance, an actual or potential disputed amount that is equal to or
in excess of $10,000.00.

                (cc)      COMPLIANCE WITH THE TRANSACTION DOCUMENTS.  Each
Borrower is in compliance with all provisions of the Transaction Documents to
which it is a party or by which it is bound.  The representations and
warranties made by each Borrower in the Transaction Documents are true,
complete and correct as of the Fannie Mae Facility Closing Date.

                (dd)      ERISA.  Each Borrower and Guarantor are in compliance
in all material respects with all applicable provisions of ERISA and has not
incurred any liability to the PBGC on a Plan under Title IV of ERISA.  None of
the assets of any Borrower or Guarantor constitute plan assets (within the
meaning of Department of Labor Regulation Section 2510.3-101) of any employee
benefit plan subject to Title I of ERISA.

                (ee)      OFFICIAL STATEMENT.  The statements and information
concerning each Borrower, their Affiliates and the Related Bond Property set
forth in each Official Statement are each complete and correct as of its date
and, as of its date, do not contain any untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.

                (ff)      FINANCIAL INFORMATION.  The written financial
projections relating to each Borrower and Guarantor and delivered to Servicer,
on behalf of Fannie Mae, on or prior to the date hereof, if any, were prepared
on the basis of assumptions believed by each Borrower, in good faith at the
time of preparation, to be reasonable and no Borrower is aware of any fact or
information that would lead it to believe that such assumptions are incorrect
or misleading in any material respect; provided, however, that no
representation or warranty is made that any result set forth in such financial
projections shall be achieved.  The financial statements of each Borrower and
Guarantor which have been furnished to Servicer on behalf of Fannie Mae are






                                       49
<PAGE>   51
complete and accurate in all material respects and present fairly the financial
condition of each Borrower and Guarantor, as of their respective dates in
accordance with GAAP, applied on a consistent basis, and since the date of the
most recent of such financial statements no event has occurred which would
have, or may reasonably be expected to have a Material Adverse Effect, and
there has not been any material transaction entered into by any Borrower or
Guarantor other than transactions in the ordinary course of business.  No
Borrower or Guarantor has any material Contingent Obligation which is not
otherwise disclosed in its most recent financial statements.

                (gg)      ACCURACY OF INFORMATION.  No information, statement
or report furnished in writing to Fannie Mae, any Issuer, Servicer or any
Related Trustee by any Borrower or Guarantor in connection with this Agreement,
the Bond Documents, the Mortgage Documents, the Custodial Receipts Documents or
any other Transaction Document or in connection with the consummation of the
transactions contemplated hereby and thereby (including any information
furnished by any Borrower or Guarantor in connection with the preparation of
any materials related to the issuance delivery or offering of any of the Bonds
on the Bond Transaction Closing Date) contains any material misstatement of
fact or omits to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading; and the representations and warranties of each Borrower and the
statements, information and descriptions contained in each Borrower's closing
certificates, as of the Fannie Mae Facility Closing Date, are true, correct and
complete in all material respects, do not contain any untrue statement or
misleading statement of a material fact; and the estimates and the assumptions
contained herein and in any certificate of any Borrower delivered as of the
Fannie Mae Facility Closing Date are reasonable and based on the best
information available to each Borrower.

                (hh)      NO CONFLICTS OF INTEREST.  To the best knowledge of
each Borrower, no member, officer, agent or employee of any Issuer has been or
is in any manner interested, directly or indirectly, in that Person's own name,
or in the name of any other Person, in the Related Securities, the Related Bond
Documents with respect to any Bond Property, the Related Custodial Receipts
Documents, the Bond Property Loan Documents with respect to any Bond Property,
any Borrower or Guarantor or any Bond Property, in any contract for property or
materials to be furnished or used in connection with such Bond Property or in
any aspect of the transactions contemplated by the Bond Documents, the Related
Bond Property Loan Documents with respect to any Bond Property or the Related
Custodial Receipts Documents.

                (ii)      GOVERNMENTAL APPROVALS.  No Governmental Approval not
already obtained or made is required for the execution and delivery or
approval, as the case may be, of this Agreement, the Bond Documents, the
Custodial Receipts Documents, the Mortgage Documents or any other Transaction
Document or the performance of the terms and provisions hereof or thereof by
any Borrower or Guarantor.

                (jj)      GOVERNMENTAL ORDERS.  No Borrower is presently under
any cease or desist order or other orders of a similar nature, temporary or
permanent, of any Governmental






                                       50
<PAGE>   52
Authority which would have the effect of preventing or hindering performance of
its duties hereunder, nor are there any proceedings presently in progress or to
its knowledge contemplated which would, if successful, lead to the issuance of
any such order.

                (kk)      NO RELIANCE.  Each Borrower acknowledges, represents
and warrants that it understands the nature and structure of the transactions
relating to the refinancings of the Bond Properties, that it is familiar with
the provisions of all of the documents and instruments relating to such
refinancings to which it or any Issuer is a party or of which it is a
beneficiary; that it understands the risks inherent in such transactions,
including the risk of loss of all or any of the Bond Properties and the
Additional Mortgaged Properties; and that it has not relied on any Issuer or
Fannie Mae for any guidance or expertise in analyzing the financial or other
consequences of the transactions contemplated by this Agreement, any Related
Indenture or any other Transaction Document or otherwise relied on any Issuer
or Fannie Mae in any manner in connection with interpreting, entering into or
otherwise in connection with this Agreement, any other Transaction Document or
any of the matters contemplated hereby or thereby.

                (ll)      ARBITRAGE BONDS.  No money on deposit in any fund or
account in connection with any of the Existing Bond Issues, whether or not such
money was derived from other sources, has been used by or under the direction
of any Borrower or Guarantor in a manner which would cause any of the Existing
Bond Issues to be ``arbitrage bonds'' within the meaning of Section 103(c) of
the Internal Revenue Code of 1954, as amended.

                (mm)      COMPLIANCE WITH APPLICABLE LAW.  Each Borrower and
Guarantor is in compliance with Applicable Law, including all Governmental
Approvals, if any, except for such items of noncompliance that, singly or in
the aggregate, have not had and are not reasonably expected to cause, a
Material Adverse Effect.

                (nn)      CONTRACTS WITH AFFILIATES. No Borrower has entered
into or is a party to any contract, lease or other agreement with any Affiliate
of such Borrower for the provision of any service, materials or supplies to any
Property or Properties (including any contract, lease or agreement for the
provision of property management services, cable television services or
equipment, gas, electric or other utilities, security services or equipment,
laundry services or equipment or telephone services or equipment), other than
the Management Agreements and that certain Shared Facilities Agreement dated as
of July 31, 1996 (the "SHARED FACILITIES AGREEMENT") by and between Collateral
Inc. and Guarantor with respect to the Bond Property commonly known as Avalon
Meadows.

                (ao)      COMPLIANCE WITH SALEM STATION RESTRICTIVE COVENANTS
AGREEMENT.  The Salem Station Project is in compliance with all material
requirements of the Salem Station Restrictive Covenants Agreement.  The
Borrowers intend to cause the residential units in the Salem Station Project to
be rented or available for rental on a basis which satisfies the requirements
of the Salem Station Restrictive Covenants Agreements.  All Leases with respect
to






                                       51
<PAGE>   53
the Salem Station Project will comply with all applicable laws and the Salem
Station Restrictive Covenants Agreement.

2                AFFIRMATIVE COVENANTS OF OWNER.

                 Each Borrower agrees and covenants with Fannie Mae that, at
all times during the term of this Agreement:

                 (a)      COMPLIANCE WITH AGREEMENTS; NO AMENDMENTS.  Each
Borrower shall comply with all the terms and conditions of each Transaction
Document to which it is a party or by which it is bound.  Each Borrower shall
use commercially reasonable efforts to cause the Related Trustee in each Bond
Transaction and each Custodial Receipts Transaction at all times to comply with
the terms of the Related Bond Documents and/or the Related Custodial Receipts
Documents to which each such Related Trustee is a party.

                 (b)      MAINTENANCE OF EXISTENCE.  Each Borrower shall
maintain its existence and continue to be a corporation organized under the
laws of the state of Maryland, duly qualified to do business in each
jurisdiction in which such qualification is necessary to the conduct of its
business and where the failure to be so qualified would adversely affect the
validity of, the enforceability of or ability to perform its obligations under
this Agreement or any other Transaction Document.

                 (c)      MAINTENANCE OF QRS STATUS.  At all times during which
any Borrower is bound by the terms of this Agreement, each such Borrower shall
continue to qualify as a "Qualified REIT Subsidiary" (as defined in Subchapter
M of the Code) of Guarantor.

                 (d)      FINANCIAL STATEMENTS; ACCOUNTANTS' REPORTS; OTHER
INFORMATION.   The Borrowers shall keep and maintain at all times complete and
accurate books of accounts and records in sufficient detail to correctly
reflect (x) all of the Borrowers' financial transactions and assets and (y) the
results of the operation of each Property and copies of all written contracts,
Leases and other instruments which affect each Property (including all bills,
invoices and contracts for electrical service, gas service, water and sewer
service, waste management service, telephone service and management services).
In addition, the Borrowers shall furnish, or cause to be furnished, to
Servicer, and upon Fannie Mae's request, to Fannie Mae:

                          (i)     Annual Financial Statements.  As soon as
         available, and in any event within one hundred and twenty (120) days
         after the close of each fiscal year of each Borrower during the term
         of this Agreement, each Borrower's audited balance sheet as of the end
         of such fiscal year, its audited statement of income, retained
         earnings for such fiscal year and its audited statement of cash flows
         for such fiscal year, all in reasonable detail and stating in
         comparative form the respective figures for the corresponding date and
         period in the prior fiscal year, prepared in accordance with GAAP,
         consistently applied, and certified by the chief financial officer of
         such Borrower to the effect that






                                       52
<PAGE>   54
         such financial statements have been prepared in accordance with GAAP,
         consistently applied, and that such financial statements fairly
         present the results of its operations and financial condition for the
         periods and dates indicated, with such certification of such
         Borrower's chief financial officer to be free of exceptions and
         qualifications as to the scope of the audit or as to the going concern
         nature of the business.

                          (ii)    Quarterly Financial Statements.  As soon as
         available, and in any event within forty-five (45) days after each of
         the first three fiscal quarters of each fiscal years during the term
         of this Agreement, each Borrower's unaudited balance sheet as of the
         end of such fiscal quarter and its unaudited statement of income and
         retained earnings and its unaudited statement of cash flows for the
         portion of the fiscal year ended with the last day of such quarter,
         all in reasonable detail and stating in comparative form the
         respective figures for the corresponding date and period in the
         previous fiscal year, accompanied by a certificate of the chief
         financial officer of such Borrower to the effect that such financial
         statements have been prepared in accordance with GAAP, consistently
         applied, and that such financial statements fairly present the results
         of its operations and financial condition for the periods and dates
         indicated subject to year end adjustments in accordance with GAAP.

                          (iii)   Monthly Property Statements.  On a monthly
         basis within thirty (30) days of the last day of the prior month, a
         statement of income and expenses of each Property accompanied by a
         certificate of the chief financial officer of each Borrower to the
         effect that each such statement of income and expenses fairly,
         accurately and completely presents the operations of each such
         Property for the period indicated.

                          (iv)    Annual Property Statements.  On an annual
         basis within forty-five (45) days of the end of the fiscal year, an
         annual statement of income and expenses of each Property accompanied
         by a certificate of the chief financial officer of each Borrower to
         the effect that each such statement of income and expenses fairly,
         accurately and completely presents the operations of each such
         Property for the period indicated.

                          (v)     Updated Rent Rolls.  Upon Servicer's or
         Fannie Mae's request, a current Rent Roll for each Property, showing
         the name of each tenant, and for each tenant, the space occupied, the
         lease expiration date, the rent payable, the rent paid and any other
         information requested by Servicer or Fannie Mae and in the form
         required by Servicer or Fannie Mae and accompanied by a certificate of
         the chief financial officer of each Borrower to the effect that each
         such Rent Roll fairly, accurately and completely, in all material
         respects, presents the information required therein as of the date
         thereof.

                          (vi)    Security Deposit Information.  Upon
         Servicer's or Fannie Mae's request, an accounting of all security
         deposits held in connection with any lease of any part of any
         Property, including the name and identification number of the accounts
         in which such security deposits are held, the name and address of the
         financial institutions in






                                       53
<PAGE>   55
         which such security deposits are held and the name of the person to
         contact at such financial institution, along with any authority or
         release necessary for Servicer or Fannie Mae to access information
         regarding such accounts.

                          (vii)   Security Law Reporting Information.  So long
         as Guarantor is a reporting company under the Securities and Exchange
         Act of 1934, promptly upon the mailing thereof to the shareholders of
         Guarantor, the Borrowers shall furnish to Servicer and upon Fannie
         Mae's request, to Fannie Mae, copies of all financial statements,
         reports and proxy statements so mailed.  Promptly upon the filing
         thereof, copies of all registration statements (other than the
         exhibits thereto and any registration statements on Form S-8 or its
         equivalent) and annual, quarterly or monthly reports (excluding Form
         4, Statement of Changes in Beneficial Ownership, or its equivalent,
         unless they reflect a change in control in Guarantor) or current
         reports on Form 8K which Guarantor shall have filed with the United
         States Securities and Exchange Commission or other Governmental
         Authorities.

                          (viii)  Accountants' Reports.  Promptly upon receipt
         thereof, copies of any reports or management letters submitted to any
         Borrower by its independent certified public accountants in connection
         with the examination of its financial statements made by such
         accountants (except for reports otherwise provided pursuant to clause
         (i) above).

                          (ix)    Other Reports.  Promptly upon request
         therefor, all schedules, financial statements or other similar reports
         delivered by any Borrower pursuant to the Transaction Documents or
         otherwise requested by Servicer or Fannie Mae with respect to any
         Borrower's business affairs or condition (financial or otherwise) or
         any of the Properties.

                 (e)      CERTIFICATE OF COMPLIANCE.  The Borrowers shall
deliver to Servicer concurrently with the delivery of the financial statements
and/or reports required to be delivered pursuant to paragraphs (d)(i) and
(d)(ii) above a certificate signed by the chief financial officer of each
Borrower stating that, to the best of the knowledge of such chief financial
officer, following reasonable inquiry, no Event of Default or Potential Event
of Default has occurred, or if an Event of Default or Potential Event of
Default has occurred, specifying the nature thereof.

                 (f)      MAINTAIN LICENSES.  The Borrowers shall procure and
maintain in full force and effect all licenses, Permits, charters and
registrations which are material to the conduct of its business and shall abide
by and satisfy all terms and conditions of all such licenses, Permits, charters
and registrations.

                 (g)      ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND
ACCOUNTANTS.  To the extent permitted by law and in addition to the applicable
requirements of the Mortgages, each Borrower shall permit Fannie Mae or
Servicer:






                                       54
<PAGE>   56
                          (i)     to inspect, make copies and abstracts of, and
         have reviewed or audited, such books and records of each Borrower as
         may relate to the Obligations or any Property;

                          (ii)    to discuss each Borrower's affairs, finances
         and accounts with any of such Borrower's officers, partners and
         employees;

                          (iii)   to discuss each Borrower's affairs, finances
         and accounts with its independent public accountants, provided that
         the chief financial officer of such Borrower has been given the
         opportunity by Servicer or Fannie Mae to be a party to such
         discussions; and

                          (iv)    to receive any other information that Fannie
         Mae or Servicer reasonably deems necessary or relevant in connection
         with any Mortgage Loan, any Transaction Document or the Obligations.

                 Notwithstanding the foregoing, prior to an Event of Default or
Potential Event of Default all such inspections shall be conducted at
reasonable times during normal business hours.

                 (h)      INFORM FANNIE MAE AND SERVICER OF MATERIAL EVENTS.
The Borrowers shall promptly inform Fannie Mae and Servicer in writing of any
of the following (and shall deliver to Fannie Mae and Servicer copies of any
related written communications, complaints, orders, judgments and other
documents relating to the following) of which any Borrower has or obtains
actual knowledge:

                          (i)     Defaults.  The occurrence of any Event of
         Default or any Potential Event of Default under this Agreement or any
         other Transaction Document;

                          (ii)    Regulatory Proceedings.  The commencement of
         any rulemaking or disciplinary proceeding or the promulgation of any
         proposed or final rule which would have, or may reasonably be expected
         to have, a Material Adverse Effect or adversely affect the tax-exempt
         status of the interest payable on any of the Related Securities;

                          (iii)   Legal Proceedings.  The commencement or
         threat of, or amendment to, any proceedings by or against any Borrower
         or Guarantor in any Federal, state or local court or before any
         Governmental Authority, or before any arbitrator, which, if adversely
         determined, would have, or at the time of determination may reasonably
         be expected to have, a Material Adverse Effect or adversely affect the
         tax-exempt status of the interest payable on any of the Related
         Securities;

                          (iv)    Bankruptcy Proceedings.  The commencement of
         any proceedings by or against any Borrower or Guarantor under any
         applicable bankruptcy, reorganization, liquidation, insolvency or
         other similar law now or hereafter in effect or






                                       55
<PAGE>   57
         of any proceeding in which a receiver, liquidator, trustee or other
         similar official is sought to be appointed for it;

                          (v)     Regulatory Supervision or Penalty.  The
         receipt of notice from any Governmental Authority having jurisdiction
         over any Borrower or Guarantor that (A) any Borrower or Guarantor is
         being placed under regulatory supervision, (B) any license, Permit,
         charter, membership or registration material to the conduct of any
         Borrower's or Guarantor's respective business or the Properties is to
         be suspended or revoked or (C) any Borrower or Guarantor is to cease
         and desist any practice, procedure or policy employed by such Borrower
         or Guarantor, as the case may be, in the conduct of its business, and
         such cessation would have, or may reasonably be expected to have, a
         Material Adverse Effect or would adversely affect the tax-exempt
         status of the interest on any Bonds; and

                          (vi)    Environmental Claim.  The receipt of notice
         from any Governmental Authority or other Person relating to any
         Environmental Claim involving any Borrower or Guarantor or any of its
         assets, including the Properties.

                 (i)      SINGLE-PURPOSE ENTITY.  Each Borrower shall at all
times maintain and conduct itself as a Single-Purpose entity.

                 (j)      INSPECTION.  Each Borrower shall permit any Person
designated by Fannie Mae (including Servicer):  (i) to make entries upon and
inspections of the Properties; and (ii) to otherwise verify, examine and
inspect the amount, quantity, quality, value and/or condition of, or any other
matter relating to, any Property; provided, however, that prior to an Event of
Default or Potential Event of Default all such entries, examinations and
inspections shall be conducted at reasonable times during normal business
hours.

                 (k)      COMPLIANCE WITH APPLICABLE LAWS.  Each Borrower shall
comply in all material respects with all Applicable Laws now or hereafter
affecting any Property or any part of any Property or requiring any
alterations, repairs or improvements to any Property, except to the extent a
Borrower may be diligently and continuously contesting such Applicable Law in
good faith and in a timely, appropriate and legal manner and Fannie Mae
reasonably determines that such contest will not likely cause a Material
Adverse Effect.  Each Borrower shall procure and continuously maintain in full
force and effect, and shall abide by and satisfy all material terms and
conditions of all Permits.

                 (l)      WARRANTY OF TITLE.  Each Borrower shall warrant and
defend (a) the title to each Property and every part of each Property, subject
only to Permitted Liens, and (b) the validity and priority of the lien of the
applicable Mortgage Documents, subject only to Permitted Liens, in each case
against the claims of all Persons whatsoever.  The Borrowers shall reimburse
Fannie Mae and Servicer for any losses, costs, damages or expenses (including
reasonable






                                       56
<PAGE>   58
attorneys' fees and court costs) incurred by Fannie Mae or Servicer if an
interest in any Property, other than with respect to a Permitted Lien, is
claimed by others.

                 (m)      DEFENSE OF ACTIONS.  The Borrowers shall appear in
and defend any action or proceeding purporting to affect the security for this
Agreement or the rights or power of Fannie Mae or Servicer hereunder or under
any other Transaction Document, and shall, pursuant to section 4.2, pay all
costs and expenses, including the cost of evidence of title and reasonable
attorneys' fees, in any such action or proceeding in which Fannie Mae may
appear in accordance with the provisions of this Agreement or the other
Transaction Documents.  If the Borrowers fail to perform any of the covenants
or agreements contained in this Agreement or in any other Transaction Document,
or if any action or proceeding is commenced that is not diligently defended by
the Borrowers which affects in any material respect Fannie Mae's or any Related
Trustee's interest in any Property or any part thereof, including eminent
domain, code enforcement or proceedings of any nature whatsoever under any
Applicable Law, whether now existing or hereafter enacted or amended, then
Fannie Mae may, with ten (10) days prior notice to the Borrowers, but without
demand upon the Borrowers, without obligation to do so, and without releasing
the Borrowers from any Obligation, make such appearances, disburse such sums
and take such action as Fannie Mae or Servicer deems necessary or appropriate
to protect Fannie Mae's or such Related Trustee's interest, including
disbursement of attorney's fees, entry upon such Property to make repairs or
take other action to protect the security of said Property, payment, purchase,
contest or compromise of any encumbrance, charge or lien which in the judgment
of Fannie Mae appears to be prior or superior to the Transaction Documents, and
procurement of satisfactory insurance required to be maintained by the
Borrowers under the Transaction Documents; provided, however, that Fannie Mae
shall not be required to give prior notice to the Borrowers if Fannie Mae
reasonably determines that such appearance, disbursement or action is necessary
to prevent a Material Adverse Effect.  In the event (i) that any Mortgage is
foreclosed in whole or in part or that any Transaction Document is put into the
hands of an attorney for collection, suit, action or foreclosure, or (ii) of
the foreclosure of any mortgage, deed to secure debt, deed of trust or other
security instrument prior to or subsequent to any Mortgage or any Transaction
Document in which proceeding Fannie Mae is made a party or (iii) of the
bankruptcy of any of the Borrowers or Guarantor or an assignment by any of the
Borrowers or Guarantor for the benefit of its creditors, the Borrowers shall be
chargeable with and agree to pay all costs of collection and defense, including
actual attorneys' fees in connection therewith and in connection with any
appellate proceeding or post-judgment action involved therein, which shall be
due and payable together with all required service or use taxes.

                 (n)      PROPERTY MANAGEMENT; MAINTENANCE OF PROPERTIES.  The
Borrowers shall continue to operate each Property as a Multifamily Residential
Property, and shall manage or cause to be managed the operations of each
Property in accordance with the applicable provisions of the Mortgage Documents
and the other Transaction Documents.  The Borrowers (i) shall not commit waste
or permit impairment or deterioration of any Property, (ii) shall not abandon
any Property, (iii) shall restore or repair promptly and in a good and
workmanlike manner all or any part of any Property to the equivalent of its
condition existing immediately






                                       57
<PAGE>   59
prior to such Casualty, or such other lesser condition as Fannie Mae may
approve in writing, in the event of any Casualty thereto, whether or not
Insurance Proceeds are available to cover in whole or in part the costs of such
restoration or repair, (iv) shall keep each Property, including improvements,
fixtures, equipment, machinery and appliances thereon in good repair and shall
replace fixtures, equipment, machinery and appliances on each Property when
necessary to keep such items in good repair, (v) shall generally operate and
maintain each Property in accordance with the standards for "Class A"
Multifamily Residential Properties in the regional market in which each such
Property is located and (vi) shall give notice in writing to Fannie Mae of,
and, unless otherwise directed in writing by Fannie Mae, appear in and defend,
any action or proceeding purporting to affect any Property, the security of any
Mortgage or the rights or powers of Fannie Mae under any of the Transaction
Documents.  Except as provided in section 2.2(o), neither the Borrowers nor any
tenant or other person shall remove, demolish or alter any improvement now
existing or hereafter erected on any Property or any fixture, equipment,
machinery or appliance in or on any Property except when incident to the
replacement of fixtures, equipment, machinery and appliances with items of like
kind.

                 (o)      ADDITIONS TO THE PROPERTIES.  Except as otherwise
provided in the Mortgage Documents, the Borrowers shall have the right to
undertake any alteration, improvement, demolition, removal, or construction
(collectively, "ALTERATIONS") to the Properties without the prior consent of
Fannie Mae; provided, however, that in any case, no such Alteration shall be
made to any Property without the prior written consent of Fannie Mae if (i)
such Alteration could reasonably be expected to have a Material Adverse Effect
on the value of such Property or its operation as a multifamily housing
facility in substantially the same manner in which it is being operated on the
date of this Agreement, (ii) the construction of such Alteration could
reasonably be expected to result in interference to the occupancy of tenants of
such Property such that tenants in occupancy with respect to 5% or more of the
Leases would be permitted to terminate their Leases or to abate the payment of
all or any portion of their rent, or (iii) such Alteration will be completed in
more than twelve (12) months from the date of commencement or in the last year
of the term of this Agreement.  Notwithstanding the foregoing, the Borrowers
must give prior written notice to Fannie Mae of any Borrower's intent to
construct Alterations with respect to such Property costing in excess of
$100,000; provided, however, that the preceding requirement shall not be
applicable to Alterations made, conducted or undertaken by the Borrowers as
part of the routine maintenance and repair of the Properties pursuant to
section 2.2(n) or as otherwise required by the Mortgage Documents.

                 (p)      ERISA.  The Borrowers shall at all times remain in
compliance in all material respects with all applicable provisions of ERISA and
similar requirements of the PBGC.

                 (q)      TAXES.  If any tax, assessment or Imposition (other
than a tax measured by gross or net income of, or an excise, franchise or gross
receipts tax imposed on, any Related Trustee or Fannie Mae (or any transferee
or assignee thereof, including a participation holder)) ("TAXES") is levied,
assessed or charged by the United States or any political subdivision or taxing
authority thereof or therein upon any of the Transaction Documents or the
obligations






                                       58
<PAGE>   60
secured thereby, the interest of Fannie Mae or any Related Trustee in the
Properties, or Fannie Mae or any Related Trustee by reason of or as holder of
the Transaction Documents, the Borrowers shall pay all such Taxes to, for, or
on account of Fannie Mae or the applicable Related Trustee (or provide funds to
Fannie Mae or such Related Trustee for such payment, as the case may be) upon
receipt of written notice that such amounts have become due and payable (or
upon such amounts becoming due and payable if any Borrower has received prior
written notice thereof) and shall promptly furnish proof of such payment to
Fannie Mae or such Related Trustee, as applicable.  In the event of passage of
any law or regulation permitting, authorizing or requiring such Taxes to be
levied, assessed or charged, which law or regulation in the opinion of counsel
to Fannie Mae or any Related Trustee may prohibit the Borrowers from paying the
Taxes to or for Fannie Mae or such Related Trustee, the Borrowers shall enter
into such further instruments as may be reasonably required by Fannie Mae and
permitted by Applicable Law to obligate the Borrowers to pay such Taxes.

                 (r)      FURTHER ASSURANCES.  The Borrowers, at the request of
Fannie Mae, shall execute and deliver and, if necessary, file or record such
statements, documents, agreements, UCC financing and continuation statements
and such other instruments and take such further action as Fannie Mae from time
to time may request as reasonably necessary, desirable or proper to carry out
more effectively the purposes of this Agreement or any of the other Transaction
Documents or to subject the Collateral to the lien and security interests of
the Mortgage Documents or to evidence, perfect or otherwise implement, to
assure the lien and security interests intended by the terms of the Transaction
Documents or in order to exercise or enforce its rights under the Transaction
Documents.  In addition, the Borrowers shall cooperate with each of the Rating
Agencies in connection with any review of the transactions described in the
Transaction Documents which may be undertaken by either of the Rating Agencies
after the date of this Agreement.

                 (s)      MONITORING COMPLIANCE.  Upon the request of Servicer,
from time to time, and at any time certification of the matters set forth below
is provided to the Issuer, the Related Trustee or any other Governmental
Authority, the Borrowers shall promptly provide to Servicer the following:

                          (i)  the Borrowers' certification of each Bond
         Property's compliance with the rules qualifying such Bond Property for
         federal tax exemption pursuant to Section 103 of the Code and the
         regulations issued under such Section 103 and the requirements of the
         Regulatory Agreement with respect to such Bond Property;

                          (ii) If any Property has received or receives a tax
         credit allocation, Borrowers' certification of such Property's
         compliance with the requirements of Section 42 of the Code and the
         regulations issued under Section 42 and if the tax credits have not
         yet been syndicated, Borrowers' report regarding progress in
         syndicating the tax credit allocation until the syndication is
         completed; and






                                       59
<PAGE>   61
                          (iii)  Such other documents, certificates and other
         information as may be deemed necessary to enable Servicer to perform
         the functions under the Servicing Agreement.

