<PAGE>

                                 LOAN AGREEMENT


        This Loan Agreement (the "Agreement") is made this 28th day of June
2006, by and between MENDOCINO BREWING COMPANY, INC., a California corporation
("Borrower"), and GRAND PACIFIC FINANCING CORPORATION, a California corporation
("Lender").

                                    RECITALS
                                    --------

        A. Borrower has applied to Lender for a loan in the maximum principal
amount of Three Million and No/100 Dollars ($3,000,000.00) ("Loan") for the
purpose of (i) refinancing Borrower's existing indebtedness secured by the
Property (as hereinafter defined), and (ii) financing Borrower's working
capital.

        B. Lender has agreed to make the Loan to Borrower for such purpose upon
the terms and conditions set forth herein.

        NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

                                    ARTICLE I
                                    ---------
                         DEFINITIONS AND INTERPRETATIONS
                         -------------------------------

1.1     DEFINITIONS -
        -------------

        For purposes of this Agreement, the following terms shall have the
following meanings:

        The definitions set forth in the Recitals or elsewhere in this Agreement
are incorporated herein by reference.

        "ADVANCE" shall mean any advance or disbursement of Loan Proceeds by
Lender pursuant to this Agreement.

        "ADVANCE DATE" shall mean the date of each Advance.

        "AFFILIATE" shall mean any Person, directly or indirectly, related to,
in control of, controlled by, or under the common control of, Borrower, or of a
successor thereof, whether through merger, consolidation, transfer of assets or
otherwise.

        "AGREEMENT" shall mean this Loan Agreement, either as originally
executed or as it may from time to time be supplemented, extended, renewed,
modified, or amended.

        "AGREEMENT TO FURNISH INSURANCE" shall mean the Agreement To Furnish
Insurance duly executed by Borrower in form and content as required by Lender.

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        "ANTI-MONEY LAUNDERING LAWS" shall mean the USA Patriot Act of 2001, the
Bank Secrecy Act, as amended through the date hereof, Executive Order 1
3324--Blocking Property and Prohibiting Transactions with Persons Who Commit,
Threaten to Commit, or Support Terrorism, as amended through the date hereof,
and other federal laws and regulations and executive orders administered by the
United States Department of the Treasury, Office of Foreign Assets Control
("OFAC") which prohibit, among other things, the engagement in transactions
with, and the provision of services to, certain foreign countries, territories,
entities and individuals (such individuals include specially designated
nationals, specially designated narcotics traffickers and other parties subject
to OFAC sanction and embargo programs), and such additional laws and programs
administered by OFAC which prohibit dealing with individuals or entities in
certain countries regardless of whether such individuals or entities appear on
any of the OFAC lists.

        "APPRAISAL" shall mean an appraisal of the Property, or any portion
thereof, performed and prepared for Lender at Borrower's sole expense by a duly
licensed or certified appraiser designated by Lender and possessing all
qualifications required by Lender and applicable Laws, setting forth the
appraiser's opinion and determination of the fair market value of the Property;
said Appraisal shall be prepared in full narrative form meeting all requirements
and approaches to value as shall be necessary or appropriate in order to comply
with all customary and generally accepted appraisal standards within the
appraisal industry and in accordance with Lender's requirements, and to Lender's
satisfaction and amount of the Loan to the appraised value of the Property does
not exceed sixty six and 67/100 percent (66.67%).

        "APPROVED LEASE" shall mean a lease between Borrower and any tenant for
all or any portion of the Property, which lease is substantially in a form
pre-approved by Lender, the terms of which are satisfactory to Lender, and which
tenant is satisfactory to Lender.

        "ASSETS" shall have the meaning usually given that term in accordance
with GAAP, but shall exclude sums due to Borrower from Affiliates (other than
subsidiaries).

        "BUSINESS DAY" shall mean Monday through Friday, excluding any day of
the year on which banks are required or authorized to close in California.

        "COLLATERAL" shall mean all real and personal property of Borrower
described in the Deed of Trust in which Lender has been and may hereafter be
granted a lien or security interest to secure payment and performance of
Borrower's obligations under the Loan.

        "CONTINUING GUARANTY" shall mean that certain agreement or agreements by
that title, if required by Lender, duly executed by Guarantor, unconditionally
and irrevocably guaranteeing payment and performance of Borrower's obligations
to Lender in connection with the Loan, as such agreement or agreements are
originally executed and as such agreement or agreements may from time to time be
reaffirmed, supplemented, modified or amended.

                                       2
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        "DEBT SERVICE" shall mean all scheduled payments of principal and
interest payable by Borrower to Lender under the Note.

        "DEBT SERVICE COVERAGE RATIO" shall mean, at any given time, the ratio
of (a) EBITDA to (b) Debt Service.

        "DEED OF TRUST" shall mean that certain Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing dated as of the date
herein, duly executed and acknowledged by Borrower, for the benefit of Lender,
to secure the Loan and encumbering the Property and other assets and rights as
therein provided, together with all such riders and exhibits thereto as Lender
shall require.

        "EBITDA" shall mean, at any given time, the sum of (a) the Net Operating
Income, (b) all depreciation and amortization expenses deducted in determining
the Net Operating Income, and (c) the aggregate amount of federal and state
income taxes on or measured by income of Borrower that were deducted in
determining the Net Operating Income, all as determined in accordance with GAAP.

        "ENVIRONMENTAL INDEMNITY" shall mean that certain Hazardous Substances
Indemnity Agreement duly executed by Borrower and/or Guarantor, as required by
Lender, pursuant to which such parties shall indemnify and defend Lender from
and against any loss or liability, direct or indirect, with respect to the
presence or release of any hazardous or toxic material in, on, about or under
the Property.

        "EVENT OF DEFAULT" shall mean any of those events specified in Article V
hereof.

        "FINANCIAL STATEMENTS" shall mean balance sheets, income statements,
reconciliations of capital structure, statements of sources and applications of
funds, and income tax returns, all prepared in accordance with GAAP.

         "FISCAL YEAR" shall mean Borrower's fiscal year, ending on December 31
of each calendar year.

        "GAAP" shall mean generally accepted accounting principles consistently
maintained and applied throughout the period indicated and consistent with the
prior financial practice of the Person providing such financial information.

        "GOVERNMENTAL AGENCY" shall mean any governmental or quasi-governmental
agency, authority, board, bureau, commission, department, instrumentality or
public body, court, administrative tribunal, or public utility.

        "GROSS INCOME" shall mean, for any given time, either: (i) the total of
all revenue, rents or other income which are received or generated by Borrower
in connection with the possession, use, operation and/or management of the
Property, as applicable, including, without limitation, percentage rentals and
rentals representing pass-throughs of operating costs or cost increases to the
applicable tenants; PROVIDED, HOWEVER, that Gross Income shall exclude any
security deposits received from any of the tenants unless and until the same are
applied to rental obligations of the tenant in accordance with the terms

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of the applicable lease. All rentals which are to be included in Gross Income
shall be computed on a cash basis and shall include all amounts actually
received; or (ii) in the event Borrower and/or Guarantor, as applicable, are in
possession of and occupy the entirety of the Property, any and all revenues,
income, receipts and money received by or on behalf of, and moneys due to
Borrower and/or Guarantor, solely from Borrower's and/or Guarantor's use,
operation, management and/or conduct of its business on the Property, including,
without limitation, (a) gross revenues derived from its operation and possession
of the Property, (b) grants, bequests, donations and contributions, exclusive of
any gifts, grants, bequests, donations and contributions to the extent
specifically restricted by the donor to a particular purpose inconsistent with
their use from the repayment of Loan, and (c) proceeds derived from (1) accounts
receivable, (2) inventory and other tangible and intangible property, (3)
contract rights and other rights and assets now or hereafter owned by Borrower
and/or Guarantor in connection with its business on the Property.

        "GUARANTOR" shall mean Releta Brewing Company LLC, a Delaware limited
liability company.

        "HAZARD INSURANCE DISCLOSURE" shall mean the Hazard Insurance Disclosure
duly executed by Borrower in form and content as required by Lender.

        "INSURANCE POLICIES" shall mean any of the policies of insurance
specified in Section 4.1 hereof.

        "LAWS" shall mean, collectively, all federal, state, and local laws,
rules, regulations, ordinances, and codes.

        "LOAN" shall mean the loan described in the Recitals and in Article III
of this Agreement.

        "LOAN CLOSING" shall mean the date on which the Loan closes in
accordance with Section 3.2 of this Agreement.

        "LOAN CLOSING COSTS" shall mean all title insurance premiums and
recording charges, tax service contract fees, and all out-of-pocket fees and
costs incurred by Lender in connection with the appraisal, inspection,
assessment, evaluation, insuring, and testing of the Property, and all fees and
costs incurred by Lender in connection with the negotiation and preparation of
the Loan Documents, including attorneys' fees, and closing of the Loan as herein
provided, including, but without limitation, the Loan Fee.

        "LOAN DOCUMENTS" shall mean this Agreement, the Note, Deed of Trust,
Financing Statements, Continuing Guaranty, Environmental Indemnity, Agreement to
Furnish Insurance, Hazard Insurance Disclosure and such other documents as
Lender may reasonably require Borrower to give to Lender as evidence of and/or
security for and/or guaranty of the Loan.

