<PAGE>
Personal and Confidential                              August 6, 1996

Mr. David G. Phillips
Executive Vice President
Prime Retail, L.P.
100 East Pratt Street
19th Floor
Baltimore, MD 21202

RE:  Grant of Option

Dear David,

The  purpose of this  letter is to  summarize  the terms and  conditions  of our
agreement to grant you an option to purchase 100,000 limited  partnership  units
(the  "Units") in Prime Retail,  L.P. from The Prime Group,  Inc. This option to
purchase the Units is subject to the following terms and conditions:

               Option Price:           $1,200,000 ($12.00 per Unit), payable
                                       in cash at the closing.

               Exercise Date:          The option must be exercised in writing
                                       on or before December 31, 1999, with a
                                       closing to occur within sixty days
                                       thereafter.

               Forfeiture              of Option: The option shall be forfeited,
                                       whether  or not  exercised,  in the event
                                       your employment  with Prime Retail,  Inc.
                                       (the "Company") is voluntarily terminated
                                       by you for any reason,  or  terminated by
                                       the  Company  for cause at any time prior
                                       to December 31, 1999.

               Early Termination:      In the  event  of your death or a final
                                       determination of permanent disability,
                                       you or your estate shall have sixty (60)
                                       days thereafter to exercise the option,
                                       with a closing to occur sixty (60) days
                                       after the date of exercise.  In the event
                                       of a failure to so exercise, the option
                                       shall terminate.

               Non-Assignability:      This option is being granted in
                                       consideration of your continued and
                                       continuous employment by the Company and
                                       in recognition of your future services
                                       and dedication to the Company. As a
                                       result, this option is exclusive to
                                       you and non-assignable.

               Incentive Clause:       If at any time prior to December 31,
                                       1999, the market price of the common
                                       stock of the Company (NASDAQ:PRME) equals
                                       or exceeds $25.00 per share, and remains
                                       at said level for no less than ninety
                                       (90) consecutive days, then the option
                                       price shall be reduced by fifty percent
                                       (50.0%).

I believe the foregoing  accurately  reflects our mutual  understanding based on
our meeting last March.  If you agree,  please  acknowledge  both copies of this
letter and return one copy to my attention in Chicago.

                                             Very truly yours,

                                             /s/ Michael W. Reschke
Accepted:
By:       /s/ David G. Phillips
          ---------------------

Date:     June 27, 1997
          ---------------------

CC:       Robert J. Rudnik
          Abraham Rosenthal
          William H. Carpenter, Jr.
          Alan C. Schroeder