                 (t)      CONTINUING DISCLOSURE.  The Borrowers shall cooperate
with each Remarketing Agent in complying with all federal securities laws
relating to continuing disclosure that are applicable to the Bonds, including
Rule 15c2-12, promulgated by the Securities and Exchange Commission under the
Securities Exchange Related Act of 1934, as such rule may be amended from time
to time.

                 (u)      LEASES.  Each unit in each Property will be leased
pursuant to the form leases delivered to, and acceptable to, Fannie Mae and
Servicer, with no material modifications to such approved form lease, except as
disclosed in writing to Fannie Mae and Servicer.  Without the prior written
consent of Fannie Mae, no Borrowers shall enter into any Lease for any unit in
any Property that (i) is for a term in excess of one year, including any
renewal or extension period unless such renewal or extension period is subject
to termination by such Borrower upon not more than thirty (30) days' written
notice, except to the extent that a longer term may be required under
Applicable Law, (ii) provides for prepayment of more than one month's rent,
(iii) is entered into in other than the ordinary course of Borrowers' business,
or (iv) contains any option or right to purchase, right of first refusal or any
other similar provisions, except such options or purchase rights that are
granted by Applicable Law.

3                NEGATIVE COVENANTS OF BORROWERS.  The Borrowers enter into the
covenants and agreements with Fannie Mae set forth in this section 2.3.  Each
covenant and agreement shall apply continuously during the term of this
Agreement:

                 (a)      OTHER ACTIVITIES.  No Borrower shall:

                                  (i)      either directly or indirectly sell,
                 transfer, exchange or otherwise dispose of any of its assets
                 except as permitted hereunder, by the Mortgages or the Cash
                 Management Agreement;

                                  (ii)     take any action or omit to take any
                 action that, if taken or omitted, would adversely affect the
                 exclusion of interest on the Bonds from gross income for
                 Federal income tax purposes pursuant to Section 103 of the
                 Code;

                                  (iii)    engage in any business or activity
                 other than in connection with the ownership, management and
                 operation of (A) with respect to Collateral Inc., each
                 Property other than the Avalon Ridge Property and the Avalon
                 Lea Property, (B) with respect to Chase Ridge Inc., the Avalon
                 Ridge Property, and (C) with respect to Chase Lea Inc. the
                 Avalon Lea Property;






                                       60
<PAGE>   62
                                  (iv)     amend its respective Borrower
                 Organizational Documents in any manner inconsistent with this
                 Agreement or the other Transaction Documents without the prior
                 written consent of Fannie Mae;

                                  (v)      dissolve or liquidate in whole or in
                 part;

                                  (vi)     merge or consolidate with any
                 Person; or

                                  (vii)    use, or permit to be used, any
                 Property for any uses or purposes other than as a Multifamily
                 Residential Property.

                 (b)      NO AMENDMENTS TO TRANSACTION DOCUMENTS.  Unless
Fannie Mae shall otherwise consent in writing, no Borrower shall agree to any
amendment of, supplement to, or waiver, modification, or termination of, any of
the terms or provisions of any Transaction Document.

                 (c)      COMPLIANCE WITH THE TRANSACTION DOCUMENTS.  No
Borrower shall fail to comply with any provision of any the Transaction
Documents to which it is a party or by which it is bound.

                 (d)      VALUE OF SECURITY.  No Borrower shall take any action
which could reasonably be expected to have any Material Adverse Effect.

                 (e)      ZONING.  No Borrower shall initiate or consent to any
zoning reclassification of any Property or seek any variance under any zoning
ordinance or use or permit the use of any Property in any manner that could
result in the use becoming a nonconforming use under any zoning ordinance or
any other applicable land use law, rule or regulation.

                 (f)      LIENS.  No Borrower shall create, incur, assume or
suffer to exist any Lien on any Property or any part of any Property, except
the Permitted Liens;

                 (g)      SALE.  No Borrower shall sell, convey, transfer,
assign or otherwise relinquish any Property or any part of any Property without
the prior written consent of Fannie Mae (which consent may be granted or
withheld in Fannie Mae's discretion), or any interest in any Property, other
than (i) as may be permitted by the Mortgage Documents with respect to such
Property, or (ii) in accordance with the provisions of section 5.2 or section
5.3, or (iii) to enter into Leases for units in a Property to any tenant in the
ordinary course of business.

                 (h)      USE OF PROCEEDS.  The proceeds from the issuance and
sale of the Bonds shall not be used for any purpose other than the refinancing
of the Bond Properties.






                                       61
<PAGE>   63
                 (i)      INDEBTEDNESS.  The Borrowers shall not incur or be
obligated at any time with respect to Indebtedness (other than the Mortgage
Loans and the Custodial Receipts Mortgage Notes) in excess of $100,000 in the
aggregate for all Borrowers.


                 (j)      SINGLE-PURPOSE ENTITY.  No Borrower shall cease at
any time during the term hereof to be a Single-Purpose entity.

                 (k)      PRINCIPAL PLACE OF BUSINESS.  No Borrower shall
change its principal place of business or the location of its books and
records, each as set forth in section 2.1(a), without first giving thirty (30)
days' prior written notice to Fannie Mae.

4                CERTAIN COVENANTS WITH RESPECT TO FLOATING RATE BOND
TRANSACTIONS.

                 With respect to each Floating Rate Bond Transaction, the
Borrowers agree and covenant with Fannie Mae that, at all times during the term
of this Agreement:

                 (a)      PREPAYMENT OF MORTGAGE LOANS IN FLOATING RATE BOND
TRANSACTIONS.  If a Borrower elects, or is required, to prepay any Related
Mortgage Note in whole or in part, subject to and in accordance with the terms
and conditions of such Related Mortgage Note, the Borrowers shall be obligated
to pay all amounts, if any, due under or in connection with the Related Bonds
that will not have been paid as a result of the prepayment of such Related
Mortgage Note, including accrued interest on the Related Bonds to the date of
redemption (calculated at the Maximum Rate to the extent and for the period
that such Related Bonds bear interest at the Variable Rate), and the premium,
if any, payable to the applicable Bondholders by reason of such redemption,
until such Related Bonds have been redeemed in accordance with the Related Bond
Documents, together with and in addition to, any prepayment premium due
pursuant to the Related Mortgage Note.  Notwithstanding anything to the
contrary contained in the Transaction Documents, the Borrowers shall not make a
voluntary prepayment of any Mortgage Loan in a Floating Rate Bond Transaction
that would result in a redemption of all or any part of any Related Bonds
pursuant to the Related Indenture unless (i) the Borrowers have deposited with
the Related Trustee on or prior to the date on which such Related Trustee will
call the applicable Related Bonds for redemption, all amounts required for such
redemption, (ii) the Borrowers have received the prior written consent of
Fannie Mae; provided that Fannie Mae shall not withhold its consent if Fannie
Mae determines that (A) such prepayment by the Borrowers is permitted by the
terms of the Related Mortgage, and (B) in light of such opinions of legal
counsel, opinions of certified public accountants that prepare the audited
financial statements of the Borrowers and Guarantor and such other similar
information and opinions as may be provided by the Borrowers to Fannie Mae, no
part of any payments made by the Borrowers prior to or concurrently with the
voluntary prepayment will likely result in an avoidance or any other recovery
or disgorgement pursuant to the Bankruptcy Code (including sections 544, 547,
549 or 550 thereof) or any other applicable bankruptcy or insolvency law which
would result in Fannie Mae having any liability under any Related Fannie Mae
Collateral Agreement, or the Borrowers provide cash collateral or makes other
arrangements acceptable to






                                       62
<PAGE>   64
Fannie Mae in its discretion to ameliorate such risk of avoidance, recovery or
disgorgement, and (iii) with respect to the prepayment in part or in full
(other than a prepayment in connection with a mandatory application of
Insurance Proceeds or Condemnation Proceeds) of the Facility Amount prior to
the seventh (7th) anniversary of the Facility, Fannie Mae has received a
Prepayment Premium pursuant to the Related Mortgage Note.

                 (b)      INTEREST RESERVE REQUIREMENT WITH RESPECT TO FLOATING
RATE BOND TRANSACTIONS.  The Borrowers shall deposit with the Related Trustee
with respect to each Floating Rate Bond Transaction, on or before the date the
Related Mortgage Note is executed and delivered, for deposit into the Interest
Account with respect to each Floating Rate Bond Transaction, the Interest
Reserve Requirement for such Floating Rate Bond Transaction.  If the Interest
Account with respect to a Floating Rate Bond Transaction is not otherwise
replenished to the Interest Reserve Requirement for such Floating Rate Bond
Transaction from the receipt of the monthly payments under the Related Mortgage
Note pursuant to the Related Indenture, the Borrowers shall promptly deposit
with the Related Trustee the amount necessary for amounts on deposit in such
Interest Account to equal the Interest Reserve Requirement for such Floating
Rate Bond Transaction.

                 (c)      PRINCIPAL RESERVE FUND.  The Borrowers agree that as
a condition to Fannie Mae's executing and delivering the Related Fannie Mae
Collateral Agreement, the Borrowers shall fund, and replenish, the applicable
Principal Reserve Fund with respect to each Floating Rate Bond Transaction as
and when required by the Related Mortgage Note and this Agreement.  The
Borrowers acknowledge that the Related Mortgage Note for each Initial Bond
Property provides that the obligation to fund the applicable Principal Reserve
Fund shall commence on July 1, 2006, and that prior to such time, the Borrowers
shall not be required to fund the such Principal Reserve Fund; provided,
however, that, the commencement date of the Borrowers' obligation to fund the
Principal Reserve Fund relating to each New Bond Property entering the Fannie
Mae Credit Facility as a Floating Rate Bond Transaction, shall be determined by
Fannie Mae in its discretion.  The Borrowers agree that they shall replenish
each Principal Reserve Fund by delivery to the Related Trustee the amount equal
to any loss from the investment of amounts on deposit in such Principal Reserve
Fund, as and when such loss is incurred and irrespective of the reason for such
loss.  The Borrowers acknowledge and agree that amounts on deposit in the
Principal Reserve Fund with respect to each Mortgage Loan in a Floating Rate
Bond Transaction shall be applied toward the mandatory redemption of the
Related Bonds, and the corresponding reduction of amounts owed under the
Related Mortgage Note, as and to the extent provided in the Related Indenture.
The Borrowers further acknowledge and agree that, as provided in the Related
Mortgage Note, the Mortgage Loan with respect to any Floating Rate Bond
Transaction shall not be deemed to have been amortized by reason of deposits
into the Principal Reserve Fund with respect to such Mortgage Loan until such
deposits have been withdrawn from such Principal Reserve Fund and applied to
the redemption of the Related Bonds as provided in the Related Indenture.  So
long as no Event of Default or no Potential Event of Default has occurred and
is continuing, investment income derived from amounts on deposit in the
Principal Reserve Funds shall be paid to the applicable Borrower by






                                       63
<PAGE>   65
the Related Trustees to the extent and in the manner provided in the Related
Indenture.  At the request of the Borrowers, Fannie Mae shall direct the
Related Trustee to apply funds in a particular Principal Reserve Fund to prepay
the principal amount of Related Bonds, if each of the following conditions are
met:

                 (i)      no Event of Default has occurred and is continuing;
         and

                 (ii)     either (x) the Related Bonds are then bearing
         interest at a Variable Rate, or (y) the Related Securities are then
         bearing interest at a Reset Rate and the applicable Borrower has the
         right under the Related Indenture to prepay the Related Bonds.

Upon the occurrence and during the continuance of an Event of Default or a
Potential Event of Default, Fannie Mae shall have the absolute right, in its
discretion, to apply the funds in the Principal Reserve Funds in accordance
with section 7.2(d).

                 (d)      INTEREST RATE ADJUSTMENTS IN FLOATING RATE BOND
TRANSACTIONS.  Fannie Mae and each of the Borrowers acknowledges and agrees
that the interest rate on any issue of Related Bonds in a Floating Rate Bond
Transaction may be adjusted to the Variable Rate or Reset Rate or converted to
the Fixed Rate, in each case as provided in, and subject to the terms and
conditions of, the Related Indenture and this Agreement.  Notwithstanding the
foregoing, so long as the Related Fannie Mae Collateral Agreement remains in
effect and Fannie Mae has any obligations, direct or contingent, under such
Related Fannie Mae Collateral Agreement, no Borrower shall direct or cause the
interest rate on any Related Bonds to be converted to the Fixed Rate (from the
Variable Rate or the Reset Rate), to the Reset Rate (from the Variable Rate or
a prior Reset Rate) or to the Variable Rate (from the a Reset Rate) unless
Fannie Mae consents to such conversion.  Fannie Mae will consent to such
conversion (and deliver written evidence of such consent to the Related Trustee
in accordance with the requirements of the Related Indenture), if:

                 (i)      in the case of a conversion to the Fixed Rate, (A) no
         Event of Default or Potential Event of Default has occurred and is
         continuing, (B) such Borrower complies with the terms and conditions
         of sections 3.2 and 4.2, (C) the Fixed Rate applicable to such Related
         Bonds is equal to or less than the Hedge Rate, (D) such Borrower shall
         have given Fannie Mae not less than sixty (60) days prior written
         notice of its intent to convert to the Fixed Rate and (E) such
         Borrower shall have given Fannie Mae not less than fifty (50) days
         prior final written notice and confirmation of its election to convert
         to the Fixed Rate; or

                 (ii)     in the case of conversion to the Reset Rate, (A) no
         Event of Default or Potential Event of Default has occurred and is
         continuing, (B) such Borrower complies with the terms and conditions
         of sections 3.2 and 4.2, (C) the Reset Rate on such Related Bonds is
         equal to or less than the Hedge Rate, (D) such Borrower shall have
         given Fannie Mae not less than sixty (60) days prior written notice of
         its intent to convert to the Reset






                                       64
<PAGE>   66
         Rate and (E) such Borrower shall have given Fannie Mae not less than
         fifty (50) days prior final written notice and confirmation of its
         election to convert to the Reset Rate; or

                 (iii)    in the case of conversion to the Variable Rate, (A)
         no Event of Default or Potential Event of Default has occurred and is
         continuing, (B) such Borrower complies with the terms and conditions
         of sections 3.2 and 4.2, (C) such Borrower shall have given Fannie Mae
         not less than sixty (60) days prior written notice of its intent to
         convert to the Variable Rate and (D) such Borrower shall have given
         Fannie Mae not less than fifty (50) days prior final written notice
         and confirmation of its election to convert to the Variable Rate.

                 (e)      REMOVAL OF REMARKETING AGENT.  With respect to each
Floating Rate Bond Transaction, the Borrowers agree that (i) after the
occurrence of any Event of Default or (ii) if, at any time, Fannie Mae
determines that there is a basis in fact for the removal of the then existing
Remarketing Agent with respect to such Floating Rate Bond Transaction and the
designation of a new Remarketing Agent with respect to such Floating Rate Bond
Transaction, if Fannie Mae so directs, the Borrowers immediately shall take
such action as is required under the Related Remarketing Agreement to remove
the existing Remarketing Agent with respect to such Floating Rate Bond
Transaction and replace such Remarketing Agent, without interruption of
service, with a Remarketing Agent acceptable to Fannie Mae.  The Borrowers
acknowledge and agree that any Remarketing Agent's failure to perform any of
its duties or obligations under or with respect to the Related Indenture or the
Related Remarketing Agreement, including, failure to give or deliver any notice
or information required under the Related Indenture or the Related Remarketing
Agreement, shall constitute sufficient basis in fact for such Remarketing
Agent's removal.

                 (f)      CHANGES IN REMARKETING AGENT OR REMARKETING
AGREEMENT.  The Borrowers agree that no Borrower will change any Remarketing
Agent, or appoint or engage any Person as a Remarketing Agent or change the
fees payable to any Remarketing Agent, without Fannie Mae's prior written
consent.

                 (g)      ASSIGNMENT OF RIGHTS TO THE RELATED TRUSTEES.  With
respect to each Floating Rate Bond Transaction, the Borrowers acknowledge and
agree that (i) the Related Trustee is the assignee of the applicable Issuer's
right, title and interest in and to the Bond Property Loan Documents with
respect to such Floating Rate Bond Transaction and certain rights as and to the
extent provided in the Assignment, (ii) Fannie Mae is the assignee of the
Mortgage Rights with respect to each Floating Rate Bond Transaction as and to
the extent provided in the Related Fannie Mae Collateral Agreement, and (iii)
by virtue of such Related Fannie Mae Collateral Agreement referred to in clause
(ii) above, Fannie Mae shall, as and to the extent provided in such Related
Fannie Mae Collateral Agreement, be entitled to exercise certain rights and
receive certain benefits which would otherwise be available to the Related
Trustee under the Bond Property Loan Documents with respect to such Floating
Rate Bond Transaction.  The Borrowers further acknowledge and agree that Fannie
Mae has delegated or may delegate certain






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matters and functions related to or arising under the Bond Property Loan
Documents with respect to each Floating Rate Bond Transaction to Servicer, as
an independent contractor, pursuant to the Servicing Agreement.

5                CERTAIN COVENANTS WITH RESPECT TO FIXED RATE BOND
TRANSACTIONS.

                 With respect to each Fixed Rate Bond Transaction, the
Borrowers agree and covenant with Fannie Mae that, at all times during the term
of this Agreement:

                 (a)      DEBT SERVICE FUND REQUIREMENT WITH RESPECT TO FIXED
RATE BOND TRANSACTIONS.  The Borrowers shall deposit with the Related Trustee
with respect to each Fixed Rate Bond Transaction, on or before the date the
Related Mortgage Note is executed and delivered, for deposit into the initial
debt service fund (or other similar fund required to be established in
connection with such Fixed Rate Bond Transaction) with respect to each Fixed
Rate Bond Transaction, the initial funding requirement required by the Rating
Agency for such Fixed Rate Bond Transaction, which requirement shall not be
less than one (1) month's payment of interest and principal, if any, on the
Related Mortgage Note.

                 (b)      ASSIGNMENT OF MORTGAGE LOANS TO FANNIE MAE.  With
respect to each Fixed Rate Bond Transaction, the Borrowers acknowledge and
agree that Fannie Mae is the assignee of the all of the Issuer's right, title
and interest in and to the Bond Property Loan Documents with respect to such
Fixed Rate Bond Transaction and as such, Fannie Mae shall be entitled to
exercise all rights and receive all benefits available to the owner and holder
of the Bond Property Loan Documents with respect to such Fixed Rate Bond
Transaction.  The Borrowers further acknowledge and agree that Fannie Mae has
delegated or may delegate certain matters and functions related to or arising
under the Bond Property Loan Documents with respect to each Fixed Rate Bond
Transaction to Servicer, as an independent contractor, pursuant to the
Servicing Agreement.

6                CERTAIN COVENANTS WITH RESPECT TO CUSTODIAL RECEIPTS
TRANSACTIONS.

                 With respect to each Custodial Receipts Transaction, the
Borrowers agree and covenant with Fannie Mae that, at all times during the term
of this Agreement:

                 (a)      LIMITATIONS ON CREDIT ENHANCEMENT OF THE CUSTODIAL
RECEIPTS TRANSACTIONS.  The Borrowers shall use best efforts to commence, and
diligently pursue to completion, the implementation of the Permanent Chase Lea
Refunding Transaction and the Permanent Chase Ridge Refunding Transaction not
later than the Initial Chase Ridge/Chase Lea Conversion Date.  Notwithstanding
anything to the contrary in this Agreement or any other Transaction Document:

                          (i) on or before the Initial Chase Ridge/Chase Lea
                 Conversion Date the Borrowers shall, with respect to each
                 Custodial Receipts Property, cause the






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<PAGE>   68
                 implementation of either the Permanent Refunding Transaction
                 or the Interim Custodial Receipts Transaction; and

                          (ii) if the Borrowers shall have caused the
                 implementation of the Interim Custodial Receipts Transaction
                 with respect to either the Chase Ridge Bond Property or the
                 Chase Lea Bond Property, then the Borrowers shall use best
                 efforts to commence, and diligently pursue to completion, the
                 implementation of the Permanent Refunding Transaction with
                 respect to such Custodial Receipts Property not later than the
                 Final Chase Ridge/Chase Lea Conversion Date.

                 (b)      CHASE LEA/CHASE RIDGE TERMINATION FEE.

                 (i) Subject to the limitations set forth in section 2.6(c) and
         2.6(d) below, the Borrowers shall pay Fannie Mae the Chase Ridge
         Termination Fee and the Chase Lea Termination Fee on the Initial Chase
         Ridge/Chase Lea Conversion Date unless, with respect to each such
         Custodial Receipts Property:

                          (A)     the Permanent Refunding Transaction with
                                  respect to such Custodial Receipts Property,
                                  has been completed in accordance with the
                                  requirements of sections 5.5(a), 5.5(b),
                                  5.5(e) and 5.5(d); or

                          (B)     the Interim Replacement Custodial Receipts
                                  Transaction with respect to such Custodial
                                  Receipts Property, has been completed in
                                  accordance with the requirements of sections
                                  5.5(a), 5.5(c), 5.5(d) and 5.5(e);

                 (ii) Subject to the limitations set forth in section 2.6(c)
         and 2.6(d) below, the Borrowers shall be required to pay Fannie Mae
         the Chase Ridge Termination Fee and the Chase Lea Termination Fee on
         the Final Chase Ridge/Chase Lea Conversion Date unless, with respect
         to each such Custodial Receipts Property:

                          (A)     such Termination Fee was previously paid by
                                  the Borrowers pursuant to subsection
                                  2.6(b)(i) above; or

                          (B)     the Permanent Refunding Transaction with
                                  respect to such Custodial Receipts Property,
                                  has been completed in accordance with the
                                  requirements of sections 5.5(a), 5.5(b),
                                  5.5(d) and 5.5(e).

                 (iii) In addition, notwithstanding the foregoing, but subject
         to the limitations set forth in section 2.6(c) and 2.6(d) below, the
         Borrowers shall pay to Fannie Mae the Chase Ridge Termination Fee
         and/or the Chase Lea Termination Fee as of any date that the Borrowers
         cause either such Custodial Receipts Property to be released from the






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<PAGE>   69
         Fannie Mae Credit Facility in accordance with section 5.3. or
         otherwise cause redemption of the Related Custodial Receipts or the
         termination of the Related Custodial Receipts Collateral Agreement
         with respect to either such Custodial Receipts Property; provided,
         however, that no such Termination Fee shall be payable in connection
         with a redemption of Related Custodial Receipts that occurs in
         connection with an extension of the Initial Chase Ridge/Chase Lea
         Conversion Date in accordance with the terms of the definition of
         Initial Chase Ridge/Chase Lea Conversion Date.

                 (iv) Each Termination Fee due and owing under this section
         2.6(c) shall be payable by the Borrower to Servicer for remittance to
         Fannie Mae within ten (10) Business Days of Borrowers' receipt of
         written notice that such Termination Fee has become due and payable.

                 (c)      CERTAIN WAIVERS OF CHASE LEA/CHASE RIDGE TERMINATION
FEE.  Notwithstanding anything to the contrary contained herein:

                 (i) The Borrowers shall not be required to pay the Chase Ridge
         Termination Fee on the Initial Chase Ridge/Chase Lea Conversion Date
         if Fannie Mae determines in its reasonable discretion that the
         Borrowers have satisfied their obligations under subsection 5.5(c)(ii)
         and either:

                 (A)      Fannie Mae is not permitted, under then Applicable
                          Law, to enter into the Interim Replacement Chase
                          Ridge Credit Enhancement; or

                 (B)      the Interim Replacement Custodial Receipts
                          Transaction fails to occur because (w) a Person other
                          than any of the Borrowers requires material
                          modification of any of the terms, conditions or
                          documentation specified for the Interim Replacement
                          Chase Ridge Credit Enhancement in section 5.5, (x) as
                          a result of such material modification, Fannie Mae
                          determines that the conditions to its obligation to
                          provide such Interim Replacement Chase Ridge Credit
                          Enhancement have not been satisfied in accordance
                          with subsection 5.5, (y) the Borrowers make a written
                          request to Fannie Mae requesting that,
                          notwithstanding such material modification, Fannie
                          Mae proceed with the Interim Replacement Chase Ridge
                          Credit Enhancement, and (z) notwithstanding such
                          request, Fannie Mae determines not to provide the
                          Interim Replacement Chase Ridge Credit Enhancement.


(iii)    The Borrowers shall not be required to pay the Chase Lea Termination
         Fee on the Initial Chase Ridge/Chase Lea Conversion date if Fannie
         Mae determines in its reasonable discretion that the Borrowers have
         satisfied their obligations under subsection 5.5(c)(ii) and either:






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<PAGE>   70

                 (A)      Fannie Mae is not permitted, under then Applicable
                          Law, to enter into the Interim Replacement Chase Lea
                          Credit Enhancement; or

                 (B)      such Interim Replacement Custodial Receipts
                          Transaction fails to occur because (w) a Person other
                          than any of the Borrowers requires material
                          modification of any of the terms, conditions or
                          documentation specified for the Interim Replacement
                          Chase Lea Credit Enhancement in section 5.5, (x) as a
                          result of such material modification, Fannie Mae
                          determines that the conditions to its obligation to
                          provide such Interim Replacement Chase Lea Credit
                          Enhancement have not been satisfied in accordance
                          with subsection 5.5, (y) the Borrowers make a written
                          request to Fannie Mae requesting that,
                          notwithstanding such material modification, Fannie
                          Mae proceed with the Interim Replacement Chase Lea
                          Credit Enhancement, and (z) notwithstanding such
                          request, Fannie Mae determines not to provide the
                          Interim Replacement Chase Lea Credit Enhancement.

                 (iv) In addition, the Borrowers shall not be required to pay
         the Chase Ridge Termination Fee if Fannie Mae determines in its
         reasonable discretion that the Borrowers have satisfied their
         obligations under subsection 5.5(c)(ii) and either:

                          (A)     Fannie Mae is not permitted, under then
                                  Applicable Law, to enter into the Permanent
                                  Chase Ridge Credit Enhancement; or

                          (B)     the Permanent Chase Ridge Refunding
                                  Transaction fails to occur because (w) a
                                  Person other than any of the Borrowers
                                  requires material modification of any of the
                                  terms, conditions or documentation specified
                                  for the Permanent Chase Ridge Credit
                                  Enhancement in section 5.5, (x) as a result
                                  of such material modification, Fannie Mae
                                  determines that the conditions to its
                                  obligation to provide such Permanent Chase
                                  Ridge Credit Enhancement have not been
                                  satisfied in accordance with subsection 5.5,
                                  (y) the Borrowers make a written request to
                                  Fannie Mae requesting that, notwithstanding
                                  such material modification, Fannie Mae
                                  proceed with the Permanent Chase Ridge Credit
                                  Enhancement, and (z) notwithstanding such
                                  request, Fannie Mae determines not to provide
                                  the Permanent Chase Ridge Credit Enhancement.

                 (v) In addition, the Borrowers shall not be required to pay
         the Chase Lea Termination Fee if Fannie Mae determines in its
         reasonable discretion that the Borrowers have satisfied their
         obligations under subsection 5.5(c)(ii) and either:






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<PAGE>   71
                          (A)     Fannie Mae is not permitted, under then
                                  Applicable Law, to enter into the Permanent
                                  Chase Lea Credit Enhancement; or

                          (B)     the Permanent Chase Lea Refunding Transaction
                                  fails to occur because (w) a Person other
                                  than any of the Borrowers requires material
                                  modification of any of the terms, conditions
                                  or documentation specified for the Permanent
                                  Chase Lea Refunding Transaction in section
                                  5.5, (x) as a result of such material
                                  modification, Fannie Mae determines that the
                                  conditions to its obligation to provide such
                                  Permanent Chase Lea Credit Enhancement have
                                  not been satisfied in accordance with
                                  subsection 5.5, (y) the Borrowers make a
                                  written request to Fannie Mae requesting
                                  that, notwithstanding such material
                                  modification, Fannie Mae proceed with the
                                  Permanent Chase Ridge Credit Enhancement, and
                                  (z) notwithstanding such request, Fannie Mae
                                  determines not to provide the Permanent Chase
                                  Ridge Credit Enhancement.