                                       4
<PAGE>

        "LOAN FEE" shall mean the sum of $30,000.00 payable by Borrower to
Lender for the granting of the Loan.

        "LOAN PROCEEDS" shall mean funds advanced by Lender to Borrower for
purposes set forth in Article III hereof.

        "MATURITY DATE" shall mean June 28, 2011, as set forth in the Note, at
which time the entire principal balance of the Loan, plus accrued interest
thereon, is and shall be due and payable as provided in this Agreement and the
Note, subject to acceleration as provided in the Loan Documents.

which Gross Income exceeds Operating Expenses.

        "NOTE" shall mean the Promissory Note of Borrower in the amount of the
Loan payable to the order of Lender, duly executed by Borrower, as required by
Lender to evidence the Loan.

        "OFAC PROHIBITED PERSON" shall mean a country, territory, individual or
person

        (a) listed on, included within or associated with any of the countries,
territories, individuals or entities referred to on The Office of Foreign Assets
Control's List of Specially Designated Nationals and Blocked Persons or any
other prohibited person lists maintained by governmental authorities, or
otherwise included within or associated with any of the countries, territories,
individuals or entities referred to in or prohibited by OFAC or any other
Anti-Money Laundering Laws, or

        (b) which is obligated or has any interest to pay, donate, transfer or
otherwise assign any property, money, goods, services, or other benefits from
the Property directly or indirectly, to any countries, territories, individuals
or entities on or associated with anyone on such list or in such laws.

        "OPERATING EXPENSES" shall mean, at any given time, the sum of either of
the following expenses, as applicable: (i) (a) all taxes and assessments
(including, without limitation, bond assessments) imposed on the Property (but
excluding taxes and assessments which any tenant is required to pay directly to
the applicable taxing authority so long as such tenant's payment of such taxes
is correspondingly excluded from Gross Income); (b) all amounts paid by Borrower
on account of insurance premiums for insurance carried in connection with the
Property; (c) all other expenses which are properly charged against income
according to GAAP and which are incurred by Borrower with respect to the
ownership and operation of the Property, including, without limitation,
management expenses, cleaning expenses, leasing expenses, maintenance and repair
costs, utility expenses, HVAC costs, material costs, cost of services, license
fees and business taxes; and (d) all depreciation and amortization expenses
allocable to the Property; provided, however, that Operating Expenses shall
exclude Debt Service; or (ii) in the event that Borrower and/or Guarantor, as
applicable, are in possession of and occupy the Property in its entirety, the
current expenses of operation, maintenance, and conducting of Borrower's and/or
Guarantor's, as applicable, business, including, without

                                       5
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limitation, wages, salaries, benefits and bonuses to personnel, the cost of
goods, materials and supplies used for current business operations and
maintenance, security costs, utility expenses, all taxes and assessments,
including, without limitation, bond assessments (but, as to Borrower, excluding
taxes and assessments which Guarantor is required to pay directly to the
applicable taxing authority so long as Guarantor's payment of such taxes is
correspondingly excluded from Borrower's Gross Income), insurance premiums,
trash removal, cost of goods sold, advertising, insurance premiums, rental
payments for real or personal property (other than capital lease payments), and
charges for the accumulation of appropriate reserves for current expenses that
are not recurrent monthly but may reasonably be expected to-be incurred in
accordance with GAAP; PROVIDED, HOWEVER, Operating Expenses shall not include
Debt Service, or any allowance for depreciation, renewals or replacement of
capital assets or any other noncash charges.

        "ORGANIZATIONAL DOCUMENTS" shall mean, if Borrower or Guarantor is other
than a natural person, the duly filed, certified and/or executed documents or
instruments evidencing or confirming the lawful formation and existence of
Borrower and/or Guarantor, and all written consents and certifications required
by Lender from persons having management and/or ownership interests in Borrower
and/or Guarantor.

        "PERMITTED ENCUMBRANCES" shall mean only those matters and exceptions to
title approved by Lender shown in the preliminary report of title and all
supplements thereto of the Title Company covering the Property.

        "PERSON" shall mean an individual, corporation, limited liability
company, partnership, joint venture, trust or unincorporated organization or a
Governmental Agency.

        "PROPERTY" shall mean the real property described in Exhibit "A" hereto
and in the Deed of Trust and all present and future improvements thereon and
appurtenances attached thereto.

        "SNDA" shall mean a subordination, nondisturbance and attornment
agreement by a tenant on the Property, in form and content satisfactory to
Lender.

        "TENANT ESTOPPEL" shall mean a tenant estoppel certificate by a tenant
on the Property, in form and content satisfactory to Lender.

        "TITLE COMPANY" shall mean the title insurer designated by Lender, in
its sole opinion and judgment, which shall issue the Title Policy.

        "TITLE POLICY" shall mean an ALTA Loan Policy (1970 Policy Form),
written as such at Loan Closing and issued by the Title Company, with liability
equal to the full amount of the Loan, in favor of Lender, as insured, insuring
the lien of the Deed of Trust to be a valid first lien on the Property subject
only to the Permitted Encumbrances. The Title Policy shall have such
endorsements thereto as Lender shall require. If required by Lender, the title
insurance coverage will provide for reinsurance.

                                       6
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        1.2 ACCOUNTING TERMS - All accounting terms not specifically defined
herein shall be construed in accordance with GAAP, and all financial data
submitted pursuant to this Agreement shall be prepared in accordance with GAAP,
unless Lender agrees to another manner of preparation.

        1.3 USE OF DEFINED TERMS - Any defined terms used in the plural shall
include the singular, and the masculine gender shall include the feminine and/or
neuter, and such terms shall encompass all members of the relevant class.

        1.4 SCHEDULES AND EXHIBITS - All schedules and exhibits to this
Agreement, either as originally existing or as the same may from time to time be
supplemented, modified or amended, are incorporated herein by reference.

        1.5 REFERENCES - Any reference to this Agreement or any other document
shall include such document, both as originally executed, and as it may from
time to time be amended, supplemented and modified. References herein to
Articles, Sections and Exhibits shall be construed as references to this
Agreement unless a different document is named.

        1.6 OTHER TERMS - The term "document" is used in its broadest sense and
encompasses agreements, certificates, opinions, consents, instruments and other
written material of every kind. The terms "including" and "include" shall mean
"including (include), without limitation."

                                   ARTICLE II
                                   ----------
                   REPRESENTATIONS AND WARRANTIES OF BORROWER
                   ------------------------------------------

        Borrower hereby represents and warrants to Lender as of the date of this
Agreement, the date of Loan Closing, each Advance Date, and each and every date
during the existence of the Loan, or any portion thereof, as the context admits
or requires, that:

        2.1 BORROWER'S CAPACITY - Borrower is a corporation, duly organized and
existing under the laws of the State of California, duly qualified to do
business in any state in which the nature of its business requires it to be so
qualified, and is lawfully empowered and possesses the capacity to enter into
and carry out the provisions of this Agreement.

        2.2 VALIDITY OF LOAN DOCUMENTS - The Loan Documents are in all respects
valid and binding upon Borrower according to their terms, subject to all Laws,
including, without limitation, equitable principles, insolvency Laws, and other
matters applying to creditors generally; PROVIDED, HOWEVER, that the
implementation of such Laws do not and will not affect the ultimate realization
of the obligations and security afforded thereby. The execution and delivery by
Borrower of and the performance by Borrower of all its obligations under the
Loan Documents have been duly authorized by all necessary action and do not and
will not:

                                       7
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        2.2.1 Require any consent or approval not heretofore obtained of any
other Person holding any interest in or entitled to receive any interest issued
or to be issued by Borrower or otherwise; or

        2.2.2 Violate any provision of the Organizational Documents or any other
agreements to which Borrower is bound; or

        2.2.3 Result in or require the creation or imposition of any mortgage,
deed of trust, pledge, lien, security interest, claim, charge, right of others,
or other encumbrance of any nature (other than under the Loan Documents) upon or
with respect to any property now owned or leased or hereafter acquired by
Borrower; or

        2.2.4 To the best of Borrower's knowledge, violate any order, writ,
judgment, injunction, decree, determination, or award, or violate any provision
of any Laws; or

        2.2.5 Result in a breach of or constitute a default under, cause or
permit the acceleration of any obligation owed under, or require any consent
under any indenture or loan or credit agreement or any other agreement, lease,
or instrument to which Borrower is a party or by which Borrower or any property
of Borrower is bound or affected.

        2.3 NO DEFAULT - Borrower is not in default under any order, writ,
judgment, injunction, decree, determination, award, indenture, agreement, lease,
or instrument of the type described in Section 2.2 above.

        2.4 NO GOVERNMENTAL APPROVALS REQUIRED - To the best of Borrower's
knowledge, no authorization, consent, approval, order, license, exemption from,
or filing, registration, or qualification with, any Governmental Agency is or
will be required to authorize, or is otherwise required in connection with:

                2.4.1 The execution, delivery and the performance by Borrower of
        all or any of its obligations under the Loan Documents; or

                2.4.2 The creation of the liens, security interests, or other
        charges or encumbrances described in the Loan Documents, except that
        filing and/or recording with Governmental Agencies may be required to
        perfect such liens, security interests, or other charges or
        encumbrances.