                 (d)      CERTAIN REDUCTIONS IN CHASE LEA/CHASE RIDGE
TERMINATION FEE.  Notwithstanding anything to the contrary contained herein, if
(i) an Interim Replacement Custodial Receipts Transactions fails to occur on or
before the Initial Chase Ridge/Lea Chase Termination Date because a Person
other than any of the Borrowers requires material modification of any of the
terms, conditions or documentation specified for the Interim Replacement
Custodial Receipts Transactions in section 5.5(d), (ii) such material
modification is deemed unacceptable by the Borrowers and (iii) the Borrowers
provide Fannie Mae with written notice specifying such unacceptable material
modification (a "FAILED CUSTODIAL RECEIPTS REPLACEMENT"), then the Termination
Fee otherwise payable with respect to such Failed Custodial Receipts
Replacement shall be reduced and be payable as follows:

                 (A)      if such Failed Custodial Receipts Replacement relates
                          to the Chase Ridge Bond Property, then the Chase
                          Ridge Termination Fee shall be reduced to $491,200.00
                          which amount shall be payable, at the Borrowers'
                          option, either immediately in a single lump-sum
                          payment or in sixteen (16) equal quarterly
                          installments of $30,700.00, which installments shall
                          be payable by the Borrowers commencing as of the
                          first day of the fiscal quarter immediately following
                          such Failed Custodial Receipts Replacement and on the
                          first day of each subsequent fiscal quarter until
                          paid in full; and

                 (B)      if such Failed Custodial Receipts Replacement relates
                          to the Chase Lea Bond Property, then the Chase Ridge
                          Termination Fee shall be reduced to $308,800.00 which
                          amount shall be payable in sixteen (16) equal
                          quarterly installments of $19,300.00, which
                          installments shall be payable by the Borrowers
                          commencing as of the first day of the fiscal quarter






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<PAGE>   72
                          immediately following such Failed Custodial Receipts
                          Replacement and on the first day of each subsequent
                          fiscal quarter until paid in full.

                 (e)      ASSIGNMENT CERTAIN RIGHTS AND INTERESTS TO FANNIE
MAE.  With respect to each Custodial Receipts Transaction, the Borrowers
acknowledge and agree that, pursuant to the terms of the Related Custodial
Receipts Collateral Agreements, Fannie Mae is (or has the right to become) the
assignee of all of Morgan's right, title and interest in and to the Related
Custodial Receipts Documents (other than the Custodial Receipts Guaranty) with
respect to such Custodial Receipts Transaction and as such, Fannie Mae shall be
entitled to exercise all rights and receive all benefits available to the owner
and holder of such Custodial Receipts Loan Documents.  The Borrowers further
acknowledge and agree that:

                 (i)      Collateral Inc. has pledged, assigned and granted
         Fannie Mae a security interest in all of its residual interests in the
         Custodial Receipts Bond Issues and certain other collateral pursuant
         to the Custodial Receipts Bond Pledge Agreement;

                 (ii)     Subject to its obligations under the Custodial
         Receipts Agreement, Guarantor has pledged, assigned and granted Fannie
         Mae a security interest in all of its right, title and interest in the
         Custodial Receipts Bond Issues and certain other collateral pursuant
         to the Custodial Receipts Bond Pledge Agreement, as additional
         security for the Obligations, and that by virtue of such Custodial
         Receipts Bond Pledge Agreement, Fannie Mae shall, as and to the extent
         provided in such Custodial Receipts Bond Pledge Agreements, be
         entitled to exercise certain rights and receive certain benefits, more
         particularly set forth therein;

                 (iii) in accordance with and subject to the terms of the
         Assumption and Direction Agreement, (A) Fannie Mae's consent shall be
         required prior to any Borrower or Guarantor giving any directions to
         Crestar Bank with respect to the Custodial Receipts Bond Issues, (B)
         upon an Event of Default, Fannie Mae shall have the sole right to
         direct Crestar Bank and (C) the Borrowers and Guarantor shall
         cooperate in all respects with Fannie Mae in the giving of such notice
         and direction; and

                 (iv) Fannie Mae has delegated or may delegate certain matters
         and functions related to or arising under the Custodial Receipts
         Documents to Servicer, as an independent contractor, pursuant to the
         Servicing Agreement.

7                CERTAIN COVENANTS WITH RESPECT TO SALEM STATION PROJECT.

                 The Borrowers agree and covenant with Fannie Mae that, at all
times during the term of this Agreement:

                 (a)      COMPLIANCE WITH SALEM STATION RESTRICTIVE COVENANTS
AGREEMENT.






                                       71
<PAGE>   73

The Borrowers shall comply in all material respects with all provisions of the
Salem Station Restrictive Covenants Agreement, including, all applicable
reporting requirements, and all rental limitations and restrictions.

                 (b)      TERMINATION OF SALEM STATION RESTRICTIVE COVENANTS
AGREEMENT.  Notwithstanding anything herein to the contrary, on or before April
1, 2002, the Borrowers shall use commercially reasonable efforts to cause the
Salem Station Restrictive Covenants Agreement to be fully satisfied and
discharged of record by obtaining appropriate release documentation from each
party-in-interest to the Salem Station Restrictive Covenants Agreement and
causing such release documentation to be recorded in the land records of
Spotsylvania County, Virginia.  Satisfaction of the requirements of this
section 2.7(b) shall be evidenced by the Borrowers' delivery to Fannie Mae of
an endorsement to Fannie Mae's title insurance policy with respect to the Salem
Station Project, in form and substance acceptable to Fannie Mae, confirming
that the Salem Station Restrictive Covenants Agreement is no longer an
exception to the title insurance provided thereunder or evidence satisfactory
to Fannie Mae that the Borrowers have used commercially reasonable efforts to
cause the satisfaction and release of such Salem Station Restrictive Covenants
Agreement.

8                CERTAIN COVENANTS WITH RESPECT TO AVALON POINTE PROJECT.

                 The Borrowers agree and covenant with Fannie Mae that, at all
times during the term of this Agreement:

                 (a)      COMPLIANCE WITH AVALON POINTE RESTRICTIVE COVENANTS
AGREEMENT.  The Borrowers shall comply in all material respects with all
provisions of the Avalon Pointe Restrictive Covenants Agreement, including, all
applicable reporting requirements, and all rental limitations and restrictions.

                 (b)      TERMINATION OF AVALON POINTE RESTRICTIVE COVENANTS
AGREEMENT.  Notwithstanding anything herein to the contrary, the Borrowers
shall use commercially reasonable efforts to cause the Avalon Pointe
Restrictive Covenants Agreement to be fully satisfied and discharged of record
as soon as reasonably possible by obtaining appropriate release documentation
from each party-in-interest to the Avalon Pointe Restrictive Covenants
Agreement and causing such release documentation to be recorded in the land
records of Stafford County, Virginia.  Satisfaction of the requirements of this
section 2.8(b) shall be evidenced by the Borrowers' delivery to Fannie Mae of
an endorsement to Fannie Mae's title insurance policy with respect to the
Avalon Pointe Project, in form and substance acceptable to Fannie Mae,
confirming that the Avalon Pointe Restrictive Covenants Agreement is no longer
an exception to the title insurance provided thereunder or evidence
satisfactory to Fannie Mae that the Borrowers have used commercially reasonable
efforts to cause the satisfaction and release of such Avalon Pointe Restrictive
Covenants Agreement.






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<PAGE>   74
III.

                 FINANCIAL COVENANTS; INTEREST RATE PROTECTION;
                             CASH MANAGEMENT SYSTEM

1                BORROWERS' FINANCIAL COVENANTS.

                 (a)  FINANCIAL COVENANTS WITH RESPECT TO UNHEDGED BONDS.  With
respect to each issue of Unhedged Bonds, the Borrowers shall not be required to
comply with the interest rate protection provisions set forth in section 3.2 of
this Agreement if Fannie Mae determines, in its discretion, that as of each
Determination Date all of the following conditions are satisfied (the "HEDGE
TESTS"):

                 (i)      no Event of Default or Potential Event of Default
         exists as of such Determination Date;

                 (ii)     the Aggregate Loan to Value Ratio as of such
         Determination Date shall be equal to or less than the Maximum LTV
         Percentage;

                 (iii)    the Aggregate Debt Service Coverage Ratio on a
         combined basis for the twelve (12) month period ending within sixty
         (60) days of the date this test is applied shall equal or exceed the
         Minimum DSC Ratio.

The Borrowers shall deliver to Servicer all information necessary to calculate
the Hedge Tests at least sixty (60) days prior to each Determination Date.  If
Fannie Mae determines that any of the Hedge Tests set forth in clauses (i)
through (iii) above are not satisfied as of any Determination Date (a "HEDGE
TEST FAILURE"), the Borrowers shall be required, within ten (10) Business Days
of Borrowers' receipt of notice (a "HEDGE TEST NOTICE") from Fannie Mae or
Servicer specifying the Hedge Test Failure, to obtain a Hedge satisfying all of
the requirements of section 3.2 of this Agreement for each of the Mortgage
Loans with respect to Unhedged Bonds; provided, however, that if such Hedge
Test Failure consists of a failure to satisfy either the loan to value test set
forth in clause (ii) above and/or the debt service coverage test set forth in
clause (iii) above, the Borrowers may cure such Hedge Test Failure by providing
Fannie Mae with Shortfall Cash Collateral in an amount at least equal to the
amount by which the Bonds would have to be theoretically reduced in order for
the Borrowers to satisfy such Hedge Tests.  Such Shortfall Cash Collateral
shall be released by Fannie Mae if and to the extent that Fannie Mae determines
on any subsequent annual Determination Date that the Hedge Tests are satisfied
without including such Shortfall Cash Collateral.  If Fannie Mae or the
Servicer is not able to or does not perform the Hedge Tests on any
Determination Date because the Borrowers have failed to provide the necessary
information at least sixty (60) days prior to such Determination Date, then a
Hedge Test Failure shall be deemed to have occurred and the Borrowers shall be
required, within ten (10) Business Days of their receipt of a Hedge Test Notice
from Fannie Mae or






                                       73
<PAGE>   75
Servicer, to obtain a Hedge satisfying all of the requirements of section 3.2
of this Agreement for each of the Mortgage Loans with respect to Unhedged
Bonds.

                 (b)  FINANCIAL COVENANTS WITH RESPECT TO CASH MANAGEMENT
SYSTEM.  Prior to the occurrence of a Cash Management Triggering Event or a
Lock-Box Triggering Event, the Borrowers may collect the Gross Cash Flow from
all of the Properties directly from tenants and other Persons obligated to pay
such Gross Cash Flow.  A "CASH MANAGEMENT TRIGGERING EVENT" shall have occurred
if, as of any Determination Date, the Aggregate Debt Service Coverage Ratio (as
determined by Fannie Mae on a combined basis for the twelve (12) month period
ending within sixty (60) days of the date this test is applied), including any
Shortfall Cash Collateral or Alternative DSC Shortfall Collateral previously
pledged by the Borrowers in accordance with section 3.1(c), falls below 1.45:1
(the "CASH MANAGEMENT TEST").  A "LOCK-BOX TRIGGERING EVENT" shall have
occurred if, as of any Determination Date, the Aggregate Debt Service Coverage
Ratio (as determined by Fannie Mae on a combined basis for the twelve (12)
month period ending within sixty (60) days of the date this test is applied),
including any Shortfall Cash Collateral or Alternative DSC Shortfall Collateral
previously pledged by the Borrowers in accordance with section 3.1(c), falls
below 1.25:1 (the "LOCK-BOX TEST").  Upon the occurrence of:

                 (i)  a Cash Management Triggering Event, and at all times
         thereafter but subject to section 3.1(c) below, the Borrowers shall
         cause the Gross Cash Flow from all of the Properties to be deposited
         into the Cash Management Account in accordance with the terms of the
         Cash Management Agreement, which shall be entered into between the
         Borrowers and Fannie Mae within ten (10) Business Days of Borrowers'
         receipt of notice (a "CASH MANAGEMENT NOTICE") from Fannie Mae or
         Servicer specifying that a Cash Management Triggering Event has
         occurred.  The Borrowers acknowledge and agree that the Cash
         Management Agreement imposes certain requirements and restrictions
         upon Borrowers' rights, duties and obligations with respect to the
         Gross Cash Flow of the Properties, including provisions requiring: (A)
         the Cash Management Account to be established by the Borrowers in
         Fannie Mae's name and under Fannie Mae's sole dominion and control;
         (B) the Borrowers to grant Fannie Mae a perfected, first priority
         security interest in and to the Cash Management Account and all of the
         Cash Management System Collateral as security for Borrowers' payment
         and performance of the Obligations; (C) that so long as no Event of
         Default has occurred, Fannie Mae shall cause the Gross Cash Flow to be
         withdrawn from the Cash Management Account on a daily basis and
         transferred to an account established and controlled by Borrowers; and
         (D) that upon the occurrence of an Event of Default, Fannie Mae shall
         have the right to cancel all future transfers from the Cash Management
         Account and to apply all funds deposited into the Cash Management
         Account in payment of the outstanding Obligations of Borrowers; and

                 (ii) a Lock-Box Triggering Event and at all times thereafter,
         the Borrowers shall cause all tenants of all of the Properties to make
         rent payments directly to the financial






                                       74
<PAGE>   76
         institution or institutions at which the Cash Management Account is
         located and otherwise cause the Gross Cash Flow from all of the
         Properties to be deposited directly into the Cash Management Account
         in accordance with the terms of the Cash Management Agreement, which
         shall be entered into between the Borrowers and Fannie Mae within five
         (5) Business Days of Borrowers' receipt of notice (a "LOCK-BOX
         NOTICE") from Fannie Mae or Servicer specifying that a Lock-Box
         Triggering Event has occurred.  Upon and at all times following a
         Lock-Box Triggering Event, distributions from the Cash Management
         Account shall be made only after the payment of debt service and such
         other amounts as specified in the Cash Management Agreement.

The Borrowers shall deliver to Servicer all information necessary to calculate
the Cash Management Test and the Lock-Box Test at least sixty (60) days prior
to each Determination Date.  If Fannie Mae or the Servicer is not able to or
does not perform the Cash Management Test or the Lock-Box Test on any
Determination Date because the Borrowers have failed to provide the necessary
information at least sixty (60) days prior to such Determination Date, then a
Lock-Box Triggering Event shall be deemed to have occurred and the Borrowers
shall be required to cause all tenants of all of the Properties to make rent
payments directly to the financial institution or institutions at which the
Cash Management Account is located and otherwise cause the Gross Cash Flow from
all of the Properties to be deposited directly into the Cash Management Account
in accordance with the terms of the Cash Management Agreement, which shall be
entered into between the Borrowers and Fannie Mae within five (5) Business Days
of Borrowers' receipt of a Lock-Box Notice from Fannie Mae or Servicer.  In
addition, within thirty (30) days following the occurrence of a Cash Management
Triggering Event or a Lock-Box Triggering Event and in either case, execution
and delivery of the Cash Management Agreement, the Borrowers shall deliver or
cause to be delivered to Fannie Mae, one or more opinions, in form and
substance and delivered by counsel satisfactory to Fannie Mae in its
discretion, confirming that upon (A) creation of the Cash Management Account,
(B) delivery and acknowledgement of the "RESTRICTED ACCOUNT LETTER" (as defined
in the Cash Management Agreement) by the depository with respect to such Cash
Management Account, and (C) filing of the financing statements in accordance
with the requirements of the Cash Management Agreement, Fannie Mae shall have a
valid and perfected security interest in the Cash Management Account under the
laws of the state in which such Cash Management Account is located.

                 (c)  BORROWERS' RIGHT TO POST ADDITIONAL COLLATERAL.  Upon
their receipt of a Cash Management Notice, the Borrowers shall be entitled to
post additional collateral in the form of either (i) Shortfall Cash Collateral
in an amount at least equal to the difference between (x) the Net Operating
Income of all Properties as determined by Fannie Mae on the Determination Date
and (y) the actual amount of Net Operating Income required to satisfy the Cash
Management Test (such difference, the "CASH MANAGEMENT TEST SHORTFALL") or (ii)
an Additional Mortgaged Property ("ALTERNATIVE DSC SHORTFALL COLLATERAL")
pledged as collateral for the Fannie Mae Credit Facility in accordance with
section 5.4, provided, that such Alternative DSC Shortfall Collateral is
acceptable to Fannie Mae in its discretion and has annual Net Operating Income,
as






                                       75
<PAGE>   77
determined by Fannie Mae in its discretion, that is at least equal to the Cash
Management Test Shortfall.  Such Shortfall Cash Collateral or Alternative DSC
Shortfall Collateral shall be released by Fannie Mae if and to the extent that
Fannie Mae determines on any subsequent annual Determination Date that the Cash
Management Test is satisfied without including such Shortfall Cash Collateral
or Alternative DSC Shortfall Collateral.

                 (d)  CASH MANAGEMENT SYSTEM TAKE-OUT.  The Borrowers and
Fannie Mae acknowledge and agree that following the occurrence of (i) a
Lock-Box Triggering Event or a Cash Management Triggering Event and (ii)
implementation of the cash management system as contemplated under the Cash
Management Agreement, Fannie Mae will agree to discontinue such cash management
system and terminate the Cash Management Agreement if Fannie Mae determines in
its discretion that as of any subsequent Determination Date (A) no Event of
Default or Potential Event of Default has occurred and is continuing and (B)
the Aggregate Debt Service Coverage Ratio (as determined by Fannie Mae on a
combined basis for the thirty-six (36) month period ending within sixty (60)
days of the date this test is applied), including any Shortfall Cash Collateral
or Alternative DSC Shortfall Collateral previously pledged by the Borrowers in
accordance with section 3.1(c), was equal to or in excess of 1.45:1.

                 (e)  COSTS AND EXPENSES OF FINANCIAL TESTS.  In each instance,
the Borrowers shall pay all of Fannie Mae's and Servicer's costs and expenses
(including reasonable legal fees and expenses, but excluding the internal
overhead expenses of Fannie Mae and Servicer, such as salaries and other
compensation of employees) incurred by Fannie Mae or Servicer in determining
whether the Hedge Test, the Cash Management Test or the Lock-Box Test have been
satisfied.

2                INTEREST RATE PROTECTION.

                 Subject to the limitations in section 3.1(a) applicable to the
Unhedged Bonds, the terms, conditions and provisions of this section 3.2 shall
apply to each issue of Related Bonds in a Floating Rate Bond Transaction.

                 (a)      INTEREST RATE MODES.  To protect against fluctuations
in interest rates no Related Bonds shall initially bear interest at or be
converted to: (i) the Fixed Rate unless the Fixed Rate applicable to such
Related Bonds is equal to or less than the Hedge Rate; (ii) the Reset Rate
unless (A) the Reset Rate applicable to such Related Bonds is equal to or less
than the Hedge Rate, and (B) the Reset Period with respect to such Related
Bonds is equal to or in excess of the Required Hedge Term, or such Reset Period
is less than the Required Hedge Term and the Borrowers shall obtain and
maintain at all times during such Reset Period a "forward" Swap or Cap in
accordance with section 3.2(c); or (iii) the Variable Rate unless the Borrowers
shall obtain, and maintain at all times during which the Related Bonds bear
interest at such Variable Rate, a Hedge in accordance with this section 3.2.






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<PAGE>   78
                 (b)      VARIABLE RATE HEDGE REQUIREMENTS.  If an issue of
Related Bonds is issued bearing interest at the Variable Rate, a Hedge must be
in place on the Bond Transaction Closing Date with respect to such issue for a
period of time equal to or in excess of the Required Hedge Term.  Effective not
later than the last day of any Hedge Period, or the last day of any other
period that the Variable Rate and a Hedge are in effect, or the last day of any
Reset Period where the Related Bonds will subsequently bear interest at the
Variable Rate, the Borrowers shall either (i) secure a new Hedge for a period
of time equal to or in excess of the Required Hedge Term, (ii) adjust the
Related Bonds to a Reset Rate equal to or less than the Hedge Rate for a period
equal to or greater than the Subsequent Hedge Period, or (iii) convert the
Related Bonds to a Fixed Rate equal to or less than the Hedge Rate.  Any
adjustment or conversion under the preceding clauses (ii) or (iii) shall be in
accordance with the Related Bond Documents and the related Bond Property Loan
Documents.

                 (c)      RESET RATE HEDGE REQUIREMENTS.  Notwithstanding
anything herein to the contrary, any Reset Period may be for a period less than
the Required Hedge Term if, prior to the commencement of such Reset Period, the
Borrowers shall obtain a "forward" Swap or Cap that: (i) has an initial
"calculation period" that begins on the date that such Reset Period ends, and
that ends on the date that is the last day of the Required Hedge Term; (ii) if
a "forward" Cap, has been fully paid for by Borrowers, and if a "forward" Swap,
is not subject to any unpaid fees or expenses; and (ii) otherwise complies with
the requirements of this section 3.2.

                 (d)      GENERAL HEDGE TERMS AND CONDITIONS.   Each Hedge
shall be (i) obtained on terms and conditions approved by Fannie Mae in its
discretion, (ii) evidenced and governed by Hedge Documents in form and
substance acceptable to Fannie Mae in its discretion and (iii) with a
counterparty acceptable to Fannie Mae in its discretion (a "COUNTERPARTY").
Except as provided in section 3.2(e), if any Hedge required under this
Agreement constitutes a Swap, such Swap shall provide for a fixed rate of
interest equal to or less than the Hedge Rate, and if any Hedge required under
this Agreement constitutes a Cap, such Cap shall require the Counterparty with
respect thereto to make interest payments equal to the amount by which the
notional interest rate payable under the terms of the Hedge Documents with
respect to such Cap exceeds the Hedge Rate.

                 (e)      SPECIAL HEDGE TERMS AND CONDITIONS.   If the
Borrowers are unable to obtain a Hedge with a fixed rate of interest (with
respect to a Swap) or a notional interest rate (with respect to a Cap) that is
equal to or less than the Hedge Rate, the Borrowers may obtain a Hedge (a
"SHORTFALL HEDGE") at an interest rate in excess of the Hedge Rate if the
Borrowers provide Fannie Mae with Shortfall Cash Collateral in an amount at
least equal to the aggregate amount of all interest that would accrue on the
initial notional principal amount of such Shortfall Hedge at an assumed
interest rate equal to the difference between the interest rate with respect to
such Shortfall Hedge and the Hedge Rate for the full term of such Shortfall
Hedge.  Such Shortfall Cash Collateral shall be released by Fannie Mae upon the
expiration of the Hedge Period with respect to the Shortfall Hedge, provided,
however, that if the Related Bonds will bear interest at the Variable Rate or
in a Reset Period of less than the Required Hedge Term,






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<PAGE>   79
prior to any release of such Shortfall Cash Collateral, the Borrowers shall
have obtained a new Hedge with respect to such Related Bonds satisfying the
requirements of this section 3.2.

                 (f)      HEDGE PAYMENT TERMS.  Under each Swap arrangement,
the Counterparty shall pay a rate based on the PSA Municipal Swap Index (as
defined below) and the Borrowers shall pay a fixed rate to the Counterparty, in
each case based on the notional amount of the Swap.  If the PSA Municipal Swap
Index is not published on any reset date under the Swap, the Counterparty must
determine an appropriate index as a substitute for the PSA Municipal Swap Index
on each such reset date.  The index so determined shall equal the prevailing
rate determined by the Counterparty for bonds that are rated in the highest
short-term rating category by the Rating Agencies in respect of issuers of not
less than five (5) "high grade" component issuers selected by the Counterparty
which shall include, without limitation, issuers of general obligation bonds,
and that are subject to tender by holders thereof for purchase on not more than
seven (7) days notice and the interest on which is (i) variable, determined on
a weekly basis, (ii) excludable from gross income for federal income tax
purposes, and (iii) not subject to a "minimum tax" or similar tax.  The PSA
Municipal Swap index rate is the rate determined on the basis of an index based
upon the weekly interest rate resets of tax-exempt variable rate issues
included in a database maintained by Municipal Market Data which meet specific
criteria established by the Public Securities Association.

                 (g)      SECURITY INTEREST IN HEDGE PAYMENTS.  Fannie Mae
shall be granted an enforceable, perfected, first priority lien on and security
interest in each Hedge, payments due under the Hedge (including scheduled and
termination payments) and each Custodial Account (as defined below) in order to
secure Borrowers' obligations to Fannie Mae under this Agreement pursuant to a
Hedge Security Agreement to be delivered by the Borrowers to Fannie Mae no
later than the commencement date of each Hedge Period with respect to each
Hedge required to be obtained under the terms of this Agreement.  Pursuant to
the terms of the Hedge Security Agreement with respect to each Hedge, the
Counterparty with respect to such Hedge shall make all payments under such
Hedge (including any Termination Payments due from such Counterparty upon
termination of such Hedge) directly to a custodial account (the "CUSTODIAL
ACCOUNT") designated by Fannie Mae pursuant to such Hedge Security Agreement.
As provided in the applicable Hedge Security Agreement, each Custodial Account
with respect to a Swap shall be established in Fannie Mae's name and each
Custodial Account with respect to a Cap shall be established in the name of the
Related Trustee.


                 (h)      CHANGE IN HEDGE.  The Borrowers may change the type
of Hedge (i.e., from a Swap to a Cap or from a Cap to a Swap) which is in place
at any time with respect to the applicable Related Bonds so long as the
replacement Hedge and the new Counterparty complies with the terms of this
Agreement, including any consent or approval rights.


                 (i)      TERMINATION.  The Borrowers shall not terminate any
existing Hedge unless (i) either (x) the Borrowers shall have obtained Fannie
Mae's prior written consent to such termination, or (y) no Event of Default or
Potential Event of Default then exists and after such






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<PAGE>   80
termination the Borrowers will be in compliance with the requirements under
this Agreement relating to Hedges, and (ii) the Borrowers shall have paid all
"breakage" and termination fees (collectively, "TERMINATION PAYMENTS") due
under the applicable Hedge Documents.

                 (j)      PERFORMANCE UNDER HEDGE DOCUMENTS.  The Borrowers
agree to comply fully with, and to pay and otherwise perform when due, its
obligations under all applicable Hedge Documents and all other agreements
evidencing, governing and/or securing any Hedge arrangement contemplated under
this section 3.2; provided, however, that the Borrowers shall not exercise
without Fannie Mae's prior written consent, and shall exercise at Fannie Mae's
direction, any rights or remedies under any Hedge Documents, including, if any
event of default then exists under the applicable Hedge Documents, the right of
termination.  Notwithstanding anything herein to the contrary, Fannie Mae shall
not have any liability, responsibility, obligation or accountability for the
performance, payment or remittance of any of Borrowers' obligations or a
Counterparty's obligations under any Hedge or Hedge Document.

                 (k)      FANNIE MAE RIGHT TO CONVERT TO RESET RATE, FIXED
RATE.  The Borrowers shall with respect to each issue of Related Bonds, at
least seventy (70) days prior to the expiration date of each Hedge Period, give
notice, and provide evidence satisfactory, to Fannie Mae that the Borrowers
will either (i) secure a new Hedge with respect to such Related Bonds, or (ii)
adjust such Related Bonds to a Reset Rate for a period not shorter than five
(5) years, or (iii) convert such Related Bonds to the Fixed Rate, in each case
in accordance with this section 3.2.  If Fannie Mae determines in its
discretion upon receipt of Borrowers' notice required pursuant to the preceding
sentence that additional evidence substantiating Borrowers' election is
necessary, Fannie Mae shall request such additional evidence within ten (10)
Business Days of its receipt of Borrowers' notice and the Borrowers shall
provide such additional evidence within five (5) Business Days of its receipt
of such request.  If the Borrowers fail to timely provide the foregoing notice
and/or satisfactory evidence, Fannie Mae is hereby granted the right to direct
on behalf of the Borrowers (and the Borrowers hereby appoint Fannie Mae as
Borrowers' attorney-in-fact, with full authority in the place and stead of the
Borrowers, to make such direction, which power-of-attorney shall be irrevocable
and deemed coupled with an interest) that the interest rate on such Related
Bonds be (x) adjusted to a Reset Rate pursuant to the Related Indenture, (y)
converted to a Fixed Rate pursuant to the Related Indenture, or (z) adjusted
to, or remain at, the Weekly Variable Rate pursuant to the Related Indenture,
without a Hedge being in place (without waiving any right to declare an Event
of Default under this Agreement because of Borrowers' failure to comply with
the requirements of this section 3.2).  Fannie Mae shall have the right at any
time to revoke any prior direction it may give in connection with any proposed
adjustment or conversion of the interest rate on any issue of Related Bonds as
contemplated above in this section 3.2 without waiving any of its rights under
this Agreement.  A copy of any such direction or revocation of a direction
shall be given to the Borrowers promptly after it is issued.  Fannie Mae shall
have the further right, in its discretion, to take no action upon Borrowers'
failure to provide timely notice and/or evidence as required by this section
3.2 or otherwise to comply with this section 3.2, without waiving any of its
rights under this Agreement.






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<PAGE>   81
IV.

               FANNIE MAE REIMBURSEMENT; FEES; INDEMNIFICATION

1                REIMBURSEMENT OBLIGATIONS UNDER FANNIE MAE CREDIT ENHANCEMENT
INSTRUMENTS; POTENTIAL EVENT OF DEFAULT.

                 (a)      REIMBURSEMENT OBLIGATIONS UNDER FANNIE MAE CREDIT
ENHANCEMENT INSTRUMENTS.  The Borrowers unconditionally promise and agree that:

                          (i)     Advances other than for Purchased Bonds.  By
         2:00 p.m. Washington, D.C. time on each date on which Fannie Mae shall
         have provided an Advance (other than an Advance with respect to
         Related Purchased Bonds), the Borrowers shall, without notice or
         demand, pay Servicer for remittance to Fannie Mae, an amount equal to
         the amount of such Advance;

                          (ii)    Withdrawals other than for Purchased Bonds.
         After first paying all amounts payable pursuant to subsection (i)
         above, by 2:00 p.m., Washington, D.C. time on each date on which the
         Related Trustee with respect to any Related Bonds shall have made a
         Withdrawal (other than a Withdrawal with respect to Related Purchased
         Bonds), the Borrowers shall, without notice or demand, pay Servicer,
         for remittance to such Related Trustee for deposit into the Principal
         Reserve Fund with respect to such Related Bonds, an amount equal to
         the amount of such Withdrawal;

                          (iii)   Advances With Respect to Related Purchased
         Bonds.  In reimbursement for an Advance with respect to Related
         Purchased Bonds, by 2:00 p.m. Washington, D.C. time on (A) the
         effective date of any Alternate Credit Facility or (B) the first to
         occur of the date (1) on which the Related Purchased Bonds purchased
         with such Advance are (x) remarketed by the Remarketing Agent with
         respect to such Related Bonds and the proceeds of the remarketing are
         delivered to the Related Trustee or the Tender Agent or (y) redeemed
         or otherwise paid in full and cancelled or (2) on which the Related
         Fannie Mae Collateral Agreement either terminates in full or
         terminates as a liquidity facility for the Related Bonds or (3) which
         is ninety (90) days following such Advance, the Borrowers shall,
         without notice or demand, pay Servicer for remittance to Fannie Mae,
         an amount equal to the amount of such Advance;

                          (iv)    Withdrawals With Respect to Related Purchased
         Bonds.  In reimbursement for a Withdrawal with respect to Related
         Purchased Bonds, by 2:00 p.m. Washington, D.C. time on (A) the
         effective date of any Alternate Credit Facility or (B) the first to
         occur of the date (1) on which the Related Purchased Bonds purchased
         with such Withdrawal are (x) remarketed by the Remarketing Agent with
         respect to such Related Bonds and the proceeds of the remarketing are
         delivered to the Related Trustee






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<PAGE>   82
         or the Tender Agent or (y) redeemed or otherwise paid in full and
         cancelled or (2) on which the Related Fannie Mae Collateral Agreement
         either terminates in full or terminates as a liquidity facility for
         the Related Bonds or (3) which is ninety (90) days following such
         Withdrawal, the Borrowers shall, without notice or demand, pay
         Servicer, for remittance to the Related Trustee for deposit into the
         Principal Reserve Fund with respect to the Related Bonds, an amount
         equal to the amount of such Withdrawal; and

                          (v)     Activity Fee.  The Borrowers shall, without
         notice or demand, pay Servicer for remittance to Fannie Mae the
         Activity Fee, pursuant to section 4.4(b) hereof, with respect to the
         amount of all Advances and Withdrawals until such amounts have been
         fully and completely paid, provided, however, with respect to Advances
         made to purchase Related Purchased Bonds, the Activity Fee shall be
         due and payable on the first Business Day of each month and on the
         date such Advance is reimbursed in full.

                 (b)      CREDITS RELATING TO REMARKETING PROCEEDS AND THE
CANCELLATION OF PURCHASED BONDS.  Borrowers' obligation to reimburse Fannie Mae
for amounts described in clauses (iii), (iv) and (v) of section 4.1(a) to the
extent Advances relate to Related Purchased Bonds shall be reduced as and to
the extent that remarketing proceeds become available and are applied to such
reimbursement and/or replenishment.  In addition, the obligation to replenish a
Withdrawal which was used to purchase Related Purchased Bonds shall be
satisfied upon the date such Related Purchased Bonds are cancelled.

                 (c)      FUNDS DEEMED ADVANCED UNDER RELATED FANNIE MAE CREDIT
ENHANCEMENT INSTRUMENT.  The Borrowers and Fannie Mae acknowledge and agree
that any reference in this Agreement to payments made under any Related Fannie
Mae Credit Enhancement Instrument or to the provision by Fannie Mae of funds
under any Related Fannie Mae Credit Enhancement Instrument (or words of similar
import) shall, for all purposes under this Agreement, including Borrowers'
obligation to reimburse Fannie Mae and to pay the Activity Fee, be construed to
refer, in addition, to any and all funds that, pursuant to any written
agreement between the Servicer and Fannie Mae, are advanced by the Servicer or
which otherwise would have been required to be advanced by Fannie Mae under any
Related Fannie Mae Credit Enhancement Instrument but for the advance of the
Servicer.  No agreement between the Servicer and Fannie Mae pursuant to which
the Servicer may advance funds on behalf of Fannie Mae shall be construed to
create a guaranty or other surety obligation by the Servicer with respect to
the Obligations.

2                COSTS, FEES AND EXPENSES.

                 In addition to Borrowers' obligations set forth in section 4.1
and in the other Transaction Documents, the Borrowers hereby agree absolutely
and unconditionally to pay, or cause to be paid, to Fannie Mae or Servicer, as
the case may be, the following:






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<PAGE>   83
                 (a)      any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) which Fannie Mae or Servicer may pay or incur in connection
with any payment under any Related Fannie Mae Credit Enhancement Instrument,
including payments of any fees and charges in connection with any accounts
established to facilitate payments under any Related Fannie Mae Credit
Enhancement Instrument, or the performance of Fannie Mae's obligations under
any Related Fannie Mae Credit Enhancement Instrument;

                 (b)      any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) which Fannie Mae may pay or incur in connection with the
approval and documentation of any Hedge arrangement required under the terms of
this Agreement;

                 (c)      any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) which Fannie Mae may pay or incur following and in
connection with a Cash Management Triggering Event or a Lock-Box Triggering
Event, including those paid or incurred in the preparation, execution, delivery
or approval of the Cash Management Account, any Cash Management Notice, any
Lock-Box Notice or the grant or perfection of Fannie Mae's security interest in
and to any Shortfall Collateral or Alternative DSC Shortfall Collateral;

                 (d)      the amount of any fees, costs, or charges or expenses
(including the reasonable fees and expenses of attorneys, accountants and other
experts) incurred by Fannie Mae or Servicer in connection with the
administration or enforcement of, or preservation of rights or remedies under,
this Agreement or any of the other Transaction Documents or in connection with
the foreclosure upon, sale of or other disposition of any security granted
pursuant to the Transaction Documents;

                 (e)      any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) incurred by Fannie Mae or Servicer in connection with the
disbursement or application of insurance or condemnation awards, proceeds,
payments or damages to the costs of restoration and repair of any Property;

                 (f)      any payments or advances made by Fannie Mae or
Servicer on behalf of the Borrowers pursuant to any of the Transaction
Documents;

                 (g)      all reasonable expenses incurred in connection with
or related to the execution and delivery of the Related Fannie Mae Credit
Enhancement Instruments, the sale of the Bonds or the Obligations and the
preparation and review of this Agreement and the other Transaction Documents
and the consummation of the transactions contemplated hereby and thereby,
including fees payable to any agencies rating the Bonds or the Obligations from
which ratings were requested and received, any tax or governmental charge
imposed in connection with






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<PAGE>   84
the execution and delivery of the Related Fannie Mae Credit Enhancement
Instruments and the reasonable fees and disbursements of Fannie Mae's and
Servicer's counsel and accountants, including fees and expenses relating to any
(i) amendments, consents or waivers to this Agreement or any of the other
Transaction Documents (whether or not any such amendments, consents or waivers
are entered into), (ii) requests to evaluate any substitute or additional
collateral, (iii) proposed Hedge arrangement, (iv) proposed or actual change in
the mode of interest borne by the Bonds, or (v) proposed or actual release or
substitution of a Property; and

                 (h)      all documentary stamp, recording, transfer, mortgage,
intangible or filing or other taxes or fees (excluding taxes measured by gross
or net income, excise, franchise or gross receipts taxes) and any and all
liabilities with respect to, or resulting therefrom which may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of or filing of record, recordation, release or discharge of, this
Agreement, the Mortgages, or any other Transaction Document; and

                 (i)      interest on any and all amounts referred to in
paragraphs (a) through (g) of this section 4.2 from the date when due under
this Agreement until payment of all such amounts in full, payable at the
Activity Rate, in immediately available funds.

All amounts to be paid pursuant to clauses (a) through (i) of this section 4.2
shall be payable separate and apart from principal, interest and other amounts
due under the Mortgage Loans and under the Related Custodial Receipts and shall
be due and payable within thirty (30) days of Borrowers' receipt of written
demand therefor.

3                PAYMENT OF CERTAIN OTHER FEES AND EXPENSES.

                 (a)      BOND FEES.  In addition to the foregoing, the
Borrowers shall pay, or cause to be paid, when due the Bond Fees applicable
with respect to each issue of Related Securities.  Such Bond Fees shall be paid
by the Borrowers in accordance with the terms of the Related Bond Documents and
the Related Custodial Receipts Documents, as the case may be.

                 (b)      FANNIE MAE ADVANCES.  Fannie Mae shall have the right
but not the obligation to pay any fee or expense due and owing by the Borrowers
pursuant to sections 4.2 and 4.3 or any Related Financing Agreement on behalf
of the Borrowers if the Borrowers fail to pay such fee or expense when due.  If
Fannie Mae pays any such fee or expense and the Borrowers receive written
notice of such payment, the Borrowers shall pay such amount and the Activity
Fee relating to such amount to Fannie Mae in the same manner as any Advance.

                 (c)      PREPAYMENT PREMIUM.  The Borrowers agree to pay the
Prepayment Premium pursuant to each Related Mortgage Note and each Custodial
Receipts Mortgage Note (i) whether prepayment of such Related Mortgage Note or
Custodial Receipts Mortgage Note is






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<PAGE>   85
voluntary or involuntary (in connection with acceleration of the unpaid
principal balance of such Related Mortgage Note or Custodial Receipts Mortgage
Note; provided, however, that no Prepayment Premium shall be payable upon a
prepayment in connection with a mandatory application of Insurance Proceeds or
Condemnation Proceeds) or the Related Mortgage is satisfied or released by
foreclosure (whether by power of sale or judicial proceeding) or in lieu of
foreclosure or by any other means and (ii) in the event that an Alternate
Credit Facility is provided to the Related Trustee in substitution for the
Related Fannie Mae Credit Enhancement Instrument.

4                FACILITY AND ACTIVITY FEES.

                 In addition to any other fees and amounts payable to Fannie
Mae under this Agreement or the other Transaction Documents, the following fees
shall be payable by the Borrowers to Fannie Mae with respect to the Related
Fannie Mae Collateral Agreements, the Mortgage Documents and the Bonds:

                 (a)      FACILITY FEE.  The Borrowers shall, in consideration
of Fannie Mae's entering into the Related Fannie Mae Credit Enhancement
Instruments and so long as any Related Fannie Mae Credit Enhancement Instrument
shall remain in effect, be responsible for paying to Servicer, for remittance
to Fannie Mae, a facility fee (the "FACILITY FEE").  The Facility Fee shall be
calculated with respect to each issue of Related Securities is set forth on the
Schedule of Facility Fee Information attached hereto as Exhibit C.  With
respect to each Fixed Rate Bond Transaction, the Facility Fee shall be included
in the actual fixed rate of interest set forth in and payable under the Related
Mortgage Note.  With respect to each Floating Rate Bond Transaction and each
Custodial Receipts Transaction the Facility Fee shall be payable monthly, on
the first day of each month (x) with respect to each Floating Rate Bond
Transaction, as part of the Mortgage Note Rate under the Related Mortgage Note
and (y) with respect to each Custodial Receipts Transaction, directly to
Servicer on behalf of Fannie Mae as one the Obligations of the Borrowers under
this Agreement.  With respect to each Floating Rate Bond Transaction, the
Facility Fee shall be calculated as of the last day of each month based on the
amount then on deposit in the Principal Reserve Fund and the Allocated Release
Price, if any, as of such date with respect to the Related Bond.  The initial
payment for the month in which the applicable Related Securities are issued
shall be a prorated amount if the applicable Related Securities are issued on
other than the first day of a month, such proration to be determined by
multiplying the fee otherwise payable for the entire month by a fraction, the
numerator of which is the number of days in such month from and including the
date on which the applicable Related Securities are issued to and including the
last day of the month and the denominator of which is the number of days in
such month.

                 (b)      ACTIVITY FEE.  In addition to the Facility Fee, the
Borrowers shall, in consideration of Fannie Mae providing the Related Fannie
Mae Credit Enhancement Instruments, pay to Servicer, for the account of and
remittance to Fannie Mae, an activity fee (the "ACTIVITY FEE") with respect to
each Advance and each Withdrawal.  The Activity Fee shall, with respect






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<PAGE>   86
to each Advance and each Withdrawal, be an amount equal to the amount of such
Advance or such Withdrawal, as the case may be, multiplied by the Activity
Rate, and further multiplied by a fraction, the numerator of which is the
number of days that such Advance or such Withdrawal is outstanding (i.e., until
Fannie Mae is reimbursed) and the denominator of which is 365 days or 366 days,
as applicable.  The Activity Fee shall be payable so long as the Advance or
Withdrawal remains unreimbursed, in whole or in part, to Fannie Mae.  The
Activity Fee shall not be due to Fannie Mae if Fannie Mae is reimbursed for all
funds provided under the Related Fannie Mae Credit Enhancement Instruments by
2:00 p.m., Washington, D.C. time, on the date on which Fannie Mae shall have
provided such funds.  Any reimbursement payment received after 2:00 p.m.,
Washington, D.C. time, shall be treated as if it were paid at 9:00 a.m.,
Washington, D.C. time, on the next Business Day.  The Activity Fee shall be
payable initially on the first (1st) day of each month following any Advance or
Withdrawal and shall be payable on the first (1st) day of each successive month
for so long as such Advance or Withdrawal shall remain outstanding.  The
Activity Fee shall be otherwise due and payable as provided in this Agreement.
Upon receipt by Servicer, the Activity Fee shall be remitted immediately to
Fannie Mae.






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<PAGE>   87
5                INDEMNIFICATION.

                 (a)      INDEMNIFICATION.  The Borrowers hereby release Fannie
Mae, Servicer and their respective officers, directors, members, shareholders,
officials, agents, independent contractors and employees and each of them and
each Person, if any, who controls Fannie Mae or Servicer within the meaning of
either Section 15 of the Securities Act of 1933, as amended, or Section 20 of
the Securities Exchange Act of 1934, as amended (each an "INDEMNIFIED PARTY"),
from, and covenant and agree to indemnify, hold harmless and defend each such
indemnified party from and against, any and all claims, losses, liabilities
(including penalties), actions, suits, judgments, demands, damages, costs,
charges or expenses (including reasonable fees and expenses of attorneys,
consultants and auditors and costs of investigation) and obligations whatsoever
(herein collectively referred to as "LIABILITIES") of any nature arising out
of, relating to or in connection with: (i) the transactions provided for in
this Agreement or the other Transaction Documents or otherwise in connection
with any Property, the Bonds, the Mortgage Loans, the Custodial Receipts Bond
Issues, the Custodial Receipts, the Custodial Receipts Transactions or the
execution or amendment of any document relating thereto; (ii) the approval of
the refinancing of the Bond Properties or the making of the Mortgage Loans;
(iii) any act or omission of any of the Borrowers or any of their Affiliates,
agents, servants, employees or licensees, in connection with the Properties,
the Mortgage Loans, the Custodial Receipts Bond Issues, the Custodial Receipts,
the Custodial Receipts Transactions, this Agreement or the other Transaction
Documents; (iv) the issuance and sale, resale or remarketing of any Bonds or
any certifications or representations made by any person (other than any Issuer
or the party seeking indemnification in connection therewith), including, (A)
any untrue statement or alleged untrue statement of a material fact contained
in any offering documents relating to any of the Bonds or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (B) the violation by any Borrower of any Federal, state or local
securities or real estate laws, rules or regulations in connection with the
issuance, offer and sale of any of the Bonds; (v) the operations of any
Property, or the conditions, occupancy, use, possession, conduct or management
of work done in or about, or from the planning, design, acquisition,
installation or construction of any Property, or any part of any Property; (vi)
the exercise by Fannie Mae or Servicer of their respective powers or duties
under this Agreement or any other Transaction Document; (vii) any Related
Trustee's acceptance or administration of the trusts created by the Related
Indenture and the exercise of its powers or duties thereunder, and under any
Regulatory Agreement or any other agreements in connection therewith to which
it is a party; (viii) errors, omissions, interruptions, losses or delays in
transmission or delivery of any messages by mail, cable, telegraph, telex,
telephone or otherwise; (ix) any other circumstances whatsoever relating to or
resulting from a payment or nonpayment by Fannie Mae in accordance with the
terms of any Fannie Mae Credit Enhancement Instrument; (x) any circumstances
whatsoever relating to or in connection with the Salem Station Restrictive
Covenants Agreement, including, any violation by Collateral Inc. or any
predecessor in interest to the Salem Station Project of any terms, conditions,
requirements or restrictions of the Salem Station Restrictive Covenants
Agreement; and (xi) all reasonable costs, counsel fees, expenses or liabilities
incurred in connection with any such claim or proceeding referred to in clauses
(i) through (x) above; provided, however, that the foregoing release and
indemnification shall not be effective to the extent such Liabilities are






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<PAGE>   88
caused by the gross negligence, bad faith or willful misconduct of an
indemnified party or relate to disclosure provided by Fannie Mae for inclusion
under the subheading "Federal National Mortgage Association" of any Official
Statement.  Neither Fannie Mae nor Servicer shall have any liability to the
Borrowers or to any other person as a result of any reduction of the credit
rating of any of the Bonds or any deterioration of Fannie Mae's financial
condition, nor shall any such reduction or deterioration reduce or diminish in
any respect Borrowers' obligations under this Agreement.  In the event that any
action or proceeding is brought against any indemnified party with respect to
which indemnity may be sought hereunder, the Borrowers, upon written notice
from the indemnified party, shall assume the investigation and defense thereof,
including the employment of counsel selected by the Borrowers, but acceptable
to the indemnified party, and shall assume the payment of all expenses related
thereto, with full power to litigate, compromise or settle the same in its
discretion, provided that if such settlement or compromise shall contain or
infer an admission regarding, or relating in any way to, any indemnified party,
such indemnified party shall have the right to review and approve or disapprove
any such compromise or settlement.  Each indemnified party shall have the
right, if such indemnified party shall conclude in good faith that a conflict
of interest exists (either between such indemnified party and one or more other
indemnified parties or with respect to such indemnified party and the proposed
joint counsel), to employ one separate counsel (per indemnified party),
together with appropriate local counsel engaged by such primary counsel and
whose fees shall be billed through such primary counsel, in any such action or
proceeding and participate in the investigation and defense thereof, and the
Borrowers shall pay the reasonable fees and expenses of such separate counsel;
provided that if such conflict of interest is between such indemnified party
and the proposed joint counsel, then before such indemnified party retains such
separate counsel, the Borrowers shall have the right to attempt to identify
alternative joint counsel, as to whom no conflict of interest exists and which
is otherwise acceptable to the such indemnified party, and who may,
accordingly, represent the Borrowers and all of the indemnified parties.  If
separate counsel are employed as described above, the Borrowers and any such
indemnified party agree to cooperate as may reasonably be required in order to
ensure the proper and adequate defense of any such action, suit or proceeding,
including making available to each other, and their counsel and accountants,
all books and records relating to such action, suit or proceeding.  If any such
counsel determines that the rendering of such assistance will adversely affect
the defense or interests of its client, such counsel shall not be required to
comply with the terms of the immediately preceding sentence.  Each of the
Borrowers and the indemnified parties shall be entitled to assert the
attorney/client and work product privileges, as applicable, in response to any
requests for disclosure of any communications, work product or information that
the Borrowers or such indemnified party believes may be protected pursuant to
such privileges, and discussions between indemnified parties and counsel shall
not be deemed a waiver of such privileges.

                 Notwithstanding any permitted transfer of any Property to
another Person or the release of any Property from the lien of any Mortgage,
the Borrowers shall remain obligated to indemnify each indemnified party
pursuant to this section 4.5 with respect to acts occurring prior






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<PAGE>   89
to the date of permitted transfer of legal title to such Property or release of
such Property from the lien of any Mortgage, as applicable (irrespective of
when a claim is actually made).

                 (b)      SURVIVAL.  The indemnity provisions of this section
4.5 shall survive the termination of this Agreement and foreclosure or release
of the Mortgages or other disposition of the Properties to the fullest extent
allowable under the applicable statute of limitations.

6                LIABILITY OF BORROWERS.

                 The obligations of the Borrowers under this Agreement shall be
absolute, unconditional and irrevocable and shall be paid and performed
strictly in accordance with the terms of this Agreement under all circumstances
whatsoever, including the following circumstances: (a) any invalidity or
unenforceability of this Agreement or any of the other Transaction Documents or
any other agreement or instrument related to the Transaction Documents; (b) any
amendment or waiver of, or any consent to or departure from, the terms of this
Agreement, any Related Fannie Mae Credit Enhancement Instrument, any of the
other Transaction Documents, or any other agreement or instrument related to
the Transaction Documents, any extensions of time or other modifications of the
terms and conditions for any act to be performed in connection with this
Agreement, any Related Fannie Mae Credit Enhancement Instruments or any of the
other Transaction Documents, other than any amendment, waiver, consent,
extension or modification entered into in strict accordance with the terms of
this Agreement; (c) the existence of any claim, set-off, defense or other right
which the Borrowers may have at any time against any Issuer, any Related
Trustee, any tender agent, Fannie Mae, Servicer, Remarketing Agent or any other
Person, whether in connection with this Agreement, any of the other Transaction
Documents, any Property, or any unrelated transaction; (d) the surrender or
impairment of any security for the performance or observance of any of the
agreements or terms of this Agreement or the other Transaction Documents; (e)
defect in title to any Property, any acts or circumstances that may constitute
failure of consideration, destruction of, damage to or condemnation of any
Property, commercial frustration of purpose, or any change in the tax or other
laws of the United States of America or of the State or any political
subdivision of either; (f) the breach by any Issuer, any Related Trustee, any
tender agent, Servicer, Remarketing Agent, Fannie Mae or any other Person of
its obligations under any Transaction Document or (g) any other circumstance,
happening or omission whatsoever.






                                       88
<PAGE>   90
7                FANNIE MAE AND SERVICER NOT LIABLE.

                 Neither Fannie Mae, Servicer nor any of their officials,
officers, directors, members, shareholders, agents, independent contractors or
employees shall be responsible for or liable to any Borrower, any Affiliate of
any Borrower or any members, partners, Affiliates, independent contractors or
employees of any Borrower or any Affiliate of any Borrower for (i) any act or
omission of Fannie Mae, Servicer or any other Person made in good faith with
respect to the validity, sufficiency, accuracy or genuineness of documents, or
of any endorsement(s) thereon (except for documents and endorsements provided
by Fannie Mae or Servicer, as applicable), even if such documents should in
fact prove to be in any or all respects invalid, insufficient, fraudulent or
forged, (ii) the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any Related Fannie Mae Credit
Enhancement Instrument or the rights or benefits under any Related Fannie Mae
Credit Enhancement Instrument or proceeds under any Related Fannie Mae Credit
Enhancement Instrument, in whole or in part, that may prove to be invalid or
ineffective for any reason, (iii) failure of any Related Trustee to comply
fully with all conditions required in order to effect any Advance, (iv) errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex, telecopier or otherwise; (v) for any loss or
delay in the transmission or otherwise of any document or draft required in
order to make any Advance, or (vi) any consequences arising from causes beyond
the control of Fannie Mae.  In furtherance and not in limitation of the
foregoing, Fannie Mae or Servicer may accept documents that appear on their
face to be valid and in order, without any responsibility for further
investigation.  None of the above shall affect, impair, or prevent the vesting
of rights or powers of Fannie Mae or Servicer under this Agreement.  In
furtherance and extension and not in limitation of the specific provision set
forth above, any action taken or omitted by Fannie Mae under or in connection
with any Transaction Document or any related certificates or other documents
shall be binding upon the Borrowers, the Related Trustee, the Issuer, the
Remarketing Agent and the tender agent and shall not under the Related Fannie
Mae Credit Enhancement Instrument put Fannie Mae under any resulting liability
to any of them except to the extent such liability is caused by Fannie Mae's
bad faith, gross negligence or willful misconduct.






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<PAGE>   91
8                WAIVERS AND CONSENTS.

                 THE BORROWERS AGREE TO BE BOUND BY THIS AGREEMENT AND TO THE
EXTENT PERMITTED BY LAW, (A) WAIVE AND RENOUNCE ANY AND ALL REDEMPTION AND
EXEMPTION RIGHTS AND THE BENEFIT OF ALL VALUATION AND APPRAISAL PRIVILEGES
AGAINST THE INDEBTEDNESS AND OBLIGATIONS EVIDENCED BY THIS AGREEMENT AND THE
OTHER TRANSACTION DOCUMENTS OR BY ANY EXTENSION OR RENEWAL OF THIS AGREEMENT
AND THE OTHER TRANSACTION DOCUMENTS; (B) WAIVE PRESENTMENT AND DEMAND FOR
PAYMENT, NOTICES OF NONPAYMENT AND OF DISHONOR (UNLESS SUCH NOTICES ARE
EXPRESSLY REQUIRED UNDER THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT),
PROTEST OF DISHONOR AND NOTICE OF PROTEST; (C) WAIVE ALL NOTICES IN CONNECTION
WITH THE DELIVERY AND ACCEPTANCE OF THIS AGREEMENT AND THE OTHER TRANSACTION
DOCUMENTS AND ALL OTHER NOTICES IN CONNECTION WITH THE PERFORMANCE, DEFAULT OR
ENFORCEMENT OF THE PAYMENT OF ANY OBLIGATIONS UNDER THIS AGREEMENT AND THE
OTHER TRANSACTION DOCUMENTS EXCEPT AS REQUIRED BY THIS AGREEMENT OR THE OTHER
TRANSACTION DOCUMENTS; (D) AGREE THAT THEIR LIABILITIES UNDER THIS AGREEMENT
AND THE OTHER TRANSACTION DOCUMENTS SHALL BE UNCONDITIONAL AND WITHOUT REGARD
TO THE LIABILITY OF ANY OTHER PERSON; AND (E) AGREE THAT ANY CONSENT, WAIVER OR
FORBEARANCE UNDER THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS WITH
RESPECT TO AN EVENT SHALL OPERATE ONLY FOR SUCH EVENT AND NOT FOR ANY
SUBSEQUENT EVENT.

9                SUBROGATION.

                 The Borrowers acknowledge that Fannie Mae is to be fully
subrogated to the extent of any payment made by Fannie Mae pursuant to any
Related Fannie Mae Collateral Agreement and any additional interest due on any
late payment, to the rights of the Related Trustee and the respective
Bondholders to any moneys paid or payable under the Related Securities and all
security therefor under the Related Indenture.  The Borrowers further
acknowledge that Fannie Mae is to be fully subrogated to the extent of any
payment made by Fannie Mae pursuant to any Related Custodial Receipts
Collateral Agreement and any additional interest due on any late payment, to
the rights of Morgan to any moneys paid or payable under the Related Custodial
Receipts or the related Custodial Receipts L/C Reimbursement Agreement and all
security therefor under the Related Indenture.  The Borrowers agree to such
subrogation and further agree to execute such instruments and to take such
actions as, in the judgment of Fannie Mae, are necessary to evidence such
subrogation and to perfect the rights of Fannie Mae to the extent necessary to
provide reimbursement hereunder.






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<PAGE>   92
10               APPLICATION OF PAYMENTS.