        2.5 TAX LIABILITY - Borrower has timely filed all tax returns (federal,
state, and local) required to be filed and has paid all taxes shown thereon to
be due and all property taxes due, including interest and penalties, if any,
except as set forth in SCHEDULE 2.8 attached hereto.

        2.6 FINANCIAL STATEMENTS - All Financial Statements of Borrower,
Guarantor and any Persons having an interest in Borrower (if Borrower is other
than a natural person) which have heretofore been submitted to Lender fairly
present the financial positions of Borrower, Guarantor and of such other Persons
at the respective

                                       8
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dates of their preparation. Since the dates of such financial statements, there
have been no material adverse changes in the financial conditions of Borrower,
Guarantor and of such other Persons.

        2.7 PENDING LITIGATION - There are no actions, suits, or proceedings
pending, or to the knowledge of Borrower, threatened against or affecting
Borrower, Guarantor or the Property, or involving the validity or enforceability
of any of the Loan Documents or the priority of the lien thereof, at Law or in
equity, or before or by any Governmental Agency, except actions, suits, and
proceedings that are fully covered by insurance or which, if adversely
determined, would not substantially impair the ability of Borrower or Guarantor
to perform each and every one of their obligations under and by virtue of the
Loan Documents; and neither Borrower nor Guarantor is in default with respect to
any order, writ, injunction, decree, or demand of any court or any Governmental
Agency.

        2.8 VIOLATIONS OF LAWS - There are no material violations or notices of
violations of any Laws relating to the Property or any of the Collateral, except
as set forth on SCHEDULE 2.8 attached hereto.

        2.9 COMPLIANCE WITH ZONING ORDINANCES AND SIMILAR LAWS - To the best of
Borrower's knowledge, the Property complies with all applicable Laws and all
permits and approvals issued thereunder, affecting the Property, the sale,
operation, leasing or financing of the Property and the intended occupancy, use
and enjoyment of the Property, including, but not limited to, applicable
subdivision Laws, licenses and permits, building codes, zoning ordinances, flood
disaster, environmental protection and equal employment regulations and
appropriate supervising boards of fire underwriters and similar agencies.
Borrower shall not seek, make or consent to any change in the zoning, conditions
of use, or any other applicable land use permits, approvals or regulations
pertaining to the Property, or any portion thereof, which would constitute a
violation of the warranties and representations herein contained, or would
change the nature of the use or occupancy of the Property.

        2.10 AVAILABILITY OF UTILITIES - All utility services necessary for the
proper operation of the Property for its intended purposes are available at the
Property.

        2.11 CONDITION OF PROPERTY - The Property is not now damaged or injured
as a result of any fire, explosion, accident, flood, or other casualty, nor
subject to any action in eminent domain.

        2.12 BROKERAGE COMMISSIONS - No brokerage commissions are or will be
owed by Borrower in connection with the Loan, or if there are commissions due or
payable, the same will be paid by Borrower. Borrower agrees to and shall
indemnify Lender from all liability, claims, or losses arising by reason of any
such brokerage commissions related to any or all acts of Borrower in connection
with the Loan. This provision shall survive the repayment of the Loan and shall
continue in full force and effect so long as the possibility of such liability,
claims or losses exists.

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        2.13 ENVIRONMENTAL IMPACT STATEMENT - All required environmental impact
statements as required by any Governmental Agency having jurisdiction over the
Property have been duly filed and approved.

        2.14 ACCESS - The Property fronts on a publicly maintained road or
street and has both legal and practical access to the same.

        2.15 LEASES - Subject to Section 4.14 of this Agreement, Borrower will
not, without the written consent of Lender, enter into a lease for all or any
portion of the Property, except for Approved Leases.

        2.16 [Intentionally omitted].

        2.17 AIR RIGHTS - Borrower has not and will not transfer, assign,
convey, hypothecate or encumber any of the air rights pertaining to the
Property.

        2.18 COMPLIANCE WITH ENVIRONMENTAL LAWS - Borrower will not use, store,
manufacture, generate, transport to or from, or dispose of any toxic substances,
hazardous materials, hazardous wastes, radioactive materials, flammable
explosives, or related material on or in connection with the Property or the
business of Borrower on the Property in violation of any and all applicable
Laws. Borrower will not permit any lessee on any property to use, store,
manufacture, generate, transport to or from, or dispose of any toxic substances,
hazardous materials, hazardous waste, radioactive materials, flammable
explosives, related material on or in connection with the Property or the
business on the Property in violation of any and all applicable Laws. ("Toxic
substances," "hazardous materials," and "hazardous waste" shall include, but not
be limited to, such substances, materials and wastes which are or become
regulated under applicable Laws or which are classified as hazardous or toxic
under applicable Laws.)

        2.19 SOLVENCY - Borrower is and shall continue to be able to pay its
debts as they mature and the realizable value of its Assets is, and at all times
that it may have obligations hereunder shall continue to be, sufficient to
satisfy any and all obligations hereunder.

        2.20 PERMITS - Borrower possesses all licenses, approvals, permits,
franchises, patents, copyrights, trademarks, and trade names, or rights thereto,
that are necessary to own the Property and conduct business on the Property
substantially as now conducted and as presently proposed to be conducted, and to
the best of Borrower's knowledge, Borrower is not in material violation of any
valid rights of others with respect to the foregoing.

         2.21 FULL DISCLOSURE - All information in the loan application,
Financial Statement, certificate, or other document and all information prepared
and delivered by Borrower to Lender in obtaining the Loan is correct and
complete in all material respects, and there are no omissions therefrom that
result in such information being incomplete, incorrect, or misleading in any
material adverse respect as of the date thereof. All information in any loan
application, financial statement, certificate or other document

                                       10
<PAGE>

prepared and delivered to Lender on behalf of Borrower by Persons other than
Borrower or its Affiliates, and all other information prepared and delivered to
Lender on behalf of Borrower by Persons other than Borrower or its Affiliates in
applying for the Loan is correct and complete in all material respects, and
there are no omissions therefrom that result in any such information being
incomplete, incorrect, or misleading in any material adverse respect as of the
date thereof.

        2.22 USE OF PROCEEDS; MARGIN STOCK - The proceeds of each Advance will
be used by Borrower solely for the purposes specified in this Agreement. None of
such proceeds will be used for the purpose of purchasing or carrying any "margin
stock" as defined in Regulation U or G of the Board of Governors of the Federal
Reserve System (12 C.F.R. Part 221 and 207), or for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry a
margin stock or for any other purpose which might constitute this transaction a
"purpose credit" within the meaning of such Regulation U or G. Borrower is not
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock. Neither Borrower nor any Person acting on behalf of
Borrower has taken or will take any action which might cause any Loan Documents
to violate Regulation U or G or any other regulations of the Board of Governors
of the Federal Reserve System or to violate Section 7 of the Securities Exchange
Act of 1934, or any rule or regulation thereunder, in each case as now in effect
or as the same may hereafter be in effect. Borrower and Borrower's Affiliates
own no "margin stock".

        2.23 GOVERNMENTAL REGULATION - Borrower is not subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Investment Company Act of 1940, the Interstate Commerce Act (as any of the
preceding have been amended), or any other Law which regulates the incurring by
Borrower of indebtedness, including but not limited to laws relating to common
or contract carriers or the sale of electricity, gas, steam, water, or other
public utility services.

        2.24 NO CONDEMNATION - No condemnation proceedings are pending, or to
the best of Borrower's knowledge, threatened against the Property.

        2.25 INSOLVENCY PROCEEDING - Neither Borrower nor Guarantor (i) is the
subject of any bankruptcy, reorganization or insolvency proceedings or any
assignment for the benefit of creditors; or (ii) has been the subject of any
bankruptcy, reorganization or insolvency proceedings or any assignment for the
benefit of creditors during the past six (6) years.

        2.26 BUILDING PERMITS - All building permits, by every name, required
for the Property have been obtained.

                                       11
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                                   ARTICLE III
                                   -----------
                                    THE LOAN
                                    --------

        3.1 THE LOAN - The Loan will be in an amount not exceeding the principal
sum of Three Million and No/100 Dollars ($3,000,000.00)

        3.2 LOAN CLOSING

            3.2.1 The Loan will close if, and only if, on or before July 7,2006,
Borrower shall, at its sole expense, deposit or cause to be deposited with
Lender, the following in form and substance satisfactory to Lender, in Lender's
sole opinion and judgment, duly executed by the party to be charged and
acknowledged where required:

                (a)     The Loan Fee;

                (b)     The Note;

                (c)     The Deed of Trust;

                (d)     The Continuing Guaranty;

                (e)     The Title Policy or evidence of a commitment therefor.
The Title Policy shall show no blanket exceptions for anything a survey would
show;

                (f)     If required by Lender, the survey or surveys prepared by
a licensed surveyor satisfactory to Lender, certified to the Title Company and
to Lender and its successors, nominees, and assigns, and showing all easements.
The survey shall be conducted in compliance with ALTA standards as applied in
California and shall be certified to the Title Company, Lender, and Borrower in
form and content acceptable to Lender;

                (g)     One or more Financing Statements;

                (h)     If required by Lender, UCC search certificates showing
the Financing Statements to be subject only to such prior filings as are
acceptable to Lender, in its sole opinion and judgment;