                 Payments made by the Borrowers in respect of the Obligations
shall be applied in the manner provided in the Mortgage Documents.

11               PLEDGE OF RIGHTS TO CERTAIN FUNDS AND INVESTMENTS.

                 To secure Borrowers' obligations under this Agreement, to the
extent, if any, that the Borrowers retain an interest in and to all funds and
accounts and investments of funds and accounts now or hereafter held: by (a)
the Related Trustees under the Related Indentures as security for the payment
of the Bonds, including the Principal Reserve Funds, and any and all loan
funds, escrow funds, revenue funds, debt service funds, reserve funds,
redemption funds and other funds and securities and other instruments
comprising investments of any of the foregoing and interest and other income
derived from any of the foregoing held as security for the payment of the
Bonds, the Borrowers hereby pledge and assign to Fannie Mae and grant to Fannie
Mae a security interest in such funds, accounts, and investments which pledge,
assignment and grant shall be subject only to the rights of each Related
Trustee under the Related Indenture) and (b) by Servicer with respect to
payments payable under any of the Transaction Documents including the
Replacement Reserve Accounts and any and all escrow funds, completion repair
funds and other funds, and any securities and other instruments comprising
investments of any of the foregoing and interest income and other proceeds
derived from any of the foregoing.  The Borrowers covenant and agree that it
will defend Fannie Mae's rights and security interests created by this section
4.11 against the claims and demands of all Persons.  In addition to its other
rights and remedies under this Agreement and the other Transaction Documents,
Fannie Mae shall have all the rights and remedies of a secured party under the
Uniform Commercial Code or other applicable law with respect to the security
interests created by this section 4.11, subject only to the rights of the
Related Trustees under the Related Indentures.  Fannie Mae's rights under this
section 4.11 are in addition to, and not in lieu of, its rights and remedies
described elsewhere in this Agreement.

12               PURCHASED BONDS.

                 The Borrowers acknowledge that any Related Purchased Bonds
will be purchased for and registered in the name of the applicable Borrower, to
the extent that Fannie Mae has provided the funds to purchase such Related
Purchased Bonds or moneys in the applicable Principal Reserve Fund were used
for such purposes and will be pledged to Fannie Mae pursuant to the Related
Pledge Agreement.






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<PAGE>   93
13               NONRECOURSE OBLIGATIONS.

                 (a)      NON-RECOURSE LIABILITY.  Subject to the provisions of
section 4.13(b), section 4.13(c) and the Guaranty and notwithstanding any other
provision in the Related Mortgage Notes, the Mortgages or any other Transaction
Document, the personal liability of the Borrowers, Guarantor and their
respective affiliates, shareholders, members, partners, officers, directors and
employees to pay and perform the Obligations shall be limited to (i) the real
and personal property described as "Property" in the Mortgages, (ii) the
personal property described in and pledged under any other Mortgage Document,
(iii) the rents, profits, issues, products and income of the Properties
received or collected by or on behalf of any Borrower (the "RENTS AND PROFITS")
to the extent such receipts are necessary, first, to pay the Operating Expenses
then due and payable as of the time of receipt of such Rents and Profits, and
then, to pay principal and interest due under the Related Mortgage Notes, the
Custodial Receipts L/C Reimbursement Agreement, any other sums due under the
Mortgages or any other Mortgage Document and any other Obligations then due and
owing to Fannie Mae under this Agreement, except to the extent that the
Borrowers did not have the legal right, because of a bankruptcy, receivership
or similar judicial proceeding, to direct the disbursement of such sums.
Except as provided in section 4.13(b), section 4.13(c) and in the Guaranty,
Fannie Mae shall not seek (A) any judgment for a deficiency against any of the
Borrowers or Guarantor, or any Borrower's or Guarantor's heirs, legal
representatives, successors or assigns, in any action to enforce any right or
remedy under any of the Related Mortgage Notes, the Custodial Receipts L/C
Reimbursement Agreement, the Mortgages, this Agreement or any other Transaction
Document, or (B) any judgment on any of the Related Mortgage Notes, the
Custodial Receipts L/C Reimbursement Agreement or the Obligations except as may
be necessary in any action brought under any of the Mortgages to enforce the
lien against the Property encumbered thereby or to exercise any remedies under
any other Mortgage Documents.

                 (b)      EXCEPTIONS TO NON-RECOURSE LIABILITY.  If, without
obtaining Fannie Mae's prior written consent, (i) a "Transfer" shall occur
which, pursuant to Uniform Covenant 19 of the any of the Mortgages, gives
Fannie Mae the right, at its option, to declare all sums secured by any such
Mortgage immediately due and payable, or (ii) any Borrower shall voluntarily
encumber or permit the encumbrance of any Property with the lien of any
"Subordinate Instrument" (as defined in the Related Mortgage with respect to
such Property) in connection with any financing by such Borrower, any of such
events shall constitute an Event of Default hereunder and under the other
Mortgage Documents, and if such Event of Default shall continue for thirty (30)
days then, from and after the date that is thirty (30) days after such event,
(x) section 4.13(a) shall not apply, and (y) the Borrowers and, solely to the
extent provided in the Guaranty, Guarantor shall be personally liable on a
joint and several basis for full recourse liability under this Agreement and
the other Mortgage Documents.

                 (C)      EXCEPTIONS TO EXCULPATION.  Notwithstanding section
4.13(a), each Borrower and Guarantor (but excluding other affiliates, members,
partners, officers, directors






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<PAGE>   94
and employees of each Borrower and Guarantor and further excluding the
shareholders of Guarantor) shall be personally liable on a joint and several
basis in the amount of any loss, damage or cost (including reasonable
attorneys' fees and expenses) resulting from (1) fraud or intentional
misrepresentation by any of the Borrowers, any Borrower's agents or employees
or Guarantor, in connection with obtaining the Mortgage Loans evidenced by the
Related Mortgage Notes, obtaining the credit enhancement evidenced by the
Related Fannie Mae Credit Enhancement Instruments, or in complying with any of
the Obligations, (2) Insurance Proceeds, Condemnation Proceeds, security
deposits from tenants and other sums or payments received by or on behalf of
the Borrowers in their capacity as owners of the Properties and not applied in
accordance with the provisions of the Mortgages (except to the extent that the
Borrowers did not have the legal right, because of a bankruptcy, receivership
or similar judicial proceeding, to direct disbursement of such sums or
payments), (3) all Rents and Profits (except to the extent that the Borrowers
did not have the legal right, because of a bankruptcy, receivership or similar
judicial proceeding, to direct the disbursement of such sums) received by or on
behalf of the Borrowers in its capacity as owner of the Properties and not
applied first (a) to the payment of the Operating Expenses as such Operating
Expenses become due and payable, and then (b) to the payment of principal and
interest due under the Related Mortgage Notes, any other sums due under the
Mortgages or any other Mortgage Document and any other Obligations then due and
owning to Fannie Mae under this Agreement, (4) the Borrowers' failure to
deposit all Gross Cash Flow into the Property Accounts when required in
accordance with the Cash Management Agreement, if any (except to the extent
that the Borrowers did not have the legal right because of a bankruptcy,
receivership or similar judicial proceeding to deposit such sums), (5) the
Borrowers' failure following an Event of Default to deliver to Fannie Mae on
demand all Rents and Profits and security deposits (except to the extent that
the Borrowers did not have the legal right because of a bankruptcy,
receivership or similar judicial proceeding to direct disbursement of such
sums), (6) the Borrowers' failure following an Event of Default to deliver to
Fannie Mae on demand all books and records relating to the Properties, (7) the
Borrowers' indemnification obligations set forth in section 4.5(a), excluding
(A) the indemnification obligations set forth in clause (v) of such section
4.5(a) and (B) the indemnification obligations set forth in clause (x) of such
section 4.5(a) to the extent such indemnification obligations relate to clause
(v) of such section 4.5(a), (8) failure of any Borrower to remain a
Single-Purpose entity or to comply with any of the provisions of subsections
2.3(a)(iii) or 2.3(a)(iv) or (9) all or any portion of the Obligations of all
or any of the Borrowers being rendered invalid or unenforceable by the
application of Fraudulent Transfer Laws.

                 (d)      NO IMPAIRMENT OF CERTAIN RIGHTS.  Although the
personal liability of Borrowers, Guarantor and their respective affiliates,
shareholders, members, partners, officers, directors and employees may be
limited pursuant to section 4.13, no provision of this section 4.13 shall (i)
affect any guaranty or similar agreement executed in connection with the debt
evidenced by the Related Mortgage Notes and the Custodial Receipts L/C
Reimbursement, or otherwise in connection with the Obligations, (ii) release or
reduce the Obligations or the debt evidenced by the Related Mortgage Notes and
the Custodial Receipts L/C Reimbursement Agreement, (iii) impair the right of
Fannie Mae to enforce the provisions of paragraph 6 of the






                                       93
<PAGE>   95
portion of each Mortgage identified as the "Multifamily Instrument", (iv)
impair the lien of any Mortgage or (v) impair the right of Fannie Mae to
enforce the provisions of the Cash Management Agreement, any Replacement
Reserve Agreement, any Hedge Security Agreement, any Custodial Agreement, the
Assignment of Management Agreement, or any other agreement defined as an
"Ancillary Collateral Agreement" in any Mortgage.






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<PAGE>   96
14               APPLICATION FOR FANNIE MAE CREDIT ENHANCEMENT INSTRUMENTS.

                 Upon the terms and subject to the conditions set forth in this
Agreement and subject to the condition that the Mortgage Loans be originated by
an independent third-party lender or issuer and comply with the other
requirements of the Fannie Mae Charter Act for multifamily loans, the Borrowers
hereby apply to Fannie Mae for and hereby request Fannie Mae (a) with respect
to each Fixed Rate Bond Transaction, to deliver to each Related Trustee for the
account of the Borrower, the Related Fannie Mae Pass-Through Certificate in the
Facility Amount, and (b) with respect to each Floating Rate Bond Transaction
and each Custodial Receipts Transaction, to execute and deliver the Related
Fannie Mae Collateral Agreement. While each Bond Transaction, each Custodial
Receipts Transaction and the Related Fannie Mae Credit Enhancement Instrument
represents a separate and independent obligation of each Borrower and Fannie
Mae, respectively, the Borrowers acknowledge that, in requesting Fannie Mae to
execute and deliver the Related Fannie Mae Credit Enhancement Instruments,
Borrowers intend that all of the obligations of the Borrowers arising under the
Bond Transactions and the Custodial Receipts Transactions be treated as if they
were a single, integrated Indebtedness of the Borrowers.  Accordingly, the
Borrowers agree that if any of the Borrowers fails to pay fully, when due, any
amount payable under any Related Mortgage Note, any Custodial Receipts Mortgage
Note or any Custodial Receipts L/C Reimbursement Agreement or their respective
Related Mortgages, then Fannie Mae may elect to treat such unpaid amount as
being due and owing by the Borrowers on a joint and several basis, and such
amount may be realized upon on a pro rata basis or otherwise, in each case in
Fannie Mae's discretion, from the value each of the Properties and the other
Collateral.  Similarly, if any of the Borrowers fails to pay fully, when due,
to Fannie Mae any other amount which such Borrowers is obligated to pay under
this Agreement, the unpaid amount shall be deemed to be due and owing by all of
the Borrowers on a joint and several basis, and such amount may be realized
upon on a pro rata basis or otherwise, in each case in Fannie Mae's discretion,
from the value each of the Properties and the other Collateral.  It is a
material part of the consideration for Fannie Mae's agreement to execute and
deliver the Related Fannie Mae Credit Enhancement Instruments that the
Borrowers not be able to put one or more of the Mortgage Loans or the Custodial
Receipts Mortgage Loans in default without putting all such Mortgage Loans and
Custodial Receipts Mortgage Loans in default.  Accordingly, the Borrowers
expressly agree that irrespective of the actual payments made by any Borrower
under the Mortgage Loans,  the Custodial Receipts Mortgage Loans or this
Agreement, if the amount actually paid is not sufficient to pay fully and
timely all such obligations, then the failure to pay shall exist with respect
to all of the Mortgage Loans and Custodial Receipts Mortgage Loans
notwithstanding that the amount paid was sufficient to pay fully some but not
all of the amounts due and owing with respect to the Mortgage Loans and the
Custodial Receipts Mortgage Loans or other Obligations.






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V.


       ALLOCABLE FACILITY AMOUNTS; SUBSTITUTION, RELEASE, AND ADDITION
                 OF PROPERTIES; CERTAIN PERMITTED TRANSFERS

1                ALLOCABLE FACILITY AMOUNTS.

                 Fannie Mae shall determine the Allocable Facility Amount for
each Property annually on or before the Determination Date.  The Allocable
Facility Amount, once determined by Fannie Mae as aforesaid, shall remain in
effect until the next Determination Date.

2                SUBSTITUTION OF ADDITIONAL MORTGAGED PROPERTIES.

                 An Additional Mortgaged Property may be released from the lien
of a Mortgage and a New Additional Property substituted therefor if each of the
following conditions are met:

                 (a)      the New Additional Property is owned by Collateral
Inc. and has a Value equal to or greater than the product of 125% (the
"SUBSTITUTION PERCENTAGE") times the Minimum Substitute Property Value of the
Released Property;

                 (b)      the New Additional Property has Net Operating Income
(as determined by Fannie Mae in its discretion) for the twelve (12) month
period ending within sixty (60) days of the date this test is applied, equal to
or greater than the Net Operating Income (as determined by Fannie Mae in its
discretion) of the Additional Mortgaged Property being released from the lien
for the corresponding twelve (12) month period multiplied by the Substitution
Percentage;

                 (c)      no Event of Default or Potential Event of Default
shall have occurred and be continuing;

                 (d)      the applicable Borrower shall cause the Released
Property to be immediately conveyed by such Borrower to Guarantor, or such
other Person (other than another Borrower) as such Borrower may otherwise
determine;

                 (e)      the New Additional Property meets all of Fannie Mae's
then applicable underwriting criteria for new loans secured by Multifamily
Residential Property;

                 (f)      all documentation relating to the foregoing is
acceptable to Fannie Mae in its discretion in all respects, including legal
opinions, title insurance, Security Instruments, Replacement Reserve
Agreements, assignments and any amendments to this Agreement or the other
Transaction Documents; and






                                       96
<PAGE>   98

                 (g)      with respect to each proposed New Additional
Property, the Borrowers shall pay Fannie Mae and Servicer a due diligence fee
plus all costs and expenses (including reasonable legal fees and expenses)
incurred by Fannie Mae or Servicer in connection with the foregoing.  Such
amounts shall be paid by the Borrowers promptly upon receipt of invoices
therefor, and shall be payable regardless of whether the property substitution
does or does not (for any reason) ultimately occur.

3                RELEASE OF PROPERTIES.

                 A Property may be released from the lien of a Mortgage without
another Multifamily Residential Property being substituted therefor if each of
the following conditions are met:

                 (a)      the Borrowers shall either redeem or otherwise remove
Bonds from the Fannie Mae Credit Facility and/or post cash collateral in a
manner acceptable to Fannie Mae in its discretion, in either case in an amount
equal to 110% of the Allocable Facility Amount of the Released Property (the
"RELEASE PRICE").  The Release Price requirement shall be satisfied by (i) if
the Released Property is a Bond Property, the amount of Related Bonds
outstanding with respect to such Bond Property immediately prior to such
release (provided, that, the requirements of section 5.3(c) have been
satisfied), plus (ii) the amount of any other Bonds redeemed by the Borrowers
to obtain such release, plus (iii) the amount of any letter of credit in form
and substance and provided by a financial institution satisfactory to Fannie
Mae in its discretion or any cash collateral deposited with Fannie Mae or its
designee and otherwise held in a manner approved by Fannie Mae in its
discretion ("RELEASE PRICE CASH COLLATERAL") and posted by the Borrowers to
obtain such release; and

                 (b)      no Event of Default or Potential Event of Default
shall have occurred and be continuing; and

                 (c)      if the Released Property is a Bond Property, then
either (i) the Related Fannie Mae Credit Enhancement Instrument shall, subject
to subsection 5.3(h), terminate on or before the Released Property is released
from the lien of any Related Mortgage, or (ii) Fannie Mae, in its discretion,
shall have consented to the transfer of such Bond Property and the assumption
of the Related Mortgage Note, the Related Mortgage and the other related
Transaction Documents in accordance with section 5.6; and

                 (d)      the applicable Borrower shall cause the Released
Property to be immediately conveyed by such Borrower to Guarantor or such other
Person (other than another Borrower) as such Borrower may determine; and

                 (e)      if the Released Property is a Custodial Receipts
Property, then the Obligations of the Borrower with respect to such Custodial
Receipts Property shall be assumed






                                       97
<PAGE>   99
by Collateral Inc. pursuant to documentation in form and substance accepted to
Fannie Mae in its discretion, and such Borrower shall be released by Fannie Mae
from such Obligations pursuant to release documentation prepared by Fannie Mae
and reasonably acceptable to such Borrower; and

                 (f)      all documentation relating to the foregoing is
acceptable to Fannie Mae in all respects, including legal opinions, release
documentation and any amendments to this Agreement or the other Transaction
Documents; and

                 (g)      the Borrowers shall pay, with respect to each
Released Property, to Fannie Mae and Servicer, a due diligence fee plus all
costs and expenses (including reasonable legal fees and expenses) incurred by
Fannie Mae or Servicer in connection with the foregoing.  Such amounts shall be
paid by the Borrowers promptly upon receipt of invoices therefor, and shall be
payable regardless of whether the property is or is not (for any reason)
ultimately released from the lien of a Mortgage; and

                 (h)      Fannie Mae shall execute and deliver to the
appropriate Borrower (i) a release of the lien of the Related Mortgage in
recordable form and (ii) if the Released Property is a Custodial Receipts
Property, a partial release with respect to those portions of the pledged
collateral relating to such Custodial Receipts Property and pledged under the
Custodial Receipts Bond Pledge Agreement, provided, in each instance, that
Fannie Mae reasonably determines, in light of such opinions of certified public
accountants that prepare the audited financial statements of the appropriate
Borrower and such other similar information and opinions as may be provided by
such Borrower to Fannie Mae, that no part of any payments made by such Borrower
prior to or concurrently with the release of the lien of the Related Mortgage
will likely result in an avoidance or any other recovery or disgorgement
pursuant to the Bankruptcy Code (including sections 544, 547, 549 or 550
thereof) or any other applicable bankruptcy law which would result in Fannie
Mae having any liability under any Related Fannie Mae Collateral Agreement, or
such Borrower will provide cash collateral or make other arrangements
acceptable to Fannie Mae in its discretion to ameliorate such risk of
avoidance, recovery or disgorgement.

4                ADDITION OF NEW PROPERTIES TO THE CREDIT FACILITY.

                 (a)      IN GENERAL.  At the request of the Borrowers and
Servicer, Fannie Mae may, from time to time, consent to the addition of a New
Bond Property (and to the extent required to meet the underwriting requirements
established by Fannie Mae with respect to the addition of a New Bond Property,
a New Additional Property) to the Fannie Mae Credit Facility; provided,
however, that:


                 (i) such consent may be granted or withheld by Fannie Mae in
its discretion;






                                       98
<PAGE>   100

                 (ii) the underwriting with respect to each such New Property
         shall be conducted by Servicer and reviewed by Fannie Mae and shall
         take into account all facts and circumstances deemed relevant by
         Servicer and Fannie Mae in their discretion;

                 (iii) the terms and conditions relating to the addition of
         such New Property shall be determined by Servicer and Fannie Mae in
         their discretion;

                 (iv) all documentation deemed necessary by Servicer or Fannie
         Mae for the making of a new loan, if applicable, and the addition of
         such New Property shall be fully executed and delivered by each party
         thereto and shall be in form and substance acceptable to Servicer and
         Fannie Mae in their discretion;

                 (v) any loan made in conjunction with the addition of such New
         Property must be originated by an independent third-party lender or
         issuer and otherwise comply with applicable Fannie Mae Charter Act
         requirements;

                 (vi) the Borrowers shall pay or cause to be paid all fees,
         costs, charges and expenses (including the fees and expenses of
         attorneys, accountants and other experts) incurred by or on behalf of
         Fannie Mae or Servicer in connection with the addition of such New
         Property in accordance with section 4.2.

The addition of any New Bond Property and any New Additional Property to the
Credit Facility shall become effective only upon satisfaction of all of the
requirements set forth above and Fannie Mae's execution and delivery to the
Borrowers of a Confirmation of Addition of New Property, substantially in the
form of Exhibit H attached hereto (a "NEW PROPERTY CONFIRMATION").  Upon the
execution and delivery of the New Property Confirmation in accordance with this
section 5.4, this Agreement shall be automatically deemed amended and
supplemented to incorporate the terms and provisions of such New Property
Confirmation including any provisions, (A) specifying whether the New Property
is a New Bond Property or a New Additional Property, (B) specifying whether a
New Bond Property is a Floating Rate Bond Property or a Fixed Rate Bond
Property, (C) specifying whether the Related Bonds with respect to a New Bond
Property are Unhedged Bonds, (D) specifying the Credit Enhancement Component,
the Reserve Component and if applicable, the Liquidity Component, with respect
to a New Bond Property, (E) specifying the amendment and restatement of any of
the Exhibits to this Agreement, (F) modifying the Allocable Facility Amount of
all or any of the Properties and (G) modifying the Maximum LTV Percentage
and/or the Minimum DSC Ratio.

                 (b)      ADDITION OF FALKLAND CHASE.  On or before December
31, 1996, the Borrowers in conjunction with Servicer, may request that a new
tax-exempt housing bond transaction (the "FALKLAND CHASE BOND TRANSACTION")
with respect to that certain Multifamily Residential Property located in Silver
Spring, Maryland and commonly known as Falkland Chase (the "FALKLAND CHASE
PROJECT") be added to the Fannie Mae Credit Facility as a new Floating Rate
Bond Transaction and that the bonds with respect to such Falkland Chase Bond
Transaction






                                       99
<PAGE>   101
be deemed Unhedged Bonds for purposes of Section 3.1(a).  Subject to
satisfaction in full of the conditions and limitations set forth in this
Section 5.4(b), Fannie Mae will consider granting its approval to the addition
of the Falkland Chase Bond Transaction and providing credit enhancement and, if
applicable, liquidity support (the "FALKLAND CHASE CREDIT ENHANCEMENT") with
respect thereto by issuing a collateral agreement substantially in the form of
a Related Fannie Mae Collateral Agreement for the benefit of the trustee with
respect to the Falkland Chase Bond Transaction.  Fannie Mae's consideration of
providing the Falkland Chase Credit Enhancement and consenting to the bonds
with respect to the Falkland Chase Bond Transaction being qualified as Unhedged
Bonds is subject to Fannie Mae's determination in Fannie Mae's discretion that
each of the following conditions have been satisfied in full:

                 (i)      the Falkland Chase Bond Transaction shall close on or
         before March 31, 1997;

                 (ii)     no Event of Default or Potential Event of Default
         exists as of the proposed date for the addition of the Falkland Chase
         Project;

                 (iii)    the Falkland Chase Project shall be owned in fee by
         Collateral Inc.;

                 (iv)     the ratio (expressed as a percentage) of the Facility
         Amount of the proposed Falkland Chase Bond Transaction to the Value of
         the Falkland Chase Project plus the amount of any Shortfall Cash
         Collateral (which, if the Shortfall Cash Collateral is a letter of
         credit, has a term of at least one year and shall be in an "evergreen
         format") or Value of any proposed New Additional Property offered by
         the Borrowers in connection with the Falkland Chase Bond Transaction,
         will be equal to or less than 50%;

                 (v)      the ratio of (A) the Net Operating Income of the
         Falkland Chase Project plus (I) the Net Operating Income of any
         proposed New Additional Property offered by the Borrowers in
         connection with the Falkland Chase Bond Transaction for the twelve
         (12) month period ending within sixty (60) days of the proposed date
         for the addition of the Falkland Chase Project, and (II) the amount of
         any Shortfall Cash Collateral (which, if the Shortfall Cash Collateral
         is a letter of credit, has a term of at least one year and shall be in
         an "evergreen format") but only to the extent such Shortfall Cash
         Collateral is not included in the calculation of the loan to value
         ratio pursuant to section 5.4(b)(iv), to (B) to the anticipated
         Imputed Debt Service with respect to the Falkland Chase Project for
         the twelve (12) month period immediately following the proposed date
         for the addition of the Falkland Chase Project, each as determined by
         Fannie Mae in its discretion, will equal or exceed 2.2:1;

                 (vi)     the mortgage loan with respect to the Falkland Chase
         Bond Transaction shall be originated by an independent third-party
         lender or issuer and comply with applicable Fannie Mae Charter Act
         requirements;






                                      100
<PAGE>   102
                 (vii) all documentation (including any amendments to this
         Agreement and the other Transaction Documents) relating to Falkland
         Chase Bond Transaction shall be the same in all material respects as
         the documentation with respect to the Related Bonds, subject to such
         modifications as may be necessary and which, in any event, are
         approved by Fannie Mae in its discretion and the terms and conditions
         of the bonds, the related bond documents, mortgage loan documents and
         other documents delivered in connection with the Falkland Chase Bond
         Transaction (the "FALKLAND CHASE REFUNDING DOCUMENTS"), shall be
         satisfactory to Fannie Mae, including the following:

                 (A)      such Falkland Chase Bond Transaction shall be
                          incorporated into and be governed by the terms of
                          this Agreement;

                 (B)      the principal amount of the mortgage loan with
                          respect to the Falkland Chase Bond Transaction shall
                          be equal to or less than $26,000,000.00;

                 (C)      if the Falkland Chase Bond Transaction will be a
                          Floating Rate Bond Transaction, then, the terms and
                          conditions governing the availability of and
                          conversion between interest rate modes applicable to
                          such Falkland Chase Bond Transaction and the related
                          mortgage loan shall conform to the interest rate mode
                          provisions applicable to the existing Bonds and the
                          existing Mortgage Loans in Floating Rate Bond
                          Transactions;

                 (D)      the maturity date of the mortgage loan with respect
                          to the Falkland Chase Bond Transaction shall be June
                          1, 2026, provided, however, that the principal
                          amortization schedule or principal reserve fund
                          payment schedule, as the case may be, of such
                          mortgage loan shall be sufficient to cause such
                          mortgage loan to fully amortize by April 1, 2027;

                 (E)      the Falkland Chase Refunding Documents shall contain
                          cross-default and cross-collateralization provisions
                          that conform to the Bond Documents;

                 Notwithstanding the foregoing, the Prepayment Premium with
                 respect to the Falkland Chase Bond Transaction shall continue
                 for not less than seven (7) (assuming the bonds bear interest
                 at other than a fixed rate) years from the Fannie Mae Facility
                 Closing Date;

                 (viii)   the Borrowers shall execute and deliver to Fannie Mae
         a certificate  confirming that all of the representations and
         warranties set forth in this Agreement (including those with respect
         to the Aggregate Debt Service Coverage Ratio and the Aggregate Loan to
         Value Ratio as set forth in section 2.1(h)) shall be true, correct and
         complete after giving effect to the Falkland Chase Bond Transaction,
         subject to such modifications as the Borrowers may determine are
         necessary to make the representations and warranties contained in such
         certificate true, correct and complete as of such date;






                                      101
<PAGE>   103
         provided, however, that such modifications may be considered by Fannie
         Mae in its determination to grant or withhold its approval to the
         addition of the Falkland Chase Bond Transaction;

                 (ix)     if the Falkland Chase Bond Transaction will be a
         Floating Rate Bond Transaction, then, so long as Fannie Mae provides
         credit enhancement for the such Falkland Chase Bond Transaction, only
         Fannie Mae shall provide liquidity support, if applicable;

                 (x)      each of the Borrowers and Guarantor, to the extent
         applicable, shall have delivered to Fannie Mae appropriate evidence
         satisfactory to Fannie Mae of its authority to execute and deliver the
         Falkland Chase Refunding Documents to which it is a party;

                 (xi)     Fannie Mae shall have received from Servicer such
         representations, warranties, undertakings and such other certificates
         as Fannie Mae shall customarily require relating to the Falkland Chase
         Bond Transaction;

                 (xii)    Fannie Mae shall have received such opinions of bond
         counsel, trustee's counsel and issuer's counsel, and such other
         opinions and certificates as Fannie Mae shall reasonably require
         relating to the Falkland Chase Bond Transaction;

                 (xiii)   Fannie Mae shall have received an opinion of counsel
         to the Borrowers concerning such matters as Fannie Mae may reasonably
         require relating to the Falkland Chase Bond Transaction and Fannie Mae
         shall otherwise have received satisfactory evidence that all
         conditions to the effectiveness and enforceability of the Falkland
         Chase Refunding Documents have been fully satisfied;

                 (xiv)    all legal opinions relating to the Falkland Chase
         Bond Transaction shall be the same in all material respects as the
         opinions relating to the Bond Documents and otherwise in form and
         substance satisfactory to Fannie Mae;

                 (xv)     Fannie Mae shall have received certified copies of
         all consents and authorizations (including Governmental Approvals, if
         any), necessary for the Issuer or the Borrowers to execute, deliver
         and perform their respective obligations under the Falkland Chase
         Refunding Documents;

                 (xvi)    Fannie Mae shall have received certified copies of
         (A) the Issuer's charter or certificate of incorporation and by-laws,
         if any, (B) the resolution or resolutions of the Issuer authorizing
         the execution, delivery and performance of its obligations under the
         Falkland Chase Refunding Documents to which it is a party and (C)
         certified copies of all other documents evidencing any other official
         action of such Issuer taken with respect to the Falkland Chase Bond
         Transaction, as each such item is then in full force and effect;






                                      102
<PAGE>   104
                 (xvii)   Fannie Mae shall have received copies of all
         documents relating to the closing of such Falkland Chase Bond
         Transaction, authenticated to Fannie Mae's reasonable satisfaction;

                 (xviii)  Fannie Mae shall have received true and correct
         copies of rating letters from the Rating Agency rating the Falkland
         Chase Bond Transaction confirming that the bonds issued in such
         transaction have received the same rating afforded other debt
         instruments of the character of the bonds issued in the Falkland Chase
         Bond Transaction and which are credit enhanced by Fannie Mae;

                 (xix)    the Borrowers shall have executed and delivered to
         Fannie Mae such amendments and modifications to this Agreement or the
         other Transaction Documents and Fannie Mae shall have received such
         other documents, certificates, filings, legal opinions, approvals or
         instruments, as Fannie Mae shall deem necessary in order to effectuate
         the Falkland Chase Bond Transaction;

                 (xx)     Fannie Mae shall have received payment in full of all
         fees and expenses (including reasonable fees and disbursements of
         Fannie Mae's and the Servicer's counsel and accountants), incurred in
         connection with or related to the Falkland Chase Bond Transaction and
         the preparation, review, execution and delivery of the Falkland Chase
         Refunding Documents; and

                 (xxi)    Subject to the qualifications set forth above, all
         documentation relating to the foregoing shall be acceptable to Fannie
         Mae in its discretion in all respects, including all legal opinions,
         title insurance policies and endorsements, Security Instruments,
         Replacement Reserve Agreements, indentures, collateral agreements,
         assignments and any amendments necessary to this Agreement or the
         other Transaction Documents.

Upon satisfaction in full of the conditions and limitations set forth in this
section 5.4(b) with respect to the Falkland Chase Bond Transaction, the
Falkland Chase Project shall thereafter be deemed a New Bond Property that
shall be added to the Fannie Mae Credit Facility. The addition of the Falkland
Chase Project to the Fannie Mae Credit Facility shall become effective only
upon Fannie Mae's execution and delivery to the Borrowers of a New Property
Confirmation.  Upon the execution and delivery of any such New Property
Confirmation in accordance with this section 5.4(b), this Agreement shall be
automatically deemed amended and supplemented to incorporate the terms and
provisions of such New Property Confirmation.






                                      103
<PAGE>   105
5                CREDIT ENHANCEMENT OF THE INTERIM CUSTODIAL RECEIPTS
TRANSACTIONS AND PERMANENT REFUNDING BOND ISSUES.

                 (a)      AGREEMENT TO CREDIT ENHANCE.  Subject to satisfaction
         in full of the conditions and limitations set forth in sections 5.5(b)
         5.5(d) and 5.5(e), at the request of the Borrowers and Servicer,
         Fannie Mae will provide credit enhancement and, if applicable,
         liquidity support for (i) the Permanent Chase Lea Refunding Bonds (the
         "PERMANENT CHASE LEA CREDIT ENHANCEMENT"), and/or (ii) the Permanent
         Chase Ridge Bonds (the "PERMANENT CHASE RIDGE CREDIT ENHANCEMENT"), in
         either case, by issuing a collateral agreement or Fannie Mae Mortgage
         Backed Security, substantially in the form of the applicable Related
         Fannie Mae Credit Enhancement Instruments.  In addition, subject to
         satisfaction in full of the conditions and limitations set forth in
         sections 5.5(c) 5.5(d) and 5.5(e), at the request of the Borrowers and
         Servicer, Fannie Mae will provide credit enhancement for (i) the
         Interim Replacement Chase Lea Custodial Receipts (the "INTERIM
         REPLACEMENT CHASE LEA CREDIT ENHANCEMENT"), and/or (ii) the Interim
         Replacement Chase Ridge Custodial Receipts (the "INTERIM REPLACEMENT
         CHASE RIDGE CREDIT ENHANCEMENT"), in either case, by issuing a
         collateral agreement or other credit enhancement instrument,
         substantially in the form of the Related Custodial Receipts Collateral
         Agreements.  Fannie Mae's obligation to issue the Permanent Chase Lea
         Credit Enhancement, the Permanent Chase Ridge Credit Enhancement, the
         Interim Replacement Chase Lea Credit Enhancement and the Interim
         Replacement Chase Ridge Credit Enhancement shall be separate and
         distinct obligations of Fannie Mae.

                 (b)      CERTAIN CONDITIONS TO PERMANENT CHASE RIDGE CREDIT
         ENHANCEMENT AND PERMANENT CHASE LEA CREDIT ENHANCEMENT.  Fannie Mae's
         obligation to issue the Permanent Chase Lea Credit Enhancement and the
         Permanent Chase Ridge Credit Enhancement shall be separate and
         distinct obligations of Fannie Mae, but each such obligation shall be
         subject to Fannie Mae's determination in Fannie Mae's discretion that
         each of the following conditions have been satisfied in full:

                          (i)     No Event of Default or Potential Event of
                 Default shall have occurred;

                          (ii)    concurrently with the consummation of each
                 such Permanent Refunding Bond Transaction (A) the applicable
                 Custodial Receipts Property shall be conveyed to Collateral
                 Inc., (B) the Obligations of Chase Ridge Inc. or Chase Lea
                 Inc., as the case may be, with respect to such Custodial
                 Receipts Property shall be assumed by Collateral Inc. pursuant
                 to documentation in form and substance acceptable to Fannie
                 Mae in its reasonable discretion, and (C) such Borrower shall
                 be released by Fannie Mae from all remaining Obligations of
                 such Borrower pursuant to release documentation prepared by
                 Fannie Mae and reasonably acceptable to such Borrower;






                                      104
<PAGE>   106
                          (iii)   The mortgage loan with respect to each
                 Permanent Refunding Transaction (each a "PERMANENT REFUNDING
                 MORTGAGE LOAN"; and collectively, the "PERMANENT REFUNDING
                 MORTGAGE LOANS") shall be originated by an independent
                 third-party lender or issuer and comply with applicable Fannie
                 Mae Charter Act requirements;

                          (iv)    With respect to each Permanent Refunding
                 Transaction, the following underwriting tests shall be
                 satisfied:

                          (A)     The effective interest rate with respect such
                                  Permanent Refunding Mortgage Loan (i.e. the
                                  actual fixed rate that would be payable under
                                  the mortgage note, if such Permanent
                                  Refunding Bond Transaction will be a Fixed
                                  Rate Bond Transaction or the initial
                                  Pass-Through Rate plus the Facility Fee plus
                                  the Bond Fees that would be payable under the
                                  mortgage note, if such Permanent Refunding
                                  Transaction will be a Floating Rate Bond
                                  Transaction) shall not exceed the applicable
                                  Underwriting Rate;

                          (B)     the ratio (expressed as a percentage) of (1)
                                  the Facility Amount of each proposed
                                  Permanent Refunding Transaction to (2) the
                                  Value of the applicable project plus the
                                  amount of any Shortfall Cash Collateral
                                  (which, if the Shortfall Cash Collateral is a
                                  letter of credit, has a term of at least one
                                  year and shall be in an "evergreen format")
                                  and/or the Value of any proposed New
                                  Additional Property offered by the Borrowers
                                  in connection with such Permanent Refunding
                                  Transaction, will be equal to or less than
                                  (I) 99.1% with respect to the Permanent Chase
                                  Ridge Credit Enhancement and (II) 97.7% with
                                  respect to the Permanent Chase Lea Credit
                                  Enhancement; and

                          (C)     the ratio of (1) the Net Operating Income of
                                  the applicable project plus (I) the Net
                                  Operating Income of any proposed New
                                  Additional Property offered by the Borrowers
                                  in connection with such Permanent Refunding
                                  Transaction for the twelve (12) month period
                                  ending within sixty (60) days of the proposed
                                  closing date for such Permanent Refunding
                                  Transaction, and/or (II) the amount of any
                                  Shortfall Cash Collateral (which, if the
                                  Shortfall Cash Collateral is a letter of
                                  credit, has a term of at least one year and
                                  shall be in an "evergreen format") but only
                                  to the extent such Shortfall Cash Collateral
                                  is not included in the calculation of the
                                  loan to value ratio pursuant to section
                                  5.5(b)(iv)(B), for the twelve (12) month
                                  period ending within sixty (60) days of the
                                  proposed date for the






                                      105
<PAGE>   107
                                  addition such project, to (2) to the
                                  anticipated Imputed Debt Service with respect
                                  to the applicable project for the twelve (12)
                                  months immediately following the anticipated
                                  date for the addition of the applicable
                                  project, each as determined by Fannie Mae in
                                  its discretion, will be equal to or exceed
                                  1.14:1;

                          (v)  All documentation (including any amendments to
                 this Agreement and the other Transaction Documents) relating
                 to each Permanent Refunding Transaction shall be the same in
                 all material respects as the documentation relating to the
                 existing Bonds, subject to such modifications as may be
                 necessary and which, in any event, are agreed to by the
                 Borrowers and approved by Fannie Mae in its discretion and the
                 terms and conditions of each Permanent Refunding Bond Issue,
                 the related bond documents, mortgage loan documents and other
                 documents delivered in connection with each Permanent
                 Refunding Transaction (the "PERMANENT REFUNDING DOCUMENTS"),
                 shall be satisfactory to Fannie Mae, including the following:

                          (A)     such Permanent Refunding Transaction shall be
                                  incorporated into and be governed by the
                                  terms of this Agreement;

                          (B)     the principal amount of (x) the Permanent
                                  Refunding Mortgage Loan with respect to the
                                  Chase Lea project shall be equal to or less
                                  than $16,835,000.00 and (y) the Permanent
                                  Refunding Mortgage Loan with respect to the
                                  Chase Ridge project shall be equal to or less
                                  than $26,815,000.00;

                          (C)     if either such Permanent Refunding
                                  Transaction will be a Floating Rate Bond
                                  Transaction, then, the terms and conditions
                                  governing the availability of and conversion
                                  between interest rate modes applicable to
                                  such Permanent Refunding Transaction and the
                                  related Permanent Refunding Mortgage Loan
                                  shall conform to the interest rate mode
                                  provisions applicable to the existing Bonds
                                  and the existing Mortgage Loans in Floating
                                  Rate Bond Transactions;

                          (D)     the Maturity Date of each Permanent Refunding
                                  Mortgage Loan shall be June 1, 2026, provided
                                  however, that the principal amortization
                                  schedule of each such Permanent Refunding
                                  Mortgage Loan shall be sufficient to cause
                                  such Permanent Refunding Mortgage Loan to
                                  fully amortize by November 1, 2027;

                          (E)     the Permanent Refunding Documents shall
                                  contain cross-default and
                                  cross-collateralization provisions that
                                  conform to the existing Transaction
                                  Documents;






                                      106
<PAGE>   108
                          (F)     if either such Permanent Refunding
                                  Transaction will be a Floating Rate Bond
                                  Transaction, then, such transaction shall be
                                  subject to the interest rate protection
                                  provisions of section 3.2 and shall not be
                                  eligible for the exceptions set forth in
                                  section 3.1(a); and

                 Notwithstanding the foregoing, the Prepayment Premium with
                 respect to each such Permanent Refunding Transaction shall
                 continue for not less than ten (10) years from the Fannie Mae
                 Facility Closing Date;

                          (vi)   the Borrowers shall execute and deliver to
                 Fannie Mae (A) a certificate in form and substance approved by
                 Fannie Mae confirming that all of the representations and
                 warranties set forth in this Agreement are true, correct and
                 complete in all material respects with respect to the
                 applicable Custodial Receipts Property after giving effect to
                 each such Permanent Refunding Transaction and (B) a
                 certificate confirming that no Event of Default or Potential
                 Event of Default exists or will exist after giving effect to
                 such Permanent Refunding Transaction;

                          (vii)  if either Permanent Refunding Bond Issue will
                 be a Floating Rate Bond Transaction, then, so long as Fannie
                 Mae provides credit enhancement for the such Permanent
                 Refunding Bond Issue, only Fannie Mae shall provide liquidity
                 support, if applicable;

                          (viii) each of the Borrowers and Guarantor, to the
                 extent applicable, shall have delivered to Fannie Mae
                 appropriate evidence satisfactory to Fannie Mae of its
                 authority to execute and deliver the Permanent Refunding
                 Documents to which it is a party;

                          (ix)   Fannie Mae shall have received from Servicer
                 such representations, warranties, undertakings and such other
                 certificates as Fannie Mae shall customarily require relating
                 to the Permanent Refunding Transaction;

                          (x)  Fannie Mae shall have received such opinions of
                 bond counsel, trustee's counsel and issuer's counsel, and such
                 other opinions and certificates as Fannie Mae shall reasonably
                 require relating to the Permanent Refunding Transaction;

                          (xi)   Fannie Mae shall have received an opinion of
                 counsel to the Borrowers concerning such matters as Fannie Mae
                 may reasonably require relating to the Permanent Refunding
                 Transaction and Fannie Mae shall otherwise have received
                 satisfactory evidence that all conditions to the effectiveness
                 and enforceability of the Permanent Refunding Documents have
                 been fully satisfied;






                                      107
<PAGE>   109
                          (xii)  All legal opinions relating to the Permanent
                 Refunding Transaction shall be the same in all material
                 respects as the opinions relating to the existing Transaction
                 Documents and otherwise in form and substance satisfactory to
                 Fannie Mae;

                          (xiii)  Fannie Mae shall have received certified
                 copies of all consents and authorizations (including
                 Governmental Approvals, if any), necessary for the Chase Ridge
                 Issuer or the Chase Lea Issuer or the Borrowers to execute,
                 deliver and perform their respective obligations under the
                 applicable Permanent Refunding Documents;

                          (xiv)  Fannie Mae shall have received certified
                 copies of (A) each Issuer's charter or certificate of
                 incorporation and by-laws, if any, (B) the resolution or
                 resolutions of such Issuer authorizing the execution, delivery
                 and performance of its obligations under the applicable
                 Permanent Refunding Documents to which it is a party and (C)
                 certified copies of all other documents evidencing any other
                 official action of such Issuer taken with respect thereto as
                 each such item is then in full force and effect;

                          (xv)  Fannie Mae shall have received copies of all
                 documents relating to the closing of such Permanent Refunding
                 Transaction, authenticated to Fannie Mae's reasonable
                 satisfaction;

                          (xvi)  Fannie Mae shall have received true and
                 correct copies of rating letters from the Rating Agency rating
                 the Permanent Refunding Bond Issue confirming that such bonds
                 have received the same rating afforded other debt instruments
                 of the character of the Permanent Refunding Bond Issue which
                 are enhanced by Fannie Mae;

                          (xvii)  the Borrowers shall have executed and
                 delivered to Fannie Mae such amendments and modifications to
                 this Agreement or the other Transaction Documents and Fannie
                 Mae shall have received such other documents, certificates,
                 filings, legal opinions, approvals or instruments, as Fannie
                 Mae shall deem necessary in order to effectuate the Permanent
                 Refunding Transaction;

                          (xviii)  Fannie Mae shall have received payment in
                 full of all fees and expenses (including reasonable fees and
                 disbursements of Fannie Mae's and the Servicer's counsel and
                 accountants), incurred in connection with or related to the
                 Permanent Refunding Transaction and the preparation, review,
                 execution and delivery of the Permanent Refunding Documents;
                 and

                          (xix)  Subject to the qualifications set forth above,
                 all documentation relating to the foregoing shall be
                 acceptable to Fannie Mae in its discretion in all






                                      108
<PAGE>   110
                 respects, including all legal opinions, title insurance
                 policies and endorsements, Security Instruments, Replacement
                 Reserve Agreements, indentures, collateral agreements,
                 assignments and any amendments necessary to this Agreement or
                 the other Transaction Documents.

                 (c)      CERTAIN CONDITIONS TO INTERIM REPLACEMENT CREDIT
         ENHANCEMENT.  Fannie Mae's obligation to issue the Interim Replacement
         Chase Lea Credit Enhancement and the Interim Replacement Chase Ridge
         Credit Enhancement shall be separate and distinct obligations of
         Fannie Mae, but each such obligation shall be subject to Fannie Mae's
         determination in Fannie Mae's discretion that each of the following
         conditions have been satisfied in full:

                          (i)     No Event of Default or Potential Event of
                 Default shall have occurred;

                          (ii)    Fannie Mae determines in its reasonable
                 discretion that the Borrowers used best efforts to commence
                 and diligently pursue to completion, the implementation of the
                 Permanent Refunding Transaction with respect to each Custodial
                 Receipts Property and such Permanent Refunding Transaction
                 failed to occur because the issuer and/or the underwriter with
                 respect to such Permanent Refunding Transaction required
                 economic terms or requirements (which economic terms and
                 requirements shall include but not be limited to (A) rental
                 restrictions, (B) initial or annual fees payable to such
                 issuer, (C) initial or annual fees payable to such underwriter
                 and/or (D) indemnification obligations required by such issuer
                 or underwriter) such that the economic terms and requirements
                 of the issuer and/or the underwriter for such Permanent
                 Refunding Transaction, when taken as a whole, were materially
                 more burdensome in terms of their economic impact on the
                 Borrowers than the economic terms and requirements imposed by
                 the Related Issuer with respect to the Bond Transaction
                 relating to the Bond Property identified on Exhibit A as
                 Avalon Knoll, Montgomery County, Maryland; provided, however,
                 that (1) rental restrictions comparable to the existing rental
                 restrictions with respect to each Custodial Receipts Property
                 will not be considered to be materially more burdensome in
                 terms of their economic impact than the requirements imposed
                 with respect to the above transaction and (2) indemnification
                 obligations to the issuer and/or the underwriter for the
                 Permanent Refunding Transaction that are not greater in scope
                 than the indemnification obligations guaranteed by the
                 Guarantor pursuant to the Guaranty will not be deemed to be
                 materially more burdensome in terms of their economic impact
                 than those imposed with respect to the above transaction;

                          (iii)   With respect to each Interim Replacement
                 Custodial Receipts Transaction, the following underwriting
                 tests shall be satisfied:






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<PAGE>   111
                          (A)     the ratio (expressed as a percentage) of (1)
                                  the Facility Amount of each proposed Interim
                                  Replacement Custodial Receipts Transaction to
                                  (2) the Value of the applicable project plus
                                  the amount of any Shortfall Cash Collateral
                                  (which, if the Shortfall Cash Collateral is a
                                  letter of credit, has a term of at least one
                                  year and shall be in an "evergreen format")
                                  and/or the Value of any proposed New
                                  Additional Property offered by the Borrowers
                                  in connection with such Interim Replacement
                                  Custodial Receipts Transaction, will be equal
                                  to or less than (I) 99.1% with respect to the
                                  Interim Replacement Chase Ridge Credit
                                  Enhancement and (II) 97.7% with respect to
                                  the Interim Replacement Chase Lea Credit
                                  Enhancement; and

                          (B)     the ratio of (1) the Net Operating Income of
                                  the applicable project plus (I) the Net
                                  Operating Income of any proposed New
                                  Additional Property offered by the Borrowers
                                  in connection with such Interim Replacement
                                  Custodial Receipts Transaction for the twelve
                                  (12) month period ending within sixty (60)
                                  days of the proposed closing date for such
                                  Interim Replacement Custodial Receipts
                                  Transaction, and/or (II) the amount of any
                                  Shortfall Cash Collateral (which, if the
                                  Shortfall Cash Collateral is a letter of
                                  credit, has a term of at least one year and
                                  shall be in an "evergreen format") but only
                                  to the extent such Shortfall Cash Collateral
                                  is not included in the calculation of the
                                  loan to value ratio pursuant to section
                                  5.5(b)(iv)(B), for the twelve (12) month
                                  period ending within sixty (60) days of the
                                  proposed date for the addition such project,
                                  to (2) to the anticipated Imputed Debt
                                  Service with respect to the applicable
                                  project for the twelve (12) months
                                  immediately following the anticipated date
                                  for the addition of the applicable project,
                                  each as determined by Fannie Mae in its
                                  discretion, will be equal to or exceed
                                  1.14:1;

                          (iv)  All documentation (including any amendments to
                 this Agreement and the other Transaction Documents) relating
                 to each Interim Replacement Custodial Receipts Transaction
                 shall be the same in all material respects as the
                 documentation relating to the existing Custodial Receipts
                 subject to such modifications as may be necessary and which,
                 in any event, are agreed to by the Borrowers and approved by
                 Fannie Mae in its discretion and the terms and conditions of
                 the Interim Replacement Custodial Receipts and the related
                 documents delivered in connection with each Interim
                 Replacement Custodial Receipts Transaction (the "INTERIM
                 REPLACEMENT CUSTODIAL RECEIPTS DOCUMENTS"), shall be
                 satisfactory to Fannie Mae, including the following:






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                          (A)     such Interim Replacement Custodial Receipts
                                  Transaction shall be incorporated into and be
                                  governed by the terms of this Agreement;

                          (B)     the Facility Amount of (x) the Interim
                                  Replacement Custodial Receipts Transaction
                                  with respect to the Chase Lea Bond Property
                                  shall be equal to or less than $16,835,000.00
                                  and (y) the Interim Replacement Custodial
                                  Receipts Transaction with respect to the
                                  Chase Ridge Bond Property shall be equal to
                                  or less than $26,815,000.00;

                          (D)     the termination date of each of the Interim
                                  Replacement Chase Lea Credit Enhancement and
                                  the Interim Replacement Chase Ridge Credit
                                  Enhancement shall be on or before August 31,
                                  2001;

                          (E)     the Interim Replacement Custodial Receipts
                                  Documents shall contain cross-default and
                                  cross-collateralization provisions that
                                  conform to the existing Transaction Documents
                                  with respect to which Fannie Mae is a party
                                  or of which Fannie Mae is a beneficiary;

                          (F)     the Interim Replacement Custodial Receipts
                                  Documents shall contain provisions requiring
                                  the Borrowers to deposit funds on a monthly
                                  basis into a trust or escrow fund to be
                                  established for the benefit of Fannie Mae and
                                  otherwise in form and substance in acceptable
                                  to Fannie Mae in its discretion, which
                                  payments will be sufficient in amount to
                                  amortize the Custodial Receipts Mortgage Loan
                                  over three hundred and sixty (360) months at
                                  an assumed interest rate equal to 7.05% per
                                  annum;

                          (v)  the Borrowers shall execute and deliver to
                 Fannie Mae (A) a certificate in form and substance approved by
                 Fannie Mae confirming that all of the representations and
                 warranties set forth in this Agreement are true, correct and
                 complete in all material respects with respect to the
                 applicable Custodial Receipts Property after giving effect to
                 each such Interim Replacement Custodial Receipts Transaction
                 and (B) a certificate confirming that no Event of Default or
                 Potential Event of Default exists or will exist after giving
                 effect to such Interim Replacement Custodial Receipts
                 Transaction;

                          (vi)  each of the Borrowers and Guarantor, to the
                 extent applicable, shall have delivered to Fannie Mae
                 appropriate evidence satisfactory to Fannie Mae of its
                 authority to execute and deliver the Interim Replacement
                 Custodial Receipts Documents to which it is a party;






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<PAGE>   113
                          (vii)  Fannie Mae shall have received from Servicer
                 such representations, warranties, undertakings and such other
                 certificates as Fannie Mae shall customarily require relating
                 to the Interim Replacement Custodial Receipts Transaction;

                          (viii)  Fannie Mae shall have received such opinions
                 of custodian's counsel, trustee's counsel and depositor's
                 counsel, and such other opinions and certificates as Fannie
                 Mae shall reasonably require relating to the Interim
                 Replacement Custodial Receipts Transaction;

                          (ix)  Fannie Mae shall have received an opinion of
                 counsel to the Borrowers concerning such matters as Fannie Mae
                 may reasonably require relating to the Interim Replacement
                 Custodial Receipts Transaction and Fannie Mae shall otherwise
                 have received satisfactory evidence that all conditions to the
                 effectiveness and enforceability of the Interim Replacement
                 Custodial Receipts Documents have been fully satisfied;

                          (x)  All legal opinions relating to the Interim
                 Replacement Custodial Receipts Transaction shall be the same
                 in all material respects as the opinions relating to the
                 existing Transaction Documents and otherwise in form and
                 substance satisfactory to Fannie Mae;

                          (xi)  the Borrowers shall have executed and delivered
                 to Fannie Mae such amendments and modifications to this
                 Agreement or the other Transaction Documents and Fannie Mae
                 shall have received such other documents, certificates,
                 filings, legal opinions, approvals or instruments, as Fannie
                 Mae shall deem necessary in order to effectuate the Interim
                 Replacement Custodial Receipts Transaction;

                          (xii)  Fannie Mae shall have received payment in full
                 of all fees and expenses (including reasonable fees and
                 disbursements of Fannie Mae's and the Servicer's counsel and
                 accountants), incurred in connection with or related to the
                 Interim Replacement Custodial Receipts Transaction and the
                 preparation, review, execution and delivery of the Interim
                 Replacement Custodial Receipts Documents; and

                          (xiii)  Subject to the qualifications set forth
                 above, all documentation relating to the foregoing shall be
                 acceptable to Fannie Mae in its discretion in all respects,
                 including all legal opinions, title insurance policies and
                 endorsements, Security Instruments, Replacement Reserve
                 Agreements, indentures, collateral agreements, assignments and
                 any amendments necessary to this Agreement or the other
                 Transaction Documents.






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                 (d)      FACILITY FEE COMPONENTS WITH RESPECT TO PERMANENT AND
         INTERIM CREDIT ENHANCEMENT TRANSACTIONS.

                 (i) With respect to each Permanent Refunding Transaction:

                                  (A) if such Permanent Refunding Transaction
                          is brought into the Fannie Mae Credit Facility as a
                          Fixed Rate Bond Transaction that is not subject to
                          remarketing or interest rate adjustment prior to
                          maturity, then the Credit Enhancement Component with
                          respect to such Permanent Refunding Transaction shall
                          be equal to .50% or 50 "basis points" per annum;

                                  (B) if such Permanent Refunding Transaction
                          is brought into the Fannie Mae Credit Facility as a
                          Fixed Rate Bond Transaction that is subject to
                          remarketing or interest rate adjustment prior to
                          maturity, then the Credit Enhancement Component with
                          respect to such Permanent Refunding Transaction shall
                          be equal to .53% or 53 "basis points" per annum; and

                                  (C) if such Permanent Refunding Transaction
                          is brought into the Fannie Mae Credit Facility as a
                          Floating Rate Bond Transaction, then (A) the Credit
                          Enhancement Component with respect to such Permanent
                          Refunding Transaction shall be equal to .53% or 53
                          "basis points" per annum, (B) the Reserve Component
                          with respect to such Permanent Refunding Transaction
                          shall be equal to .30% or 30 "basis points" per annum
                          and (C) the Liquidity Component with respect to such
                          Permanent Refunding Transaction shall be equal to
                          .125% or 12.5 "basis points" per annum.

                 (ii)     With respect to each Interim Replacement Custodial
                 Receipts Transaction, the Credit Enhancement Component shall
                 be equal to .50% or 50 "basis points" per annum.