                (i)     True and correct copies of: Borrower's and Guarantor's
Organizational Documents, certificate(s) of fictitious business name, and
financial statements, all of which documents must be first reviewed and approved
by Lender, its counsel, or both;

                (j)     Such resolutions or other authorizations as Lender shall
require of Borrower, Guarantor and any Person holding an interest in Borrower or
Guarantor, authorizing the Loan or such other matters as Lender shall require;

                                       12
<PAGE>


                (k)     If applicable, a Tenant Estoppel and SNDA from all
existing Major Tenants (as defined in subsection 4.14(b) below) and any other
tenants on the Property as required by Lender;

                (l)     The Environmental Indemnity;

                (m)     The Agreement to Furnish Insurance;

                (n)     The Hazard Insurance Disclosure;

                (o)     Review and approval of all current leases, including,
without limitation, executed copies of the Approved Leases;

                (p)     The Appraisal;

                (q)     A Phase I, and, if indicated, a Phase II environmental
survey, by a qualified environmental engineer, indicating an absence of
environmental concerns in regard to the Property, satisfactory in all respects
to Lender, in Lender's sole opinion and judgment;

                (r)     If required by Lender, verification and approval of (A)
all plans and specifications for the Property and (B) all permits, approvals and
authorizations required to operate and use the Property;

                (s)     Lender and Borrower shall have created and set up
necessary accounts for impounding property taxes, as determined by Lender in its
sole opinion and judgment;

                (t)     Review and approval of Borrower's Financial Statements
and tax returns satisfactory to Lender;

                (u)     Review and approval of Guarantor's Financial Statements
and tax returns satisfactory to Lender;

                (v)     If required by Lender, property inspection prepared by
an inspection company approved by Lender;

                (w)     If required by Lender, a certificate of occupancy (or
equivalent) and/or certificate of completion (or equivalent) for the Property;

                (x)     Such soils and/or geology reports as Lender may require,
which reports shall be satisfactory in all respects to Lender, in its sole and
absolute discretion, prepared by such geologists, engineers and/or other
consultants as are approved by Lender;

                (y)     Such management, license, partnership and other
significant agreements, construction contracts, all engineering plans,
consultant reports, sales contracts, reciprocal easements, covenants, conditions
and restrictions, permits, licenses and operating agreements as Lender may
reasonably request; and

                                       13
<PAGE>

                (z)     Such additional assignments, agreements, certificates,
reports, approvals, instruments, documents, financing statements, consents, and
opinions as Lender may reasonably request, including, but not limited to any
zoning variances, conditional use permits, development agreements or other land
use requirements Borrower shall be required to obtain in connection with the
operation of the Property and any and all subordination agreements and tenant
estoppel certificates as Lender, in its reasonable discretion, shall require
Borrower to obtain from tenants of the Property, if applicable.

        3.3 LOAN PURPOSE - The Loan Proceeds disbursed shall be used by Borrower
solely for (i) (A) refinancing Borrower's existing indebtedness secured by the
Property, and (B) financing Borrower's working capital, (ii) paying, at Loan
Closing, the Loan Fee and all other Loan Closing Costs, and (iii) paying, at or
after Loan Closing, such fees, costs and other amounts as Lender shall, in
Lender's sole and absolute discretion, approve in writing, but only to the
extent of the Loan Proceeds. Borrower shall be responsible for paying any of the
foregoing from its own funds in the event the Loan Proceeds are insufficient to
do so.

        3.4 LOAN FEE - The Loan Fee shall be paid by Borrower to Lender at Loan
Closing from the Loan Proceeds, and will be in addition to all other fees
mentioned in this Agreement. The Loan Fee shall be deemed fully earned and
non-refundable when paid, whether or not any Loan Proceeds are disbursed at any
time.

        3.5 LOAN TERM - The term of the Loan will commence on the date of Loan
Closing and the Loan will mature upon the Maturity Date, subject to acceleration
as provided in this Agreement and the other Loan Documents.

        3.6 INTEREST RATE - The interest rate will be as set forth in the Note.

        3.7 REPAYMENT - In addition to other provisions set forth herein,
repayment of the Loan will be required as follows:

                3.7.1 Interest and principal payments under the Loan shall be
due and payable to Lender pursuant to the provisions of the Note.

                3.7.2 Borrower hereby authorizes Lender, if and to the extent
any payment of principal or interest or sum otherwise due hereunder is not
promptly made pursuant to the Note, and to the extent of any obligation of
Borrower to Lender under this Agreement or any other agreement, to charge
against any account of Borrower with Lender an amount equal to the principal and
accrued interest from time to time due and payable to Lender under the Note or
otherwise.

                3.7.3 All payments hereunder or under the Note shall be made by
Borrower without any offset or deduction for or on account of any present or
future taxes,

                                       14
<PAGE>


imposts or duties, of whatever nature, imposed or levied by or on behalf of any
Governmental Agency. If at any time, whether by reason of any present or future
Law or other requirement, Borrower shall be compelled by such Law or other
requirement to deduct or withhold such taxes, imposts or duties, Borrower shall
pay such additional amounts to Lender as may be necessary such that every net
payment under this Agreement and the Note on which Borrower is obligated, after
such deduction or withholding, will not be less than the amount required
hereunder or thereunder.

                3.7.4 Whenever any payment to be made under this Agreement and
the Note shall be due on a day other than a Business Day of Lender, such
payment may be made on the next succeeding Business Day, and such extension of
time shall in such cases be included in the computation of payment of interest
hereunder and under the Note.

        3.8 DEPOSIT ACCOUNT - If required by Lender, Borrower hereby grants,
assigns, pledges and hypothecates to Lender all of Borrower's right, title and
interest in and to all deposit accounts maintained by Borrower with Lender, as
security for each and all of the obligations of Borrower to Lender under the
Loan Documents.

        3.9 NO AUTOMATIC SET-OFF - The existence of any sum or sums being on
deposit with Lender shall in no way constitute a set-off against or be deemed to
compensate the obligations of the Loan or any payment or performance due under
the Loan Documents or this Agreement, unless and until Lender, by affirmative
action, shall so apply said accounts or any portion thereof, and then only to
the extent thereof as so designated by Lender.

        3.10 RELIANCE BY LENDER AND ACQUITTANCE - Lender may conclusively assume
that the statements, facts, information, and representations contained herein
and/or in any affidavits, orders, receipts, or other written instrument(s) that
are filed with Lender or exhibited to it, are true and correct, and Lender may
rely thereon without any investigation or inquiry, and any payment made by
Lender in reliance thereon shall be a complete release in its favor for all sums
so paid.

                                   ARTICLE IV
                                   ----------
                              BORROWER'S COVENANTS
                              --------------------

        4.1 INSURANCE - Borrower shall obtain and at all times maintain
property/casualty and liability insurance in amount, form and issued by a
company or companies reasonably satisfactory to Lender, as required under the
Deed of Trust and/or the Agreement to Furnish Insurance.

        4.2 RIGHT OF ENTRY - Subject to the terms of the Deed of Trust, Lender
and Lender's employees or agents shall have the right at all times to enter upon
the Property for whatever purpose Lender deems appropriate, including, without
limitation, inspection of the premises and the posting of such notices and other
written or printed material thereon as Lender may deem appropriate or desirable.

                                       15
<PAGE>


        4.3 PRESERVE ITS EXISTENCE - Borrower, if other than a natural person,
will, so long as Borrower remains obligated on the Loan, do all things necessary
to preserve and keep in full force and effect its organizational status and will
comply with all Laws, orders and decrees of any Governmental Agency or court
applicable to Borrower or to the Property.

        4.4 LENDER MAY EXAMINE BOOKS AND RECORDS - Lender shall have the right,
from time to time, acting by and through its employees or agents, to examine the
books, records, and accounting data of Borrower, and to make extracts therefrom
or copies thereof. Borrower shall promptly make such books, records, and
accounting data available to Lender, as stated above, upon written request, and
upon like request shall promptly advise Lender, in writing, of the location of
such books, records, and accounting data.

        4.5 PAYMENT OF TAXES - Except to the extent Lender pays property taxes
with respect to the Property pursuant to Section 2 of the Deed of Trust,
Borrower shall pay and discharge all taxes, assessments, and governmental
charges or levies imposed upon Borrower or upon its income or profits, or upon
any properties belonging to it prior to the date on which penalties attach
thereto, and all lawful claims which, if unpaid, might become a lien or charge
of a material nature upon any of its properties; PROVIDED, THAT Borrower shall
not be required to pay any such tax, assessment, charge, levy or claim which is
being contested in good faith and by proper proceedings if it maintains adequate
reserves with respect thereto.

        4.6 COMPLY WITH APPLICABLE LAWS - Borrower shall comply with all
applicable restrictive covenants, zoning and subdivision ordinances and building
codes, all health and environmental Laws and all other applicable Laws,
directions, orders and notices of violations issued by any Governmental Agency
relating to or affecting the premises or the business or activity being
conducted thereon whether by Borrower or by any occupant thereof, including,
without limitation, any and all Laws relating to hazardous or toxic waste or
waste products or hazardous substances. Further, Borrower shall indemnify and
hold Lender and the Trustee under the Deed of Trust harmless from the failure by
Borrower to comply with such Laws to the full extent provided for herein.