                 (e)      CONFIRMATION OF PERMANENT AND INTERIM CREDIT
         ENHANCEMENT TRANSACTIONS.  Upon satisfaction in full of the conditions
         and limitations set forth in section 5.5(c) with respect to either the
         Interim Replacement Chase Lea Custodial Receipts or the Interim
         Replacement Chase Ridge Custodial Receipts, the applicable Custodial
         Receipts Property shall continue to be part of the Fannie Mae Credit
         Facility as a Custodial Receipts Property.  Fannie Mae's consent to
         each such Interim Custodial Receipts Transaction shall be evidenced by
         Fannie Mae's execution and delivery of a collateral agreement
         substantially in the form of the Related Custodial Receipts Collateral
         Agreements.  Upon satisfaction in full of the conditions and
         limitations set forth in this section 5.5 with respect to either the
         Permanent Chase Lea Bonds or the Permanent






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         Chase Ridge Bonds, the applicable Custodial Receipts Property shall
         cease to be a Custodial Receipts Property for purposes of this
         Agreement and shall thereafter be deemed a New Bond Property that
         shall be added to the Fannie Mae Credit Facility.  The addition of
         each such Custodial Property to the Fannie Mae Credit Facility shall
         become effective only upon Fannie Mae's execution and delivery to the
         Borrowers of a New Property Confirmation.  Upon the execution and
         delivery of any such New Property Confirmation in accordance with this
         section 5.5, this Agreement shall be automatically deemed amended and
         supplemented to incorporate the terms and provisions of such New
         Property Confirmation.

6                CERTAIN PERMITTED TRANSFERS OF BOND PROPERTIES.

                 (a)      CONDITIONS TO PERMITTED TRANSFERS.  At the request of
the Borrowers, Fannie Mae shall, from time to time, consent to the sale and
transfer of a Bond Property subject to Fannie Mae credit enhancement (a
"PROPOSED TRANSFER") to an independent third-party purchaser if Fannie Mae
determines that each of the following conditions have been satisfied in full:

                 (i)      no Event of Default or Potential Event of Default
         shall have occurred and be continuing either immediately before or
         immediately after giving effect to the Proposed Transfer;

                 (ii)     at the time of such Proposed Transfer, Fannie Mae
         continues to provide credit enhancement, and if applicable, liquidity
         support, with respect to new bond transactions similar to the Related
         Bonds pursuant to guaranteed mortgage pass-through certificates or
         collateral agreements, as the case may be, similar to the Related
         Fannie Mae Credit Enhancement Instrument and the provision of such
         credit enhancement and, if applicable, liquidity support, continues to
         be permitted under the Fannie Mae Charter Act;

                 (iii)    the Borrowers shall either redeem or otherwise remove
         Bonds from the Fannie Mae Credit Facility and/or post cash collateral
         in a manner acceptable to Fannie Mae, in either case in an amount
         equal to 110% of the Allocable Facility Amount of the Bond Property
         that is proposed to be transferred, which redemption, removal or cash
         collateral requirement shall be satisfied by (1) the amount of Related
         Bonds outstanding immediately prior to the Proposed Transfer, plus (2)
         the amount of any other Bonds redeemed by the Borrowers to obtain
         approval of the Proposed Transfer, plus (3) the amount of any Release
         Price Cash Collateral posted by the Borrowers to obtain approval for
         the Proposed Transfer;

                 (iv)     the Borrowers cause to be submitted to Fannie Mae all
         information required by Fannie Mae to evaluate the Proposed Transferee
         and the Bond Property as if






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         a new loan were being made to the Proposed Transferee and secured by
         the Bond Property proposed to be transferred;

                 (v)      the proposed transferee shall be a Single-Purpose
         entity, shall not be an Affiliate of any Borrower or Guarantor and
         meets the eligibility, credit, management and otherwise satisfies the
         then applicable underwriting standards customarily applied by Fannie
         Mae for approval of new borrowers (the "PROPOSED TRANSFEREE");

                 (vi)     at the time of such Proposed Transfer, the Bond
         Property proposed to be transferred shall be subject to
         re-underwriting in accordance with Fannie Mae's then applicable
         standards (including satisfaction of loan to value ratio requirements,
         debt service coverage ratio requirements, physical maintenance
         requirements, replacement reserve requirements and all other
         applicable conditions, requirements and limitations), customarily
         applied by Fannie Mae for approval of new loans secured by liens on
         new Multifamily Residential Properties and such re-underwriting shall
         be conducted by or on behalf of Servicer and Fannie Mae taking into
         account all facts and circumstances deemed relevant by Servicer and
         Fannie Mae;

                 (vii)    the Proposed Transferee shall: (1) assume, from and
         after the transfer date, all of the obligations of the Borrowers under
         and with respect to the Related Bonds, the other Bond Documents, the
         Bond Property Loan Documents with respect to such Bond Property, and
         the related Fannie Mae credit enhancement pursuant to documentation in
         form and substance acceptable to Fannie Mae; (2) enter into a
         reimbursement agreement and such other documentation deemed necessary
         by Fannie Mae to evidence and secure its reimbursement and other
         obligations to Fannie Mae; (3) agree to credit enhancement pricing
         and, if applicable, liquidity pricing that shall be determined by
         Fannie Mae; and (4) amend, modify, supplement or amend and restate the
         Related Bond Documents and the Bond Property Loan Documents with
         respect to such Bond Property, all as deemed necessary by Fannie Mae;

                 (viii)   the Borrowers shall have obtained the consent of the
         Issuer with respect to the Related Bonds, the Related Trustee and each
         other party to the Related Bond Documents and the Bond Property Loan
         Documents if such consent to a transfer of a Bond Property is required
         under the terms of such documents;

                 (ix)     all documentation relating to the foregoing shall be
         acceptable to Fannie Mae in all respects, including legal opinions,
         release documentation and any amendments to this Agreement or the
         other Transaction Documents;

                 (x)      the Borrowers or the Permitted Transferee shall have
         paid to Fannie Mae its customary transfer and assumption fees
         consisting of a $3000 non-refundable application fee and, upon
         completion of the Proposed Transfer transaction, a transfer fee equal
         to one percent (1%) of the Allocable Facility Amount of the Bond
         Property that is






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         proposed to be transferred.  In addition, the Borrowers shall have
         paid or caused to have been paid to Fannie Mae and Servicer, customary
         due diligence fees plus all costs and expenses (including reasonable
         legal fees and expenses) incurred by Fannie Mae or Servicer in
         connection with the foregoing, to the extent such expenses exceed
         $3000.  Such additional amounts shall be paid by the Borrowers
         promptly upon receipt of invoices therefor, and shall be payable
         regardless of whether the Bond Property is or is not (for any reason)
         ultimately transferred; and

                 (xi)     the Borrowers or the Permitted Transferee shall have
         paid to the appropriate parties all other fees, costs and expenses
         (including legal fees and expenses) payable by the Borrowers to each
         of the related Issuer, the Related Trustee, the related Remarketing
         Agent, Fannie Mae and Servicer under the terms of the Bond Property
         Loan Documents and the Bond Documents with respect to such Bond
         Property in connection with the Proposed Transfer.

                 (b)      PERMITTED TRANSFERS.  Fannie Mae's consent to a
Proposed Transfer shall become effective upon (i) Fannie Mae's determination,
that each of the conditions set forth in section 5.6(a) above have been
satisfied in full, and (ii) Fannie Mae's execution and delivery to the
Borrowers of a written instrument confirming that each of the conditions set
forth in section 5.6(a) above have been satisfied in full and releasing the
Borrowers from their Obligations under this Agreement from and after the
transfer date, solely to the extent such Obligations relate to the Bond
Property to be released.  Any transfer of a Bond Property consented to by
Fannie Mae in accordance with the provisions set forth above (a "PERMITTED
TRANSFER") shall be made together with and subject to (1) the Related Bonds,
(2) the other Related Bond Documents (subject to any amendments and
modifications required by Fannie Mae in accordance with subsection (a) above),
(3) the Bond Property Loan Documents with respect to such Bond Property
(subject to any amendments and modifications required by Fannie Mae in
accordance with subsection (a) above), and (4) appropriate Fannie Mae credit
enhancement with respect to such Bond Property.  Notwithstanding anything
herein or in the Bond Property Loan Documents with respect to such Bond
Property to the contrary, the Borrowers shall not be required to pay the
Prepayment Premium otherwise required under any the Related Mortgage Note in
connection with a Permitted Transfer.

7                CERTAIN PREPAYMENT PREMIUM WAIVERS.

                 Notwithstanding anything to the contrary contained in this
Agreement, any Related Fannie Mae Credit Enhancement Instrument or any Related
Mortgage Note, the Borrowers shall not be required to pay the Prepayment
Premium otherwise required under any of the Related Mortgage Notes upon the
release or substitution of any Bond Property in accordance with section 5.2 or
section 5.3 hereof, except to the extent that, after giving effect to such
prepayment, either (i) the Aggregate Facility Amount is less than either (a)
$91,000,000.00, if such prepayment occurs prior to the addition of the Falkland
Chase Bond Transaction to the Fannie Mae Credit Facility, or (b)
$117,000,000.00, if such prepayment occurs upon or after the






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addition of the Falkland Chase Bond Transaction to the Fannie Mae Credit
Facility, or (ii) the amount of any such prepayment when added to the aggregate
amount of all prior reductions in the Aggregate Facility Amount exceeds
$10,000,000.00.

8                CERTAIN PERMITTED CHANGES IN CONTROL.

                 Notwithstanding anything to the contrary contained in this
Agreement or any of the Mortgages, Fannie Mae acknowledges and agrees that
Fannie Mae will not unreasonably withhold its consent to a "Change of Control"
under the Uniform Covenant 19(b)(iii) of the Mortgages, provided that
Collateral Inc. gives Fannie Mae not less than forty-five (45) days prior
written notice of such Change of Control.  The Borrowers acknowledge and agree
that time is of the essence with respect to such notice and that the preceding
agreement of Fannie Mae and the remaining provisions of this section 5.8 shall
be null and void unless such notice is timely given by Collateral Inc.  If
Fannie Mae shall have received such notice not less than forty-five (45) days
prior to any such Change of Control and Fannie Mae determines in its reasonable
discretion not to grant its consent to such Transfer, then Fannie Mae and the
Borrowers acknowledge and agree that (a) within one hundred and eighty (180)
days from the date that Fannie Mae provides Collateral Inc. with written notice
of its refusal to grant its consent to such Transfer, the Borrowers shall cause
the Related Trustees to replace each and every Facility with alternate credit
enhancement in accordance with the requirements of section 6.2 and (b)
notwithstanding the provisions of Section 6.2(e), the Borrowers shall not be
required to pay the Prepayment Premium otherwise required under any of the
Related Mortgage Notes.






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VI.

                 SERVICING; REPLACEMENT OF CREDIT ENHANCEMENT

1                Servicing.

                 The Borrowers acknowledge that Fannie Mae has designated or
may designate an independent contractor to service the Mortgage Loans, the Bond
Property Loan Documents and the Reimbursement Loan Documents.  The Borrowers
agree that to the extent that any provision in this Agreement or any other
Transaction Document requires, at stipulated dates or at the request of Fannie
Mae, the delivery by the Borrowers of certain notices, documents, certificates,
opinions, and financial or other information to Fannie Mae or the Lender (as
such term is used and defined in the Mortgage Documents), all such items shall
instead be delivered to, or at the request of, Servicer, subject to the
provisions of this section.  The Borrowers acknowledge and agree that Fannie
Mae has delegated or may delegate certain functions to Servicer with respect to
the Transaction Documents, subject to and in accordance with the Servicing
Agreement.  The Borrowers further acknowledge and agree that in connection with
any provision in this Agreement or in any other Transaction Document requiring
that any notices, documents or other information shall be given to Servicer, or
that Servicer shall have the right to request any documents or other
information from the Borrowers, Fannie Mae shall have the right to instruct the
Borrowers to instead (a) deliver such items directly to Fannie Mae or to such
other Person as Fannie Mae may, from time to time, designate, and (b) act in
accordance with the instructions of Fannie Mae with respect to any such items
or any other rights Servicer may have under this Agreement or under any other
Transaction Document.  In addition, the Borrowers agree that any right of
Fannie Mae to give or deliver to the Borrowers any notice or other
communications, or to receive from the Borrowers any document or other
information, may be given, delivered or received by Servicer, unless otherwise
directed by Fannie Mae.  The Borrowers shall act in accordance with any
instructions received from Fannie Mae pursuant to this section.  The Borrowers
further acknowledge and agree that Fannie Mae reserves the unconditional right
to remove or replace Servicer with or without cause, with a substitute Servicer
chosen by Fannie Mae and upon any such removal or replacement, Fannie Mae shall
notify the Borrowers of the identity of the new servicer, if any.

2                REPLACEMENT OF FANNIE MAE CREDIT ENHANCEMENT.

                 Except as otherwise permitted upon a substitution or release
of a Property pursuant to section 5.2 or section 5.3, respectively, the
Borrowers will not cause any Related Trustee to terminate any Facility (except
in connection with the repayment of all of the outstanding Related Securities
or in connection with a Permitted Transfer) or replace any Facility with
alternate credit enhancement unless prior to or simultaneously with the
effectiveness of such termination or replacement:






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                 (a)      Fannie Mae's Facility is replaced or terminated with
respect to all of the outstanding Bonds, and all of the Related Fannie Mae
Credit Enhancement Instruments are terminated in full except to the extent that
such Related Fannie Mae Credit Enhancement Instruments continue to impose
liability on Fannie Mae for any avoidance, recovery or disgorgement risk that
is addressed to Fannie Mae's satisfaction in accordance with the requirements
of subsection 6.2(d);

                 (b)      the alternate credit enhancer's short term debt
obligations are rated in the highest short term category and long term debt
obligations are rated at least "A" by the Rating Agencies;

                 (c)      the Borrowers shall have received a statement from
Fannie Mae to the effect that the Borrowers have paid to Fannie Mae the amount
of all Advances, Activity Fees and any other outstanding obligations of the
Borrowers to Fannie Mae hereunder, whether or not such Advances, Activity Fees
or other amounts are otherwise then due;

                 (d)      Fannie Mae reasonably determines, in light of such
opinions of legal counsel, opinions of certified public accountants that
prepare the audited financial statements of the Borrowers and Guarantor and
such other similar information and opinions as may be provided by the Borrowers
to Fannie Mae, that no part of any payments made by the Borrowers prior to or
concurrently with the credit enhancement termination or replacement will likely
result in an avoidance or any other recovery or disgorgement pursuant to the
Bankruptcy Code (including sections 544, 547, 549 or 550 thereof) or any other
applicable bankruptcy or insolvency law which would result in Fannie Mae having
any liability under any Related Fannie Mae Collateral Agreement, or the
Borrowers will provide cash collateral or make other arrangements acceptable to
Fannie Mae in its discretion to ameliorate such risk of avoidance, recovery or
disgorgement; and

                 (e)      the Borrowers shall have paid the Prepayment Premium
with respect to the Mortgage Loans in accordance with the requirements of the
Related Mortgage Notes calculated based on the assumption that the Mortgage
Loan is being prepaid in full on the day immediately preceding the effective
date of the alternative credit enhancement.






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VII.

                       EVENTS OF DEFAULT AND REMEDIES

1                EVENTS OF DEFAULT.

                 Each of the following events shall constitute an "Event of
Default" under this Agreement, whatever the reason for such event and whether
it shall be voluntary or involuntary, or within or without the control of the
Borrowers, or be effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any Governmental
Authority:

                 (a)      the occurrence of an "EVENT OF DEFAULT" under any
other Transaction Document or the occurrence of any other default under any
Transaction Document beyond any specified cure period set forth therein; or

                 (b)      the failure by any Borrower to pay when due any
amount payable by such Borrower under any Related Mortgage Note, any Mortgage,
this Agreement or any other Transaction Document, including any fees, costs or
expenses; or

                 (c)  the failure by any Borrower to perform or observe any
covenant set forth in subsections 2.2(b), (c), (g), (h), (j) or (q), in
subsections 2.3 (a), (b), (d), (e), (g) to (i) inclusive or (k), in section
2.4, in section 2.5, in section 2.6, in section 2.7 or in Article III; or

                 (d)  the failure by any Borrower to perform or observe any
covenant set forth in subsection 2.2(a), (e), (d), or (k) to (m), inclusive,
hereunder, within ten (10) days after receipt of notice from Servicer or Fannie
Mae; or

                 (e)  the failure by any Borrower to perform or observe any
covenant set forth in subsection 2.2(i) or 2.3(j) hereunder, within twenty (20)
days after receipt of notice from Servicer or Fannie Mae; or

                 (f)      any warranty, representation or other written
statement made by or on behalf of any Borrower contained in this Agreement, any
other Transaction Document or in any instrument furnished in compliance with or
in reference to any of the foregoing, is false or misleading in any material
respect on any date when made or deemed made; or

                 (g)      any other Indebtedness in an aggregate amount in
excess of $100,000 of or assumed by the Borrowers (i) is not paid when due nor
within any applicable grace period in any agreement or instrument relating to
such Indebtedness or (ii) becomes due and payable before its normal maturity by
reason of a default or event of default, however described, or any other event






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of default shall occur and continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Indebtedness; or

                 (h)      (i)  any Borrower or Guarantor shall (A) commence a
voluntary case under the Federal bankruptcy laws (as now or hereafter in
effect), (B) file a petition seeking to take advantage of any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, debt
adjustment, winding up or composition or adjustment of debts, (C) consent to or
fail to contest in a timely and appropriate manner any petition filed against
it in an involuntary case under such bankruptcy laws or other laws, (D) apply
for or consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of a substantial part of its property, domestic or
foreign, (E) admit in writing its inability to pay, or generally not be paying,
its debts as they become due, (F) make a general assignment for the benefit of
creditors, (G) assert that the any Borrower or Guarantor has no liability or
obligations under this Agreement or any other Transaction Document to which it
is a party, or (H) take any action for the purpose of effecting any of the
foregoing; or (ii) a case or other proceeding shall be commenced against any
Borrower or Guarantor in any court of competent jurisdiction seeking (A) relief
under the Federal bankruptcy laws (as now or hereafter in effect) or under any
other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding upon or composition or adjustment of debts, or (B) the
appointment of a trustee, receiver, custodian, liquidator or the like of any
Borrower or Guarantor, or of all or a substantial part of the property,
domestic or foreign, of any Borrower or Guarantor and any such case or
proceeding shall continue undismissed or unstayed for a period of 60
consecutive calendar days, or any order granting the relief requested in any
such case or proceeding against any Borrower or Guarantor (including an order
for relief under such Federal bankruptcy laws) shall be entered; or

                 (i)      if any provision of this Agreement or any other
Transaction Document or the lien and security interest purported to be created
hereunder or under any Transaction Document shall at any time for any reason
cease to be valid and binding in accordance with its terms on any Borrower or
shall be declared to be null and void, or the validity or enforceability hereof
or thereof or the validity or priority of the lien and security interest
created hereunder or under any other Transaction Document shall be contested by
any Borrower seeking to establish the invalidity or unenforceability hereof or
thereof, any  Borrower shall deny that it has any further liability or
obligation hereunder or thereunder; or

                 (j)      if a "Transfer" (as defined in any Related Mortgage)
or a "Change in Control" (as defined in any Related Mortgage) shall occur in
violation of Uniform Covenant 19(b) of any Related Mortgage or if any Property
or any part thereof is otherwise conveyed, assigned, mortgaged, pledged, leased
or encumbered in any way other than as permitted under this Agreement or any
Related Mortgage without the prior written consent of Fannie Mae; or

                 (k)      (x) the execution by any Borrower of a chattel
mortgage or other security agreement on any materials, fixtures or articles
used in the construction or operation of the






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improvements located on any Property or on articles of personal property
located therein, excluding equipment leases and security interests granted in
the ordinary course of business in office equipment at Borrowers' rental
office, or (y) if any such materials, fixtures or articles are purchased
pursuant to any conditional sales contract or other security agreement or
otherwise so that the ownership thereof will not vest unconditionally in any of
the Borrowers free from encumbrances, or (z) if the Borrowers do not furnish to
Fannie Mae upon request the contracts, bills of sale, statements, receipted
vouchers and agreements, or any of them, under which any Borrower claims title
to such materials, fixtures, or articles; or

                 (l)      failure of any Borrower, upon request, to furnish to
Fannie Mae the results of official searches made by any Governmental Authority,
or failure by any Borrower to comply with any requirement of any Governmental
Authority within 30 days after written notice of such requirement shall have
been given to the Borrowers by such Governmental Authority; provided that, if
action is commenced and diligently pursued by the Borrowers within such 30
days, then the Borrowers shall have an additional 30 days to comply with such
requirement; or

                 (m)      a dissolution or liquidation for any reason (whether
voluntary or involuntary) of any Borrower or Guarantor; or

                 (n)      if any Borrower shall fail to qualify as a "qualified
REIT subsidiary" of Guarantor under Subchapter M of the Code; or

                 (o)      if Guarantor shall fail to qualify as a real estate
investment trust under Subchapter M of the Code;

                 (p)      the failure by Guarantor to perform or observe any
term, covenant, condition or agreement under the Guaranty within ten (10) days
after receipt of notice from Servicer or Fannie Mae;

                 (q)      any judgment against any of the Borrowers or any
attachment or other levy against any portion of the assets of any Borrower with
respect to a claim in an amount in excess of $100,000.00 individually, and/or
$250,000.00 in the aggregate for all such claims for all of the Borrowers,
remains unpaid, unstayed on appeal, undischarged, unbonded, not fully insured
or undismissed for a period of sixty (60) days; or

                 (r)      if, following an optional or mandatory tender of
Related Bonds in accordance with the Related Indenture in any Floating Rate
Bond Transaction, the Related Bonds have not been remarketed, but have been
purchased by the Related Trustee on behalf of and as agent for the applicable
Borrower with funds provided by Fannie Mae under the Related Fannie Mae
Collateral Agreement and such Related Bonds have not been remarketed as of the
ninetieth (90th) day following such purchase, then, at any time following such
ninetieth (90th) day, and provided the Related Bonds have not then been
remarketed, such failed remarketing shall, at Fannie Mae's option, constitute
an Event of Default under this Agreement; or






                                      122
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                 (s)      the failure by any Borrower to maintain insurance
with respect to each Property in accordance with the terms of the Related
Mortgage with respect to each such Property; or

                 (t)      the failure by any Borrower to perform or observe the
covenants with respect to Hazardous Materials or Hazardous Materials Laws set
forth in any Mortgages or in any other Transaction Document including, the
covenants set forth in Paragraph D of the Rider to Multifamily Instrument
constituting a part of each Mortgage; or

                 (u)      the failure by any Borrower to perform or observe any
term, covenant, condition or agreement hereunder, other than as set forth in
subsections (a) through (t) above, or in any other Transaction Document, within
thirty (30) days after receipt of notice from Servicer or Fannie Mae
identifying such failure; provided, however, that if in Fannie Mae's judgment,
(i) the cure of such failure requires a period in excess of 30 days, (ii) such
failure will not result in a Material Adverse Effect, and (iii) corrective
action is instituted by the Borrowers within such period and pursued diligently
and in good faith, then such failure shall not constitute an Event of Default
unless such failure is not cured by the Borrowers within sixty (60) days after
receipt of notice from Servicer or Fannie Mae identifying such failure; or

                 (v)      any Borrower or Guarantor shall have asserted that it
has no liability or obligations under this Agreement or under any Transaction
Document to which it is a party or that the liens and the security interests
purported to be created by the Mortgage Loan Documents shall not be a valid and
perfected first priority security interest subject to no Liens except Permitted
Liens; or (b) any Governmental Authority having jurisdiction over any Borrower
or Guarantor shall find or rule that any material provision of this Agreement
or any Transaction Document to which it is a party is not valid and binding on
such person or that the lien and the security interest purported to be created
by any Mortgage Loan Document shall not be a valid and perfected first priority
security interest subject to no Liens except Permitted Liens; or

                 (w)      a Reset Period expires and the Borrowers have not
either (i) received the prior written consent of Fannie Mae to a change in Mode
or the maintenance of the existing Mode or (ii) delivered Alternate Credit
Facilities in accordance with the terms of the Related Bond Documents and
section 6.2.

2                REMEDIES.

                 Upon the occurrence of an Event of Default and, solely with
respect to subsection (d) below, upon the occurrence of a Potential Event of
Default, Fannie Mae may in its discretion, but shall not be obligated to,
exercise any or all of the following remedies:

                 (a)      declare all amounts payable by the Borrowers under
this Agreement or the other Transaction Documents to be forthwith due and
payable, and the same shall thereupon






                                      123
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become due and payable without demand, presentment, protest or notice of any
kind, all of which are hereby expressly waived; or

                 (b)      exercise all or any of its rights and remedies as it
may otherwise have under Applicable Law and under this Agreement or the other
Transaction Documents or otherwise by such suits, actions, or special
proceedings in equity or at law, or by proceedings in the office of any board
or officer having jurisdiction, either for specific performance of any covenant
or agreement contained in this Agreement or any other Transaction Document, or
in aid or execution of any power therein granted or for the enforcement of any
proper legal or equitable remedy; or

                 (c)      demand and the Borrowers shall provide cash
collateral or Government Obligations in the full amount of the outstanding
obligations under all of the Bonds whether or not due and payable; or

                 (d)      apply all or any portion of the Collateral to any
Obligations or other obligation of the Borrowers under this Agreement or any
other Transaction Document, in such amounts, at such times and in such order as
determined by Fannie Mae in its discretion.  The Borrowers acknowledge that
this may include, among other things, applying funds or directing any Related
Trustee to apply funds on deposit in a Principal Reserve Fund or the Cash
Management Account to prepay the applicable Related Securities or to prepay any
other Related Securities or reimbursement or other payment obligations under
this Agreement or any other Transaction Document.  Such funds may be applied to
prepay or reduce amounts outstanding under one or more issues of Related
Securities regardless of whether such amounts are then due and owing; or

                 (e)      deliver to the Related Trustees written notice that
an Event of Default has occurred under this Agreement and directing the Related
Trustees to take such action pursuant to the Transaction Documents as Fannie
Mae may determine, including a request that the Related Trustees declare the
principal of all or a portion of the Related Securities then outstanding and
the interest accrued thereon to be immediately due and payable in accordance
with the terms and conditions of the Related Indentures.

No failure or delay on the part of Fannie Mae to exercise any right or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right or remedy hereunder preclude any further exercise thereof
or the exercise of any further right or remedy hereunder or under any other
Transaction Document.  The remedies herein provided are cumulative and not
exclusive of any remedies provided by law or under any Transaction Document.
No exercise by Fannie Mae of any remedy under any Transaction Document shall
operate as a limitation on any rights or remedies of Fannie Mae under this
Agreement.

In order to entitle Fannie Mae to exercise any remedy reserved to Fannie Mae in
this Article, it shall not be necessary to give any notice, other than such
notice as may be required under the






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<PAGE>   126
applicable provisions of any of the Transaction Documents.  The rights and
remedies of Fannie Mae specified in this Agreement are for the sole and
exclusive benefit, use and protection of Fannie Mae, and Fannie Mae is
entitled, but shall have no duty or obligation to the Borrowers, any Issuer,
any Related Trustee, any Bondholder with respect to any of the Bonds, or
otherwise, (a) to exercise or to refrain from exercising any right or remedy
reserved to Fannie Mae hereunder, or (b) to cause any Related Trustee or any
other party to exercise or to refrain from exercising any right or remedy
available to it under any of the Transaction Documents.

VIII.

                                MISCELLANEOUS

1                WAIVERS, AMENDMENTS.

                 This Agreement may be amended only by a written instrument
duly executed by each of the parties hereto.  The Borrowers may take any action
herein prohibited or omit to perform any act herein required to be performed or
omit to perform any act herein required to be performed by it, only if the
Borrowers shall first obtain the written consent of Fannie Mae thereto.  No
course of dealing between the Borrowers and Fannie Mae, nor any delay in
exercising any rights hereunder, shall operate as a waiver of any rights of
Fannie Mae hereunder.  Unless otherwise specified in such waiver or consent, a
waiver or consent given hereunder shall be effective only in the specific
instance and for the specific purpose for which given.

2                SURVIVAL OF REPRESENTATION AND WARRANTIES.

                 All statements contained in any Transaction Document or in any
certificate, financial statement or other instrument delivered by or on behalf
of any Borrower pursuant to or in connection with this Agreement (including any
such statement made in or in connection with any amendment hereto or thereto)
shall constitute representations and warranties made under this Agreement.  All
representations and warranties made under this Agreement (a) shall be made and
shall be true at and as of the date of this Agreement, the Fannie Mae Facility
Closing Date and the date of each Advance, and (b) shall survive the execution
and delivery of this Agreement, regardless of any investigation made by Fannie
Mae or on its behalf.






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<PAGE>   127
3                NOTICES.