        4.7 MAINTENANCE OF PROPERTIES AND PRESERVE EXISTENCE - Borrower shall
maintain and preserve, or cause to be maintained and preserved, all of its
properties, necessary or useful in the proper conduct of its business, including
such as may be under lease, in good working order and condition, ordinary wear
and tear excepted. Borrower, so long as Borrower remains obligated on the Loan,
shall do all things necessary to preserve and keep in full force and effect
Borrower's organizational status, and will comply with all Laws, orders and
decrees of any Governmental Agency or court applicable to Borrower or to the
Property.

        4.8 BOOKS AND RECORDS; AUDIT AND EXAMINATION - Borrower shall keep and
maintain all books and records in original form, as shall be required and as
shall otherwise be appropriate, in Lender's opinion and judgment, pertaining to
the performance by Borrower of its covenants and other obligations hereunder,
and otherwise

                                       16
<PAGE>

pertaining to its operations and activities. Borrower shall at all times permit
Lender to review, audit and examine all such books and records, either directly
or through one or more auditors designated by Lender, including independent
contractors.

        4.9 REPORTING REQUIREMENTS - So long as Borrower shall have any
obligation to Lender under this Agreement and/or the other Loan Documents,
Borrower shall prepare, or cause to be prepared, and deliver, or cause to be
delivered, to Lender the following Financial Statements and reports:

                (a)     As soon as practicable and in any event within five (5)
days after Borrower knows or should reasonably have known, of the commencement
of any legal action against it, except actions seeking money judgments that are
fully insured or bonded, a report of the commencement of such action containing
a statement signed by an authorized signatory of Borrower setting forth details
of such legal action and any action Borrower proposes to take with respect
thereto;

                (b)     Within five (5) days of the occurrence of any Event of
Default or event which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default, a report regarding such Event of Default
or event setting forth details and describing any action which Borrower proposes
to take with respect thereto, signed by Borrower;

                (c)     Any change in the name of Borrower or use of any trade
names or trade styles not presently used;

                (d)     As soon as possible, and in any event no later than
sixty (60) days following June 30 and December 31 of each calendar year, and
ninety (90) days following the end of each calendar year, during which the Loan
has not been fully repaid and performed, and discharged, during the term of this
Agreement, Borrower shall furnish to Lender semi-annual and annual profit and
loss statement, operating statement and income and expense statements,
respectively, presenting the financial condition and results of operations of
the Property for the six (6) month and twelve (12) month period, as applicable,
covered thereby;

                (e)     Additionally, Borrower shall furnish to Lender, and
cause Guarantor to furnish to Lender, copies of all signed income tax returns of
Borrower and Guarantor within thirty (30) days after they are filed with the
relevant taxing authorities;

                (f)     [Intentionally omitted];

                (g)     Promptly upon receipt thereof, one (1) copy of any other
report submitted to Borrower by independent accountants in connection with any
annual, interim or special audit made by them of the books of Borrower;

                (h)     Within ten (10) days of (i) any contact from any
Governmental Agency concerning any environmental protection Laws, including, but
not limited to, any notice of any proceeding or inquiry with respect to the
presence of any hazardous waste, toxic substances or hazardous materials on the
Property or the

                                       17
<PAGE>

migration thereof from or to other property, (ii) any and all claims made or
threatened by any third Person against or relating to the Property concerning
any loss or injury resulting from toxic substances, hazardous waste, or
hazardous materials, or (iii) Borrower's discovery of any occurrence or
condition on any property adjoining or in the vicinity of the Property that
could cause the Property, or any part thereof, to be subject to any restrictions
on the ownership, occupancy, transferability, or loss of the Property under any
Law, Borrower shall deliver to Lender a report regarding such contact and
setting forth in detail and describing any action which Borrower proposes to
take with respect thereto, signed by Borrower;

                (i)     Within five (5) Business Days of becoming aware of any
developments or other information which may materially and adversely affect
Borrower's Property or Borrower's financial condition or Borrower's ability to
perform this Agreement or the other Loan Documents, telephonic or written notice
(delivered via facsimile) specifying the nature of such development or
information and such anticipated effect, which shall be promptly confirmed in
writing; and

                (j)     Financial Statements of Borrower or Guarantor and such
other information respecting the business, properties or the condition or
operations, financial or otherwise, of Borrower as Lender may from time to time
request.

        4.10 LIENS - Borrower shall not create, incur, assume or suffer to exist
any involuntary lien, security interest or other charge or encumbrance
(including the lien or retained security title of a conditional vendor) of any
nature upon or with respect to the Property, or involuntarily cause the
assignment or conveyance of any right to receive income, as provided in Section
4.11.

        4.11 NO TRANSFER OR FURTHER ENCUMBRANCE - Borrower shall not, without
the prior written consent of Lender:

                (a)     [Intentionally omitted];

                (b)     Transfer the Property, or any interest therein;

                (c)     Become a party to any transaction whereby the Property
or any portion thereof, or all or any substantial part of the properties, assets
or undertakings of Borrower (whether legally or beneficially owned by Borrower),
would become the property of any other Person, whether by way of transfer, sale,
conveyance, lease, sale and leaseback, or otherwise, except for the Approved
Leases; or

                (d)     Change the use of the Property.

        4.12 PROTECTION OF LIENS - Borrower shall maintain the lien of the Deed
of Trust as a first priority lien on the Property and take all actions, and
execute and deliver to Lender all documents, reasonably required by Lender from
time to time in connection therewith.

                                       18
<PAGE>

        4.13 TITLE INSURANCE ENDORSEMENTS - Borrower shall deliver to Lender, at
Borrower's sole expense and in form and content reasonably required by Lender
from time to time, such endorsements to the Title Policy as Lender shall
request.

        4.14 APPROVED LEASES; TENANT ESTOPPEL AND SNDA.

                (a)     Borrower shall only enter into Approved Leases for the
Property.

                (b)     Borrower shall, immediately upon execution by Borrower
of any new lease with respect to the Property, provide Lender with (i) a true,
correct and complete copy of such lease, as signed by all parties thereto, and
(ii) a Tenant Estoppel and SNDA from a Major Tenant. "Major Tenant" shall mean a
tenant under an Approved Lease for a portion of the Property which is at least
twenty-five percent (25%) of the rentable square feet of the Property.

                (c)     Borrower shall, immediately upon execution by Borrower
of any modification or extension of an Approved Lease, provide Lender with a
true, correct and complete copy of such modification or extension, as signed by
all parties thereto.

                (d)     In the event the Debt Service Coverage Ratio is less
than 1.00 to 1.00, as determined by Lender using the actual Net Operating Income
for the preceding reporting period, except for the exercise of an option to
extend an Approved Lease or the modification or extension of an Approved Lease
with terms that are either equal to, or more beneficial to, Borrower, Borrower
shall not, without the written consent of Lender, modify or amend any Approved
Leases. Borrower shall provide Lender with such records, documents and other
evidence as Lender, in its sole and absolute discretion, shall request from
time to time with respect to the Debt Service Coverage Ratio for the Property.

                (e)     In the event the Debt Service Coverage Ratio is less
than 1.00 to 1.00, as determined by Lender using the actual Net Operating Income
for the preceding reporting period, Borrower shall not, without the written
consent of Lender, enter into a new lease for all or any portion of the
Property. Borrower shall provide Lender with such records, documents and other
evidence as Lender, in its sole and absolute discretion, shall request from time
to time with respect to the Debt Service Coverage Ratio for the Property.

        4.15 TAXES AND OTHER DEBT - Except to the extent Lender pays property
taxes with respect to the Property pursuant to Section 2 of the Deed of Trust,
Borrower shall pay and discharge (a) before delinquency all taxes, assessments,
and governmental charges or levies imposed upon it, upon its income or profits,
or upon any property belonging to it; (b) when due all lawful claims (including,
without limitation, claims for labor, materials, and supplies), which, if
unpaid, might become a lien or encumbrance upon any of its assets or property;
and (c) all its other obligations and indebtedness when due; provided, however,
that Borrower may contest any of the foregoing in good faith and by appropriate
proceedings diligently prosecuted by Borrower as long as Borrower

                                       19
<PAGE>

has adequate reserves to pay any adverse determination or has otherwise provided
Lender evidence of a surety or bond to pay any adverse determination.

        4.16 NAME, FISCAL YEAR, ACCOUNTING METHOD, AND LINES OF BUSINESS -
Without the prior written consent of Lender, which consent shall not be
unreasonably withheld, Borrower will not change its name, fiscal year, or method
of accounting. Borrower will not directly or indirectly engage in any business
other than the business in which Borrower is engaged on the date of this
Agreement, discontinue any existing lines of business that are material to the
business or operations of Borrower, or substantially alter its method of doing
business.

        4.17 [Intentionally omitted].

        4.18 [Intentionally omitted].

        4.19 DISTRIBUTIONS - Borrower shall not make, declare or permit any
distribution to any shareholder, member, manager or partner of Borrower at any
time that an Event of Default (or event that with the giving of notice or
passage of time, or both, would constitute an Event of Default) has occurred and
is continuing or if any such distribution would cause or contribute to an Event
of Default (or event that with the giving of notice or passage of time, or both,
would constitute an Event of Default).

        4.20 TRANSACTIONS WITH AFFILIATES - Borrower will not enter into, or
cause, suffer or permit to exist, any arrangement or contract with any of its
Affiliates, including, without limitation, any management contract, unless such
transaction is on terms that are no less favorable to Borrower than those that
could have been obtained in a comparable transaction on an arms' length basis
from a Person that is not an Affiliate.

        4.21 DEPOSIT ACCOUNTS. If applicable, Borrower hereby grants, assigns,
pledges and hypothecates to Lender all of Borrower's right, title and interest
in and to all deposit accounts maintained by Borrower with Lender, as security
for each and all of the obligations of Borrower to Lender under the Loan
Documents. Borrower hereby authorizes Lender, at Lender's option, if and to the
extent any payment of principal or interest or sum otherwise due hereunder is
not promptly made pursuant to the Note, to charge against any account of
Borrower with Lender pledged or assigned as collateral for the Loan, an amount
equal to the principal and accrued interest from time to time due and payable to
Lender under the Note or otherwise.

        4.22 TERRORISM AND ANTI-MONEY LAUNDERING. Borrower warrants and agrees
as follows:


        (a) As of the date hereof and throughout the term of the Loan: (i)
Borrower; (ii) an Affiliate of Borrower; (iii) if Borrower is a privately held
entity, any Person having a beneficial interest in Borrower; or (iv) any Person
for whom Borrower is acting as agent or nominee in connection with this
transaction, is not an OFAC Prohibited Person.

                                       20
<PAGE>


        (b) To comply with applicable Anti-Money Laundering Laws and
regulations, all payments by Borrower to Lender or from Lender to Borrower will
only be made in Borrower's name and to and from a bank account of a bank based
or incorporated in or formed under the laws of the United States or a bank that
is not a "foreign shell bank" within the meaning of the U.S. Bank Secrecy Act
(31 U.S.C. ss. 5311 et seq.), as amended, and the regulations promulgated
thereunder by the U.S. Department of the Treasury, as such regulations may be
amended from time to time.

        (c) To provide Lender at any time and from time to time during the term
of the Loan with such information as Lender determines to be necessary or
appropriate to comply with the Anti-Money Laundering Laws and regulations of any
applicable jurisdiction, or to respond to requests for information concerning
the identity of Borrower its Affiliate or any Person having a beneficial
interest in Borrower, from any governmental authority, self-regulatory
organization or financial institution in connection with its anti-money
laundering compliance procedures, or to update such information.

        (d) The representations and warranties set forth in this Section 4.22
shall be deemed repeated and reaffirmed by Borrower as of each date that
Borrower makes a payment to Lender under the Note, this Agreement and the other
Loan Documents or receives any payment from Lender. Borrower agrees promptly to
notify Lender in writing should Borrower become aware of any change in the
information set forth in these representations.

        4.23 MAINTAIN MINIMUM DEBT SERVICE COVERAGE RATIO - Borrower must
maintain a Debt Service Coverage Ratio of 1.0 or greater for each calendar year
or portion thereof during the term of the Loan.

                                    ARTICLE V
                                    ---------
                                EVENTS OF DEFAULT
                                -----------------

An "Event of Default" shall be deemed to have occurred hereunder if:

        5.1 DEFAULT UNDER LOAN DOCUMENTS - Borrower shall fail to pay principal
or interest, or both, when due under the terms of the Note; or Borrower shall
fail to pay an amount owing under this Agreement or any of the other Loan
Documents when due; or Borrower shall fail to perform or observe any term,
covenant, or agreement contained in this Agreement or in any of the other Loan
Documents, which failure may be cured by the payment of money, and, in any of
such events, such failure shall continue for a period of ten (10) calendar days
from the date such payment or performance was due; or Borrower shall fail to
perform or observe any term, covenant or agreement contained in this Agreement
or in any of the other Loan Documents, which failure cannot be cured by the
payment of money and such failure shall continue for a period of thirty (30)
calendar days after Lender shall have given a written notice to Borrower
specifying such default; PROVIDED, HOWEVER, that if such default is curable but
is of a nature that such cure cannot be completed within such thirty (30) day
period, Borrower shall be allowed to cure such default if Borrower shall
promptly commence such cure after receipt of such notice and diligently
prosecutes the same to completion within sixty (60) days of the date

                                       21
<PAGE>

Lender gave written notice to Borrower specifying such default, (PROVIDED
FURTHER, HOWEVER, that in no event shall such extension operate to extend the
Maturity Date) and provided further, however, in the event that any Section of
this Article V has a specific time period for curing any default, such specific
time period shall control; or

        5.2 BREACH OF WARRANTY - Any warranties made or agreed to be made in any
of the Loan Documents or this Agreement shall be breached in any material
respect or shall prove to be false or misleading in any respect when made; or

        5.3 ACTION AGAINST BORROWER - Any suit shall be filed against Borrower,
which, if adversely determined, could substantially impair the ability of
Borrower to perform any or all of its obligations under and by virtue of this
Agreement or any of the other Loan Documents, unless Borrower's counsel
furnishes to Lender its opinion, to the satisfaction of Lender and Lender's
counsel, that, in its judgment the suit is essentially without merit; or

        5.4 LEVY UPON PROPERTY - A levy be made on the Property or any other
Collateral under any process or any lien creditor commences suit to enforce a
judgment lien against the Property or any Collateral, and such levy or action
shall not be bonded against by sureties deemed by Lender to be sufficient in its
sole opinion and judgment; or

        5.5 FILING OF LIENS AGAINST THE PROPERTY - Any lien for labor, material,
taxes or otherwise shall be filed against the Property and such lien shall not
be either satisfied or bonded over within thirty (30) days of such filing in the
full amount, to Lender's satisfaction; or

        5.6 CROSS-DEFAULT; OTHER OBLIGATIONS - Borrower commits a breach or
default in the payment or performance of any other obligation of Borrower, or
breaches any warranty or representation of Borrower, under the provisions of any
other instrument, agreement, guaranty, or document evidencing, supporting, or
securing any other loan or credit extended by Lender, or by any affiliate of
Lender, to Borrower, including, but not limited to, any and all term loans,
revolving credits, or flooring lines of credit extended from time to time to
Borrower; or

        5.7 TRANSFER OF PROPERTY - Borrower shall voluntarily or by operation of
Law, sell, transfer, convey, lease, or encumber the Property, or any interest
therein (except as otherwise permitted under the Deed of Trust or this
Agreement), or shall contract for such sale, transfer, conveyance, or
encumbrance without the prior written consent of Lender, which consent Lender
may either give or withhold in its sole and absolute opinion and judgment; or

        5.8 INSOLVENCY - (i) Borrower shall fail to pay its debts as they become
due, or shall make an assignment for the benefit of its creditors, or shall
admit, in writing, its inability to pay its debts as they become due, or (ii)
Borrower shall file a petition under any chapter of the United States Bankruptcy
Code or any similar Law, now or hereafter existing, or shall become "insolvent"
as that term is generally defined under the United States Bankruptcy Code, or
shall in any involuntary bankruptcy case commenced

                                       22
<PAGE>

against it file an answer admitting insolvency or inability to pay its debts as
they become due, or shall fail to obtain a dismissal of such case within sixty
(60) calendar days after its commencement or shall convert the case from one
chapter of the United States Bankruptcy Code to another chapter, or be the
subject of an order for relief in such bankruptcy case, or be adjudged a
bankrupt or insolvent, or shall have a custodian, trustee, or receiver appointed
for, or have any court take jurisdiction of, its property, or any part thereof,
in any voluntary or involuntary proceeding, including, but not limited to, those
for the purpose of reorganization, arrangement, dissolution, or liquidation, and
such custodian, trustee, or receiver shall not be discharged, or such
jurisdiction shall not be relinquished, vacated, or stayed within sixty (60)
calendar days after the appointment; or

        5.9 BORROWER STATUS - Without Lender's prior written consent, Borrower
shall be liquidated, dissolved, or fail to maintain its status as a going
concern or there shall be a change in the makeup of Borrower; or

        5.10 ATTACHMENT - Any proceeding shall be brought the object of which is
that any part of Lender's commitment to make the advances hereunder shall at any
time be subject or liable to attachment or levy during the course of the suit of
any creditor of Borrower unless Borrower's counsel furnishes to Lender its
opinion, to the satisfaction of Lender and Lender's counsel, that, in its
reasonable judgment and after reasonable investigation, the suit is essentially
without merit; or

        5.11 EMINENT DOMAIN - The Property shall be the subject of an eminent
domain proceeding or a taking adverse to the interest of Lender; or

        5.12 DESTRUCTION - The Property is materially damaged or destroyed by
fire or other casualty and the loss shall prove to be inadequately covered by
insurance actually collected or in the process of collection; or

        5.13 MISREPRESENTATION AND/OR NON-DISCLOSURE - Borrower has made certain
statements and disclosures in order to induce Lender to make the Loan and enter
into this Agreement, and, in the event Borrower has made material
misrepresentations or failed to disclose any material fact, Lender may treat
such misrepresentation or omission as a breach of this Agreement. Such action
shall not affect any remedies Lender may have for such misrepresentation or
non-disclosure, as such, or under its Deed of Trust for such misrepresentation
or concealment; or

        5.14 FINANCIAL CONDITION - There shall be any material adverse changes
in Borrower's or Guarantor's financial condition; or

        5.15 DEFAULT UNDER GUARANTY - Guarantor fails to perform any term,
condition or agreement contained in the Continuing Guaranty or notifies Lender
of an intention to revoke the Continuing Guaranty.