                 All notices, directions, certificates or other communications
hereunder shall be given by certified or registered mail, return receipt
requested, OR by overnight courier addressed to the appropriate notice address
set forth below.  Any of the parties hereto may, by a notice to the other party
specifically captioned "Notice of Change of Address pursuant to section 8.3 of
the Master Reimbursement Agreement", designate any further or different address
to which subsequent notices, certificates or other communications shall be sent
without any requirement of execution of any amendment to this Agreement.  Any
such notice, certificate or communication shall be deemed to have been given as
of the date of actual delivery or the date of failure to deliver by reason of
refusal to accept delivery or changed address of which no notice was given
pursuant to this section 8.3.  Unless otherwise directed by Fannie Mae pursuant
to section 8.19, all notices pursuant to this Agreement shall also be given to
Servicer in accordance with this section 8.3.  The notice addresses are as
follows:

                 (a)      if to Borrowers:

                                  c/o Avalon Properties, Inc.
                                  5904 Richmond Highway, Suite 300
                                  Alexandria, Virginia 22303
                                  Attention:  Chief Financial Officer

                          with copies to:

                                  c/o Avalon Properties, Inc.
                                  15 River Road, Suite 210
                                  Wilton, Connecticut 06897
                                  Attention:  Joanne Lockridge

                          and to:

                                  Baber & Kalinowski, P.C.
                                  3050 Chain Bridge Road, Suite 305
                                  Fairfax, Virginia  22030
                                  Attention:  Brant Baber, Esq.

                 (b)      if to Fannie Mae:

                          if by mail or overnight courier:

                                  Fannie Mae
                                  3900 Wisconsin Avenue, N.W.






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<PAGE>   128
                                  Washington, D.C.  20016
                                  Attention:  Senior Vice President -
                                                   Multifamily Activities

                          if by messenger:

                                  Fannie Mae
                                  3939 Wisconsin Avenue, N.W.
                                  Washington, D.C.  20016
                                  Attention:  Senior Vice President -
                                                   Multifamily Activities

                          in each case, with copies to:

                                  Fannie Mae
                                  Southeast Regional Office
                                  950 East Paces Ferry Road
                                  Suite 1900
                                  Atlanta, Georgia 30326
                                  Attention:  Vice President - Multifamily
                                                   Activities

                                  and to:

                                  Fannie Mae
                                  3900 Wisconsin Avenue, N.W.
                                  Washington, D.C.  20016
                                  Attention:     Multifamily Mortgage
                                                   Operations-Manager
                                                 Multifamily Deliveries

                 (c)      if to Servicer:

                          Washington Capital DUS, Inc.
                          1616 North Fort Myer Drive, Suite 1210
                          Arlington, Virginia 22209
                          Attention:       Bridget O. Schmitz
                                           Executive Vice President






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<PAGE>   129
4                PAYMENT PROCEDURE.

                 The Borrowers agree that, unless otherwise directed pursuant
to section 6.1, all amounts due to Fannie Mae under Article 4 of this Agreement
shall be paid to Servicer for remittance to Fannie Mae pursuant to the
Servicing Agreement.  All payments to be made to Servicer, for the account of
Fannie Mae, pursuant to this Agreement shall be paid in immediately available
funds to Servicer in accordance with the Related Mortgage Note or in accordance
with instructions given to the Borrowers by Servicer.  Except as otherwise
provided above in this section 8.4, all payments to be made to Fannie Mae
pursuant to this Agreement shall be made before 2:00 p.m., Washington, D.C.
time, on the date when due, in lawful currency of the United States of America
and in immediately available funds by wire transfer to an account designated in
writing by Fannie Mae unless the Borrowers are otherwise instructed in writing
by Fannie Mae.  Notwithstanding the foregoing, in connection with Borrowers'
obligation to reimburse Fannie Mae by 2:00 p.m., Washington, D.C. time for
certain payments made by Fannie Mae as provided in Article 4 of this Agreement,
such payment will, unless otherwise directed pursuant to section 8.19, be
deemed to have been timely made if made to Servicer, for remittance to Fannie
Mae, by wire transfer to an account designated in writing by Servicer, before
2:00 p.m., Washington, D.C. time.

5                CONTINUING OBLIGATION.

                 This Agreement is a continuing obligation of the Borrowers and
shall, until the later of the date upon which all amounts due and owing to
Fannie Mae hereunder shall have been paid in full and the date Fannie Mae's
obligations under the last remaining Related Fannie Mae Credit Enhancement
Instrument are terminated, (a) be binding upon the Borrowers and its successors
and assigns and (b) inure to the benefit of and be enforceable by Fannie Mae
and its successors, transferees and assigns; provided, that the Borrowers may
not assign all or any part of this Agreement without the prior written consent
of Fannie Mae.  Notwithstanding the foregoing, the Obligations of (i) Chase
Ridge Inc. shall terminate upon Chase Ridge Inc.'s receipt of a release from
Fannie Mae in accordance with Section 5.3(e) or Section 5.5(b)(ii) and (ii)
Chase Lea Inc. shall terminate upon Chase Lea Inc.'s receipt of a release from
Fannie Mae in accordance with Section 5.3(e) or Section 5.5(b)(ii).

6                SATISFACTION REQUIREMENT.

                 If any agreement, certificate or other writing, or any action
taken or to be taken, is by the terms of this Agreement required to be
satisfactory to, or subject to the satisfaction of, Fannie Mae, then, unless
otherwise expressly specified herein, the determination of such satisfaction
shall be made by Fannie Mae in its sole and exclusive judgment.






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<PAGE>   130
7                CONSENT OF FANNIE MAE.

                 If any provision of this Agreement provides for the approval,
consent, election, determination, exercise of discretion, choice, designation,
judgment or waiver of or by Fannie Mae and if a basis for Fannie Mae granting
such approval, consent, determination, election, exercise of discretion,
choice, designation, judgment or waiver is not otherwise stated (i.e., that
such approval, consent, election, determination, exercise of discretion,
choice, designation, judgment or waiver will be "reasonable"), then in each
case such approval, consent, determination, election, exercise of discretion,
choice, designation, judgment or waiver will be given by Fannie Mae in its sole
and absolute discretion.

8                GOVERNING LAW.

                 This Agreement shall be construed and enforced in accordance
with, and the rights and remedies of the parties hereto shall be governed by,
the laws of the District of Columbia without regard to conflicts of law,
principles, except to the extent that Federal laws may prevail; provided,
however, that matters respecting the creation, perfection, priority and
foreclosure of the Lien on each Property granted pursuant to or in connection
with the Transaction Documents shall be governed by, and construed and enforced
in accordance with, the internal law of the state or commonwealth in which such
Property is situated without giving effect to the conflicts of law principles
of such state or commonwealth.

9                JURISDICTION, CONSENT TO SERVICE .

                 (a)  Each of the Borrowers hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any District of Columbia court or Federal court of the United
States of America sitting in the District of Columbia, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to
this Agreement, the Bond Documents, the Mortgage Documents, the Custodial
Receipts Documents and every other Transaction Document, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such District of Columbia court or,
to the extent permitted by law, in such Federal court.  Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law.  Nothing in this Agreement shall effect
any right that Fannie Mae may otherwise have to bring any action or proceeding
relating to this Agreement, the Bond Documents, the Mortgage Documents, the
Custodial Receipts Documents or the other Transaction Documents against any
Borrower or its properties in the courts of any jurisdiction.

                 (b)  Each Borrower hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter






                                      129
<PAGE>   131
have to the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement, the Bond Documents, the Mortgage Documents, the
Custodial Receipts Documents or the other Transaction Documents in any District
of Columbia or Federal court.  Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.

                 (c)      Each party to this Agreement irrevocably consents to
service of process in the manner provided for notices in section 8.3.  Nothing
in this Agreement will affect the right of any party to this Agreement to serve
process in any other manner permitted by law.

10               WAIVERS OF JURY TRIAL.

                 BORROWERS AND FANNIE MAE (A) COVENANT AND AGREE NOT TO ELECT A
TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING UNDER THIS AGREEMENT OR ANY OF
THE OTHER TRANSACTION DOCUMENTS TRIABLE BY A JURY AND (B) WAIVE ANY RIGHT TO
TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST.
THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL BY EACH BORROWER, AND
THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE
AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE.  FURTHER, EACH
BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF FANNIE MAE
(INCLUDING, BUT NOT LIMITED TO, THE FANNIE MAE'S COUNSEL) HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, TO OWNER THAT FANNIE MAE WILL NOT SEEK TO ENFORCE THE
PROVISIONS OF THIS SECTION 8.10.

11               COUNTERPARTS.

                 This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.






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12               SEVERABILITY.

                 Any provision of this Agreement that is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or nonauthorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction and the remaining portion of such provision
and all other remaining provisions will be construed to render them enforceable
to the fullest extent.  The parties shall endeavor in good-faith negotiations
to replace the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.

13               BUSINESS DAYS.

                 If any payment under this Agreement shall be specified to be
made upon a day which is not a Business Day, it shall be made on the next
succeeding day which is a Business Day and such extension of time shall in any
case be included in computing interest, if any, in connection with such
payment.

14               ENTIRE AGREEMENT.

                 This Agreement and the other Transaction Documents constitute
the entire contract between the parties relative to the subject matter hereof.
Any previous agreement among the parties with respect to the subject matter
hereof is superseded by this Agreement and the other Transaction Documents.
Nothing in this Agreement or the other Transaction Documents, expressed or
implied, is intended to confer upon any party other than the respective parties
hereto and thereto any rights, remedies, obligations or liabilities under or by
reason of this Agreement or the other Transaction Documents; provided, however,
that as to Persons other than Fannie Mae and the Borrowers that are parties to
any of the Transaction Documents, such Persons shall not have any rights,
remedies, obligations or liabilities under this Agreement or any of the
Transaction Documents except under such Transaction Documents as to which such
Persons are direct parties.

15               HEADINGS.

                 Section, subsection and paragraph headings in this Agreement
are included herein for convenience of reference only and shall not constitute
a part of this Agreement for any other purposes.






                                      131
<PAGE>   133
16               FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS.

                 To the extent permitted by law, the parties to this Agreement
agree that they will, from time to time, execute, acknowledge and deliver, or
cause to be executed, acknowledged and delivered, such supplements to this
Agreement and such further instruments as Fannie Mae may request and as may be
reasonably required in the opinion of Fannie Mae or its counsel to effectuate
the intention of or facilitate the performance of this Agreement or any other
Transaction Document.

17               ASSIGNMENT; TRANSFERS; THIRD-PARTY RIGHTS.

                 The Borrowers shall not assign this Agreement, or delegate any
of the Obligations hereunder, without the prior written consent of Fannie Mae.
This Agreement may not be transferred in any respect without the prior written
consent of Fannie Mae.  Nothing in this Agreement shall confer any right upon
any holder of any Bond or any other Person other than the parties hereto and
their successors and permitted assigns; provided, however, that notwithstanding
anything to the contrary herein, Servicer shall be a third-party beneficiary
with respect to Borrowers' covenants and obligations under section 4.5.

18               WAIVER OF CLAIMS.

                 IN ORDER TO INDUCE FANNIE MAE TO EXECUTE AND DELIVER THE
AGREEMENTS, THE BORROWERS HEREBY REPRESENT AND WARRANT THAT THEY HAVE NO
CLAIMS, SET-OFFS OR DEFENSES AS OF THE FANNIE MAE FACILITY CLOSING DATE IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR IN
CONNECTION WITH ANY OF THE OTHER TRANSACTION DOCUMENTS.  TO THE EXTENT ANY SUCH
CLAIMS, SET-OFFS OR DEFENSES MAY EXIST, WHETHER KNOWN OR UNKNOWN, THEY ARE EACH
HEREBY WAIVED AND RELINQUISHED IN THEIR ENTIRETY.

19               DISCLAIMER; ACKNOWLEDGEMENTS.

                 Approval by Fannie Mae of the Borrowers, the Mortgage Loans,
the Bonds or otherwise shall not constitute a warranty or representation by
Fannie Mae as to any matter.  Nothing set forth in this Agreement, in any of
the Transaction Documents or in the subsequent conduct of the parties shall be
deemed to constitute Fannie Mae as the partner or joint venturer of any person
for any purpose whatsoever.






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20               CONFLICTS BETWEEN AGREEMENTS.

                 Any terms and conditions contained in this Agreement that may
also be contained in any of the Related Mortgage Notes, any of the Related
Mortgages, any of the Reimbursement Loan Documents or any other Transaction
Document to which any of the Borrowers and Fannie Mae are parties, shall not,
to the extent reasonably practicable, be construed to be in conflict with each
other but rather shall be construed as duplicative, confirming, additional, or
cumulative provisions.  To the extent that any ultimate conflict is determined
to exist between the terms and conditions of this Agreement and those set forth
in any of the Related Mortgage Notes, any of the Related Mortgages, any of the
Reimbursement Loan Documents or any of the other Transaction Document to which
any of the Borrowers and Fannie Mae are parties, the terms and conditions of
this Agreement shall control.

21               JOINT AND SEVERAL LIABILITY.


         (a)     JOINT AND SEVERAL LIABILITY.  Notwithstanding anything
contained in this Agreement or any of the other Transaction Documents to the
contrary (but subject, however, to the provisions of subsection 8.21(b)), all
Obligations of any or all the Borrowers under this Agreement and the other Loan
Documents shall be joint and several Obligations of each Borrower.

         (b)     MAXIMUM LIABILITY OF EACH BORROWER; CONTRIBUTION AMONG
BORROWERS.

                 (i)      Maximum Liability of each Borrower.  Notwithstanding
         anything contained in this Agreement or any of the other Transaction
         Documents to the contrary, if the Obligations of any Borrower
         hereunder exceed the limitations imposed under any Fraudulent Transfer
         Law (as hereinafter defined), then such Obligations of such Borrower
         shall be limited to a maximum aggregate amount equal to the largest
         amount that would not render its Obligations subject to avoidance as a
         fraudulent transfer or conveyance under Section 548 of Title 11 of the
         United States Code or any applicable provisions of comparable state
         law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after
         giving effect to all other liabilities of such Borrower, contingent or
         otherwise, that are relevant under the Fraudulent Transfer Laws
         (specifically excluding, however, any liabilities of such Borrower in
         respect of intercompany indebtedness to any other Borrower or any
         other Affiliate of the Borrowers to the extent that such indebtedness
         would be discharged in an amount equal to the amount paid by such
         Borrower in respect of the Obligations) and after giving effect (as
         assets) to the value (as determined under the applicable provisions of
         the Fraudulent Transfer Laws) of any rights to subrogation,
         reimbursement, indemnification or contribution of such Borrower
         pursuant to applicable law or pursuant to the terms of any agreement.






                                      133
<PAGE>   135
                 (ii)     Contribution Among Borrowers.  The Borrowers together
         desire to allocate among themselves in a fair and equitable manner,
         their Obligations arising under this Agreement.  Accordingly, in the
         event any payment or distribution is made on any date by any Borrower
         under this Agreement that exceeds its Fair Share (as defined below) as
         of such date, that Borrower shall be entitled to a contribution from
         each of the other the Borrowers in the amount of such other Borrower's
         Fair Share Shortfall (as defined below) as of such date, with the
         result that all such contributions will cause each Borrower's
         Aggregate Payments (as defined below) to equal its Fair Share as of
         such date provided, however, that notwithstanding the foregoing, no
         Borrower shall be entitled to receive contribution payments which
         exceed the amount of payments such Borrower has made on account of the
         Obligations as of any date of determination.  "FAIR SHARE" means, with
         respect to a Borrower as of any date of determination, an amount equal
         to (a) the ratio of (X) the Adjusted Maximum Amount (as defined below)
         with respect to such Borrower to (Y) the aggregate of the Adjusted
         Maximum Amounts with respect to all the Borrowers multiplied by (b)
         the aggregate amount paid or distributed on or before such date by all
         the Borrowers hereunder in respect of the Obligations.  "FAIR SHARE
         SHORTFALL" means, with respect to a Borrower as of any date of
         determination, the excess, if any, of the Fair Share of such Borrower
         over the Aggregate Payments of such Borrower.  "ADJUSTED MAXIMUM
         AMOUNT" means, with respect to a Borrower as of any date of
         determination, the maximum aggregate amount of the Obligations of such
         Borrower under this Agreement determined as of such date in accordance
         with subsection 8.21(b)(i); provided that, solely for purposes of
         calculating the "Adjusted Maximum Amount" with respect to any Borrower
         for purposes of this subsection 8.21(b)(ii), any assets or liabilities
         of such Borrower arising by virtue of any rights to subrogation,
         reimbursement or indemnification or any rights to or obligations of
         contribution hereunder shall not be considered as assets or
         liabilities of such Borrower.  "AGGREGATE PAYMENTS" means, with
         respect to a Borrower as of any date of determination, an amount equal
         to (a) the aggregate amount of all payments and distributions made on
         or before such date by such Borrower in respect of this Agreement
         (including in respect of this subsection 8.21(b)(ii)) minus (b) the
         aggregate amount of all payments received on or before such date by
         such Borrower from the other Borrowers as contributions under this
         subsection 8.21(b)(ii).  The amounts payable as contributions under
         this subsection 8.21(b)(ii) shall be determined as of the date on
         which the related payment or distribution is made by the applicable
         Borrower.  The allocation among the Borrowers of their obligations as
         set forth in this subsection 8.21(b)(ii) shall not be construed in any
         way to limit the liability of any Borrower hereunder.

         (c)     BORROWERS' RIGHTS OF SUBROGATION, ETC..  Until the Obligations
shall have been paid and performed in full, each Borrower shall withhold
exercise of any right of subrogation, contribution, reimbursement or indemnity
(whether contractual (including any such right under subsection 8.21(b)(ii)),
statutory, equitable, under common law or otherwise) and any other rights to
enforce any claims or remedies which it now has or may hereafter have against
any other Borrower or any of the Collateral or against any other guarantor or
security for the






                                      134
<PAGE>   136
Obligations.  Each Borrower further agrees that, to the extent its agreement to
withhold exercise of such rights of subrogation, contribution, reimbursement
and indemnity and such other rights as set forth above is found by a court of
competent jurisdiction to be void or voidable for any reason, any such rights
such Borrower may have against any other Borrower, any Collateral or any other
guarantor or security for the Obligations shall be junior and subordinate to
any rights Fannie Mae may have against such Borrower, such Collateral, such
guarantor or such security.

         (d)     SUBORDINATION OF OBLIGATIONS BETWEEN BORROWERS.  Any
indebtedness of a Borrower (a "DEBTOR AFFILIATE") now or hereafter held by any
other Borrower (a "CREDITOR AFFILIATE") is hereby subordinated to the
Obligations of such Debtor Affiliate to Fannie Mae.  If Fannie Mae so requests
after an Event of Default has occurred and is continuing, such indebtedness
shall be collected, enforced and received by such Creditor Affiliate as trustee
for Fannie Mae and be paid over to Fannie Mae on account of the Obligations.

         (e)     FANNIE MAE' RIGHTS.  Each Borrower hereby agrees that Fannie
Mae may, without demand and at any time and from time to time and without the
consent of, or notice to, such Borrower, without incurring responsibility to
such Borrower, and without impairing or releasing the obligations of such
Borrower hereunder, upon or without any terms or conditions and in whole or in
part:

                 (i)      change the manner, place or terms of payment of,
         and/or change or extend the time of payment of, renew, increase,
         accelerate or alter, any of the Obligations of any other Borrower, any
         security therefor, or any liability incurred directly or indirectly in
         respect thereof, and the Obligations of such Borrower shall apply to
         the Obligations of such other Borrower as so changed, extended,
         renewed or altered;

                 (ii)     subject to the limitations imposed by subsection
         8.21(b)(i), if any, take and hold security for the payment of the
         Obligations of any other Borrower and sell, exchange, release,
         surrender, realize upon or otherwise deal with in any manner and in
         any order any property by whomsoever at any time pledged or mortgaged
         to secure, or howsoever securing, such Obligations or any liabilities
         (including any of those hereunder) incurred directly or indirectly in
         respect thereof or hereof, and/or any offset thereagainst;

                 (iii)    exercise or refrain from exercising any rights
         against any other Borrower or any Collateral;

                 (iv)     release or substitute any one or more endorsers,
         guarantors, or other obligors in respect of the Obligations of any
         other Borrower;

                 (v)      settle or compromise any of the Obligations of any
         other Borrower, any security therefor or any liability (including any
         of those hereunder) incurred directly or indirectly in respect thereof
         or hereof, or subordinate the payment of all or any part






                                      135
<PAGE>   137
         thereof to the payment of any liability (whether due or not) of such
         other Borrower to its creditors other than Fannie Mae;

                 (vi)     subject to the limitations imposed by subsection
         8.21(b)(i), if any, apply any sums by whomsoever paid or howsoever
         realized to any liability or liabilities of any other Borrower to
         Fannie Mae regardless of what liability or liabilities of such
         Borrower to Fannie Mae remain unpaid; and/or

                 (vii)    consent to or waive any breach by any other Borrower
         of, or any act, omission or default by any other Borrower under, this
         Agreement or any of the other Transaction Documents.

         (f)     OBLIGATIONS ABSOLUTE.  No invalidity, irregularity or
unenforceability of all or any part of the Obligations of any Borrower shall
affect, impair or be a defense to the Obligations of any other Borrower in
respect thereof, and the Obligations of each Borrower under subsection 8.21(a)
in respect of the Obligations of each other Borrower shall be primary, absolute
and unconditional notwithstanding the occurrence of any event or the existence
of any other circumstances which might constitute a legal or equitable
discharge of a surety or guarantor for the Obligations of such other Borrower
except payment and performance in full thereof.

         (g)     RELIANCE.  Fannie Mae shall not be required to inquire into
the capacity or powers of any Borrower, or any of the officers, directors,
partners or agents acting or purporting to act on behalf of any Borrower, as a
condition to the liability of any other Borrower hereunder, and any Obligations
made or created in reliance upon the professed exercise of such powers shall
become Obligations of such other Borrower hereunder.

         [The remainder of this page has been intentionally left blank]






                                      136
<PAGE>   138
                 IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their respective duly authorized
officers or representatives as of the date hereof.


                                 AVALON COLLATERAL, INC., a Maryland corporation



                                 By:
                                      -----------------------------
                                      Thomas J. Sargeant
                                      Chief Financial Officer and Secretary

                                 AVALON CHASE RIDGE, INC., a Maryland
                                 corporation



                                 By:
                                      -----------------------------
                                      Thomas J. Sargeant
                                      Chief Financial Officer and Secretary



                                 AVALON CHASE LEA, INC., a Maryland corporation



                                 By:
                                      -----------------------------
                                      Thomas J. Sargeant
                                      Chief Financial Officer and Secretary


                                 FEDERAL NATIONAL MORTGAGE ASSOCIATION


                                 By:
                                      -----------------------------
                                      Thomas W. White
                                      Senior Vice President





                                     S-1
<PAGE>   139





                                    EXHIBIT A
               BOND PROPERTIES, ISSUERS AND RELATED INFORMATION

SECTION A.  FLOATING RATE BOND PROPERTIES:


<TABLE>
<CAPTION>
                                                                    Bond/Loan               Bond
Project                                Issuer                        Amount                Trustee
-------                                ------                        ------                -------
 <S>                           <C>                                  <C>                  <C>
 1.  Avalon Meadows            Howard County,                       $11,500,000          Crestar Bank
       Apartments Project      Maryland
     Howard County, MD




 2.  Avalon at Hampton I       Hampton Redevelopment                 $8,060,000          Crestar Bank
       Project                 and Housing Authority
     City of Hampton, VA



 3.  Avalon Pointe Project     Hampton Redevelopment                 $6,387,000          Crestar Bank
     Stafford County, VA       and Housing Authority
</TABLE>





<TABLE>
<CAPTION>
                                                              Fees
                                                ------------------
                                 Issuer        Trustee     Remark.         Total
Project                                                     Agent                                       Bonds
-------                                                                                                 -----
 <S>                                  <C>   <C>              <C>         <C>          <C>
 1.  Avalon Meadows                   --      .0374%         .125%         .1624%     Howard County, Maryland Multifamily Housing
     Apartments Project                                                               Revenue Refunding Bonds (Avalon Meadows
     Howard County, MD                                                                Apartments Project), Series 1996




 2.  Avalon at Hampton I              --     .05335%         .125%        .17835%     Hampton Redevelopment and Housing Authority
     Project                                                                          Multifamily Housing Revenue Refunding Bonds
     City of Hampton, VA                                                              Series 1996A (Avalon at Hampton I Project)



 3.  Avalon Pointe Project            --    .067325%         .125%       .192325%     Hampton Redevelopment and Housing Authority
     Stafford County, VA                                                              Multifamily Housing Revenue Bonds 1996 Series
                                                                                      (Avalon Pointe Project)
</TABLE>








NY1-419670
(AVALON Master Reimbursement Agreement)
<PAGE>   140
SECTION B.  FIXED RATE BOND PROPERTIES:


<TABLE>
<CAPTION>
                                                                Bond/Loan          Bond
Project                                 Issuer                   Amount           Trustee
-------                                 ------                   ------           -------
 <S>                              <C>                         <C>               <C>
 1.  Avalon Landing Apartments    Anne Arundel County,         $7,000,000       Crestar Bank
     Project                      Maryland
     Anne Arundel County, MD



 2.  Avalon Knoll Apartments      Housing                     $14,130,000       Crestar Bank
     Montgomery County, MD        Opportunities
                                  Commission of
                                  Montgomery County
</TABLE>





<TABLE>
<CAPTION>
                                                Mortgage Loan Interest Components
                                           -----------------------------------------
                                         Pass-         Servicing     Facility      Actual
Project                                 Through           Fee           Fee       Note Rate                  Bonds
-------                                   Rate                                                               -----
 <S>                                    <C>                  <C>       <C>          <C>       <C>
 1.  Avalon Landing Apartments          6.15%(1)             .09%      .50%          6.74%    Anne Arundel County, Maryland
     Project                                                                                  Multifamily Housing Revenue
     Anne Arundel County, MD                                                                  Refunding Bonds (Avalon Landing
                                                                                              Apartments Project), Series 1996


 2.  Avalon Knoll Apartments             6.287%(2)           .09%      .50%         6.877%    Housing Opportunities Commission
     Montgomery County, MD                                                                    of Montgomery County Multifamily
                                                                                              Housing Revenue Bonds (Avalon
                                                                                              Knoll Apartments) 1996 Issue C
</TABLE>


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

    (1)         The Pass-Through  Rate for the  Anne Arundel County, Maryland
Multifamily Housing Revenue  Refunding Bonds (Avalon Landing  Apartments
Project), Series 1996 includes  the Trustee's fee  equal to .0472% per annum
of the outstanding principal  amount of the related Mortgage Loan.  There is no
Issuer's fee payable in connection with this transaction.

    (2)         The Pass-Through Rate for the Housing Opportunities Commission
of Montgomery County Multifamily Housing Revenue Bonds (Avalon Knoll
Apartments), 1996 Issue C includes the Trustee's fee equal to .02357% per annum
of the outstanding principal amount of the related Mortgage Loan and the
Issuer's Fee equal to .145% per annum of the outstanding principal amount of
the related Mortgage Loan.



                                   Exh. A-2

<PAGE>   141
SECTION C. CUSTODIAL RECEIPTS PROPERTIES:

<TABLE>
<CAPTION>
         Project                                 Bond Issuer                                 Bonds
         -------                                 -----------                                 -----
         <S>                           <C>                                <C>
         1.  Avalon Ridge              Community Development              Community Development Administration
             Montgomery County, MD     Administration, Department of      Multifamily Development Revenue Bonds, 1985
                                       Economic and Community             Issue A (Chase Ridge)
                                       Development State of Maryland

         2.  Avalon Lea                Community Development              Community Development Administration
             Baltimore County, MD      Administration, Department of      Multifamily Development Revenue Bonds, 1985
                                       Economic and Community             Issue B (Chase Lea)
                                       Development State of Maryland
</TABLE>



<TABLE>
<CAPTION>
         Project                             Custodial Receipts              Amount
         -------                             ------------------              ------
         <S>                            <C>                                  <C>
         1.  Avalon Ridge               Avalon Properties, Inc.,             $26,815,000
             Montgomery County, MD      Custodial Receipts,
                                        Series 1995 A

         2.  Avalon Lea                 Avalon Properties, Inc.,             $16,835,000
             Baltimore County, MD       Custodial Receipts,
                                        Series 1995-B
</TABLE>

                                    Exh. A-3