                                       23

<PAGE>



                                   ARTICLE VI
                                   ----------
                                    REMEDIES
                                    --------

        6.1 CEASE PAYMENT AND/OR ACCELERATE - Upon, or at any time after, the
occurrence of an Event of Default and during the continuance thereof, all Loan
Proceeds disbursed or advanced by Lender and all accrued and unpaid interest
thereon shall, at the option of Lender, become immediately due and payable, and
Lender shall be released from any and all obligations to Borrower under the
terms of this Agreement.

        6.2 ENFORCEMENT OF RIGHTS - Upon, or at any time after the occurrence of
an Event of Default and during the continuance thereof, Lender may enforce any
and all rights and remedies under the Loan Documents, the Deed of Trust and all
other documents delivered in connection therewith and against any or all
Collateral and may pursue all rights and remedies available at Law or in equity.

        6.3 COLLATERAL - Upon, or at any time after the occurrence of an Event
of Default and during the continuance thereof, Lender may, at its option,
without notice to Borrower or any Affiliate of Borrower or without regard to the
adequacy of the Collateral for the payment of the Loan, appoint one or more
receivers of the Collateral, and Borrower hereby irrevocably consents to such
appointment, with such receivers having all the usual powers and duties of
receivers in similar cases, including the full power to maintain, sell, dispose
and otherwise operate the Collateral upon such terms that may be approved by a
court of competent jurisdiction.

        6.4 RIGHTS AND REMEDIES NON-EXCLUSIVE - In addition to the specific
rights and remedies hereinabove mentioned, Lender shall have the right to avail
itself of any other rights or remedies to which it may be entitled under any
then existing Laws including, but not limited to, the right to realize upon any
or all of its security, and to do so in any order. Furthermore, the rights and
remedies set forth above are not exclusive, and Lender may avail itself of any
individual right or remedy set forth in this Agreement, or available under such
Laws, without utilizing any other right or remedy.

                                   ARTICLE VII
                                   -----------
                      GENERAL CONDITIONS AND MISCELLANEOUS
                      ------------------------------------

        7.1 NONLIABILITY OF LENDER - Borrower acknowledges and agrees that by
accepting or approving anything required to be observed, performed, fulfilled,
or given to Lender pursuant to the Loan Documents, including any certificate,
statement of profit and loss, or other financial statement, survey, appraisal or
insurance policy, Lender shall not be deemed to have warranted or represented
the sufficiency, legality, effectiveness or legal effect of the same, or of any
term, provision, or condition thereof, and such acceptance or approval thereof
shall not be or constitute any warranty or representation to anyone with respect
thereto by Lender.

        7.2 NO THIRD PARTIES BENEFITTED - This Agreement is made for the purpose
of defining and setting forth certain obligations, rights, and duties of
Borrower and Lender in connection with the Loan and shall be deemed a supplement
to the Note

                                       24
<PAGE>

and the Loan Documents, and shall not be construed as a modification of the Note
or the Loan Documents, except as provided herein. It is made for the sole
protection of Borrower and Lender, and Lender's successors and assigns. No other
Person shall have any rights of any nature hereunder or by reason hereof or the
right to rely hereon. In the event of a conflict between this Agreement and the
Note, the provisions of the Note shall control. In the event of a conflict
between this Agreement and the Deed of Trust, this Agreement shall control.

        7.3 INDEMNITY BY BORROWER - Borrower hereby indemnifies and agrees to
hold Lender and its directors, officers, agents, and employees (individually and
collectively, the "Indemnitee(s)") harmless from and against:

                7.3.1 Any and all claims, demands, actions, or causes of action
that are asserted against any Indemnitee by any Person if the claim, demand,
action, or cause of action, directly or indirectly, relates to a claim, demand,
action, or cause of action that the Person has or asserts against Borrower; and

                7.3.2 Any and all liabilities, losses, costs, or expenses
(including court costs and attorneys' fees) that any Indemnitee suffers or
incurs as a result of the assertion of any claim, demand, action, or cause of
action specified in this Section 7.3.

        7.4 CHANGE IN LAWS - In the event of the enactment, after the date of
this Agreement, of any Laws: (a) deducting from the value of property for the
purpose of taxation any lien or security interest thereon; (b) imposing upon
Lender the payment of the whole or any part of the taxes or assessments or
charges or liens herein required to be paid by Borrower; (c) changing in any way
the Laws relating to the taxation of deeds of trust or mortgages or security
agreements, or debts secured by deeds of trust or mortgages or security
agreements, or the interest of the mortgagee or secured party in the property
covered thereby; or (d) changing the manner of collection of such taxes; then,
to the extent any of the foregoing may affect the Deed of Trust or the
indebtedness secured thereby or Lender, then, and in any such event, Borrower,
upon demand by Lender, shall pay such taxes, assessments, charges, or liens, or
reimburse Lender therefor. If Borrower shall be prohibited from paying such tax
or from reimbursing Lender for the amount thereof, Borrower shall execute a
modification to the Loan Documents and the Note, which modification shall
increase the interest rate payable pursuant to the Note so as to permit Lender
to maintain its yield as if such tax had not been imposed. If Borrower shall be
prohibited from executing the above-referenced modifications, Lender may, in
Lender's sole discretion, declare the principal of all amounts disbursed and
owing under the Note, this Agreement, and the other Loan Documents (including
all obligations secured by the Loan Documents) and all other indebtedness of
Borrower to Lender, together with interest thereon, to be forthwith due and
payable, regardless of any other specified maturity or due date.

        7.5 POWER OF ATTORNEY - Borrower does hereby irrevocably appoint,
designate, empower, and authorize Lender, as Borrower's agent, under power of
attorney, coupled with an interest, to sign and file for record any financing
statements, notices of

                                       25
<PAGE>

completion, notices of cessation of labor, or any other notice or written
document that it may deem necessary to file or record to protect Lender's
interests.

        7.6 NONRESPONSIBILITY - Lender shall in no way be liable for any acts or
omissions of Borrower or Borrower's agents or employees.

        7.7 TIME IS OF THE ESSENCE - Time is of the essence of this Agreement
and of each and every provision hereof. The waiver by Lender of any breach or
breaches hereof shall not be deemed, nor shall the same constitute, a waiver of
any subsequent breach or breaches.

        7.8 BINDING EFFECT; ASSIGNMENT - This Agreement shall be binding upon
and inure to the benefit of Borrower and Lender and their respective successors
and assigns, except that Borrower may not assign its rights hereunder or any
interest herein without the prior written consent of Lender. Lender shall have
the absolute right at any time to assign, sell, transfer or otherwise dispose
of, in whole or in part, its rights under this Agreement and to grant
participations and syndications in the Loan, in whole or in part, to others
without consent of Borrower or Guarantor, but all waivers or abridgements of
Borrower's obligations that may be granted from time to time by Lender shall be
binding upon such assignees or participants. Borrower shall, promptly upon
demand, provide Lender or any such purchaser or participant, one or more written
statements confirming Borrower's indebtedness to Lender and all obligations in
connection with the Loan, including the existence of any default thereunder.

        7.9 EXECUTION IN COUNTERPARTS - This Agreement and any other Loan
Documents, except the Note and the Deed of Trust, may be executed in any number
of counterparts, and any party hereto or thereto may execute any counterpart,
each of which, when executed and delivered, will be deemed to be an original,
and all of which counterparts of this Agreement or any other Loan Document, as
the case may be, taken together will be deemed to be but one and the same
instrument. The execution of this Agreement or any other Loan Document by any
party or parties hereto or thereto will not become effective until counterparts
hereof or thereof, as the case may be, have been executed by all the parties
hereto or thereto.

        7.10 INTEGRATION; AMENDMENTS; CONSENTS - This Agreement, together with
the documents referred to herein constitutes the entire agreement of the parties
touching upon the subject matter hereof, and supersedes any prior negotiations
or agreements on such subject matter. No amendment, modification, or supplement
of any provision of this Agreement or any of the other Loan Documents shall be
effective unless in writing, signed by Lender and Borrower; and no waiver of any
of Borrower's obligations under this Agreement or any of the other Loan
Documents or consent to any departure by Borrower therefrom shall be effective
unless in writing, signed by Lender, and then only in the specific instance and
for the specific purpose given.

        7.11 NEUTRAL INTERPRETATION - This Agreement is the product of the
negotiations between the parties, and in the interpretation and/or enforcement
hereof is not to be interpreted more strongly in favor of one party or the
other.


                                       26
<PAGE>

        7.12 COSTS, EXPENSES, AND TAXES - Borrower shall pay to Lender, on
demand:

                7.12.1 Attorneys' fees and out-of-pocket expenses incurred by
Lender in connection with the negotiation, preparation, execution, delivery, and
administration of this Agreement and any other Loan Document and any matter
related thereto, including, but not limited to, the appraisal of the Property;

                7.12.2 The costs and expenses of Lender in connection with the
enforcement of this Agreement and any other Loan Document and any matter related
thereto, including the reasonable fees and out-of-pocket expenses of any legal
counsel, independent public accountants, and other outside experts retained by
Lender and including all costs and expenses of enforcing any judgment or
prosecuting any appeal of any judgment, order or award arising out of or in any
way related to the Loan, this Agreement, or the Loan Documents; and

                7.12.3 All costs, expenses, fees, premiums, and other charges
relating to or arising from the Loan Documents or any transactions contemplated
thereby or the compliance with any of the terms and conditions thereof,
including, but not limited to, recording fees, filing fees, credit report fees,
release or reconveyance fees, title insurance premiums, and the cost of realty
tax service for the term of the Loan.

                Except as otherwise provided in the Environmental Indemnity, all
sums paid or expended by Lender under the terms of this Agreement shall be
considered to be, and shall be, a part of the Loan. All such sums, together with
all amounts to be paid by Borrower pursuant to this Agreement, shall bear
interest from the date of expenditure at the rate provided in the Note, shall be
secured by the Loan Documents, and shall be immediately due and payable by
Borrower upon demand.

        7.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES - All representations
and warranties of Borrower contained herein or in any and all other Loan
Documents shall survive the making of the Loan and the execution and delivery of
the Note, and are material and have been or will be relied upon by Lender,
notwithstanding any investigation made by Lender or on behalf of Lender. For the
purpose of this Agreement, all statements contained in any certificate,
agreement, financial statement, appraisal or other writing delivered by or on
behalf of Borrower pursuant hereto or to any other Loan Document or in
connection with the transactions contemplated hereby or thereby shall be deemed
to be representations and warranties of Borrower contained herein or in the
other Loan Documents, as the case may be.

        7.14 NOTICES - Except as provided in the Deed of Trust, all notices,
requests, demands, directions, and other communications provided for hereunder
and under any other Loan Document (a "Notice") must be in writing and must be
mailed, delivered, or sent by facsimile transmission to the appropriate party at
its respective address set forth below or, as to any party, at any other address
as may be designated by it in a written notice sent to the other parties in
accordance with this Section 7.14. Any notice given by facsimile transmission
must be confirmed within forty-eight (48) hours by letter mailed


                                       27
<PAGE>

or delivered to the appropriate party at its respective address. If any notice
is given by mail it will be effective three (3) calendar days after being
deposited in the mails with first-class or airmail postage prepaid; if given by
facsimile transmission, when sent; or if given by personal delivery, when
delivered.

        7.15 FURTHER ASSURANCES - Borrower shall, at its sole expense and
without expense to Lender, do, execute, and deliver such further acts and
documents as Lender from time to time may reasonably require for the purpose of
assuring and confirming unto Lender the rights hereby created or intended, now
or hereafter so to be, or for carrying out the intention or facilitating the
performance of the terms of any Loan Document, or for assuring the validity of
any security interest.

        7.16 GOVERNING LAW - The Loan shall be deemed to have been made in
California, and the Loan Documents shall be governed by and construed and
enforced in accordance with the laws of the State of California. Without
limiting the right of Lender to bring any action or proceeding against Borrower
arising under any Loan Document in the courts of other jurisdictions, Borrower
hereby irrevocably submits to the jurisdiction of the State of California for
any action, suit or proceeding brought against Borrower under or in connection
with any of the Loan Documents, and hereby irrevocably waives, to the fullest
extent it may effectively do so, the defense of forum non conveniens.

        7.17 SEVERABILITY OF PROVISIONS - Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid shall be inoperative,
unenforceable, or invalid without affecting the remaining provisions, and to
this end the provisions of all Loan Documents are declared to be severable.

        7.18 JOINT AND SEVERAL OBLIGATIONS - If this Agreement is executed by
more than one Person as Borrower, the obligations of each of such Persons
hereunder shall be joint and several obligations.

        7.19 CONSTRUCTION - Whenever the context of this Agreement requires, the
singular shall include the plural and the masculine gender shall include the
feminine and/or neuter.

        7.20 HEADINGS - Article and section headings in this Agreement are
included for convenience of reference only and are not part of this Agreement
for any other purpose.

        7.21 AGENCY - Nothing in this Agreement shall be construed to constitute
the creation of a partnership or joint venture between Lender and Borrower.
Lender is not an agent or representative of Borrower.

        7.22 JURY TRIAL WAIVER - IN ANY ACTION BROUGHT BY LENDER, BORROWER OR
ANY THIRD PARTY ARISING UNDER THIS AGREEMENT, THE NOTE, THE DEED OF TRUST, THE
ENVIRONMENTAL INDEMNITY, THE CONTINUING GUARANTY OR ANY OF THE OTHER LOAN
DOCUMENTS, OR ANY DOCUMENT OR INSTRUMENT EXECUTED IN CONNECTION THEREWITH,
INCLUDING, WITHOUT LIMITATION, ANY ACTION BASED


                                       28
<PAGE>

UPON FRAUD, NEGLIGENCE, BREACH OF CONTRACT, WASTE, INTENTIONAL TORT OR NEGLIGENT
TORT, BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AND AGREES THAT SUCH
ACTION SHALL BE TRIED BY THE COURT ONLY. BORROWER FURTHER AGREES TO EXECUTE AND
TO FILE WITH ANY COURT IN WHICH ANY SUCH ACTION IS COMMENCED, ANY DOCUMENTS OR
INSTRUMENTS NECESSARY TO EVIDENCE OR TO EFFECTUATE THIS WAIVER OF TRIAL BY JURY

        Borrower has initialed this Section 7.22 to further indicate its
awareness and acceptance of each and every provision hereof.

         -----------------------
         Borrower's Initials





                            [SIGNATURE PAGE FOLLOWS]

                                       29
<PAGE>




        IN WITNESS WHEREOF, Borrower and Lender have hereunto caused this
Agreement to be executed as of the date first above written.

LENDER:

GRAND PACIFIC FINANCING CORPORATION,
a California corporation


By:
    -------------------------------------------------
Name:
      -----------------------------------------------
Its:
     ------------------------------------------------


Address:

1255 Corporate Center Drive, Suite PH10
Monterey Park, California 91754



BORROWER:

MENDOCINO BREWING COMPANY, INC.,
a California corporation

By:-----------------------------
Name: Yashpal Singh
Its: President

Address:

1601 Airport Road
Ukiah, California 95482
Attention: Yashpal Singh, President


                                       30
<PAGE>





                                   EXHIBIT "A"

                                LEGAL DESCRIPTION

Real property in the City of Ukiah, County of Mendodno, State of California,
described as follows:

All that real property situated in Lot 73 of the Yokayo Rancho, Mendocino
County, State of California, more particularly described as follows:

Commencing at a city monument marking the intersection of Commerce Drive and
Airport Park Boulevard as shown on a map flied in Map Case 2, Drawer 47, Page
24, Mendocino County Records; thence South 10(degree) 38' 41" East 3197.18 feet
to a 1/2 inch pipe with a plastic plug stamped L.S. 4873 and the point of
beginning; thence from a tangent that bears North 85(degree) 49' 29" East along
a curve to the right with a radius of 264.00 feet, a central angle of 91(degree)
43' 34" and an arc length of 422.64 feet to a 1/2 inch pipe with a plastic plug
stamped L.S. 4873; thence South 02(degree) 26' 58" East, 162.56 feet to a 1/2
Inch pipe with a plastic plug stamped L.S. 4873; thence South 69(degree) 12' 24"
West, 627.94 feet to a 1/2 inch pipe with a plastic plug stamped LS. 4873 on the
Easterly line of the Northwestern Pacific Railroad property; thence North
20(degree) 4T 36" West (Record North 21(degree) 32' 30" West) along the said
Easterly line, 582.11 feet to a 1/2 inch pipe with a plastic plug stamped L.S.
4873; thence leaving the said Easterly line from a tangent that bears North
73(degree) 13' 23" East along a curve to the right with a radius of 2334.00
feet, a central angle of 12(degree) 36' 05" and an arc length of 513.33 feet to
the point of beginning.

(Being the same parcel of land as shown as Parcel 1 on the Parcel Map of Minor
Subdivision No. 95-21 flied June 29, 1995 in the office of the recorder of said
County in Map Case 2, Drawer 61, Pages 37 and 38)

Together with a parcel of land beginning at a 1/2 Inch pipe with a plastic plug
stamped LS. 4873 at the Southwest corner of the hereinabove described parcel of
land, said point of beginning being on the Easterly line of said Northwestern
Pacific Railroad; thence along the Southerly One of said hereinabove described
parcel of land North 69(degree) 12' 24" East 310.00 feet; thence along a line
which is parallel with the Easterly line of said railroad South 20(degree) 47'
36" East 140.52 feet; thence parallel with the Southerly line of said
hereinabove described parcel of land South 69(degree) 12' 24" West 310.00 feet
to the Easterly line of said railroad; thence along said Easterly line North
20(degree) 47' 36" West 140.52 feet to the point of beginning.

                                       31
<PAGE>



                                  SCHEDULE 2.8


Borrower owed overdue taxes, including penalties and interest, on the Property
for the period from April 1999 to June 2003. On July 31, 2003, Borrower entered
into a payment plan to settle these issues. Borrower will pay all remaining
amounts owed pursuant to such settlement, prior to or during Loan Closing.

                                       32