Document:

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                                                                  EXHIBIT 10.7.1

                     HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
                           1999 EQUITY INCENTIVE PLAN

1.   PURPOSE AND DURATION

     1.1 Purposes. The purposes of the Hanover Capital Mortgage Holdings, Inc.
1999 Equity Incentive Plan are to attract, retain and motivate employees,
directors and consultants of the Company and its Affiliated Entities and to
enable them to participate in the growth of the Company by providing for or
increasing the proprietary interests of such persons in the Company.

     1.2 Effective Date. The Plan is effective as of the date of its adoption by
the Board.

     1.3 Expiration Date. The Plan shall expire one day less than ten years from
the date of the adoption of the Plan by the Board. In no event shall any Awards
be made under the Plan after such expiration date, but Awards previously granted
may extend beyond such date.

2.   DEFINITIONS

     As used in the Plan, the following capitalized words shall have the
meanings indicated:

     "Affiliated Entity" means HCP and any other corporation, partnership,
trust, limited liability company or other entity directly or indirectly
Controlling, Controlled by or under direct or indirect common Control with the
Company or HCP.

     "Award" means, individually or collectively, a grant under the Plan of
Options or Restricted Stock.

     "Award Agreement" means the written agreement setting forth the terms and
provisions applicable to an Award granted under the Plan.

     "Board" means the Board of Directors of the Company.

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

     "Committee" means the Compensation Committee of the Board, which shall
consist of two or more directors, each of whom shall be a Non-Employee Director
and an "outside director" within the meaning of Section 162(m) of the Code, or
any successor provision.

     "Company" means Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation, or any successor thereto.

     "Control" (including the terms "controlling," "controlled by," and "under
common control with") means the direct or indirect possession of the power to
direct or cause the direction of the management and policies of any corporation,
partnership, trust, limited liability
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company or other entity, whether through the ownership of voting securities, by
contract, or otherwise.

     "Director" means any individual who is a member of the Board.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     "Fair Market Value" means, with respect to a Share as of any date of
determination, in the discretion of the Committee, (i) the closing price per
Share on such date, as reported in the Wall Street Journal, on the principal
exchange for the Shares, (ii) the average closing price per Share, as reported
in the Wall Street Journal, during the twenty (20) day period that ends on such
date on the principal exchange for the Shares or (iii) if Shares are not
publicly traded, the fair market value of such Share as determined by the
Committee in accordance with a valuation methodology approved by the Committee
in good faith.

     "Grant Date" means the effective date of an Award as specified by the
Committee and set forth in the applicable Award Agreement.

     "HCP" means Hanover Capital Partners Ltd., a New York corporation, or any
successor thereto.

     "Non-Employee Director" means a "non-employee director" as that term is
defined in Rule 16b-3 promulgated under the Exchange Act, or any successor
provision.

     "Option" means an option to purchase Shares awarded to a Participant under
Section 6 of the Plan.

     "Ownership Limit" means the limitation set forth in Article Ninth of the
Company's Articles of Incorporation on the percentage of the outstanding Shares
that any person or group of persons may own, applying certain constructive
ownership rules set forth therein.

     "Participant" means an individual who has been selected by the Committee to
receive an Award under the Plan.

     "Plan" means the Hanover Capital Mortgage Holdings, Inc. 1999 Equity
Incentive Plan set forth in this document and as hereafter amended from time to
time in accordance with Section 10.

     "Restricted Period" means the period of time selected by the Committee
during which Shares of Restricted Stock are subject to forfeiture and/or
restrictions on transferability.

     "Restricted Stock" means Shares awarded to a Participant under Section 7 of
the Plan pursuant to an Award that entitles the Participant to acquire Shares
for a purchase price (which may be zero if permissible under applicable law),
subject to such conditions as the Committee may determine to be appropriate,
including a Company right during a specified period or periods to repurchase the
Shares at their original purchase price (or to require forfeiture of the Shares
if the

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purchase price was zero and if permissible under applicable law) upon the
Participant's termination of employment.

     "Securities Act" means the Securities Act of 1933, as amended.

     "Shares" means shares of the Company's common stock, par value $.01 per
share.

3.   ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Committee, which shall have the
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall consider advisable
from time to time, to interpret the provisions of the Plan and any Award and to
decide all disputes arising in connection with the Plan. The Committee's
decisions and interpretations shall be final and binding. In the event that
there is no Committee as provided in the Plan, the Plan shall be administered by
the Board, in which case all references in the Plan to the Committee shall be
references to the Board.

4.   ELIGIBILITY OF PARTICIPANTS

     The persons eligible to receive Awards under the Plan shall be the
executive officers of the Company, the executive officers of any Affiliated
Entity, and any other employees, consultants, advisers and agents of the Company
or any Affiliated Entity who, in the opinion of the Committee, are in a position
to make a significant contribution to the success of the Company. Directors,
including directors who are not employees, of the Company or any Affiliated
Entity shall be eligible to receive Awards under the Plan.

5.   STOCK AVAILABLE FOR AWARDS

     5.1 Number of Shares Under Plan. Subject to Section 8.12, Awards may be
granted under the Plan in respect of up to 550,710 of the Shares. Shares issued
under the Plan may consist in whole or in part of authorized but unissued Shares
or treasury Shares.

     5.2 Lapsed, Forfeited or Expired Awards. If any Award in respect of Shares
expires or is terminated before exercise or is forfeited for any reason, the
Shares subject to such Award, to the extent of such expiration, termination or
forfeiture, shall again be available for award under the Plan.

     5.3 Number of Shares Subject to any Award. Subject to Section 8.12, the
number of Shares in respect of which a Participant may receive an Award under
the Plan for any year shall not exceed 50,000.

6.   STOCK OPTIONS

     6.1 Grant of Options. Subject to the terms and provisions of the Plan, the
Committee may award Options and determine the number of shares to be covered by
each Option, the exercise price therefor, the term of the Option, and any other
conditions and limitations applicable to the exercise

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of the Option (including, without limitation, any vesting requirements
applicable to the Option) and the holding of any Shares acquired upon exercise
of the Option. Options granted under the Plan are not intended to be "incentive
stock options" within the meaning of Section 422(b) of the Code.

     6.2 Exercise Price. Subject to the provisions of this Section 6 and Section
10, the exercise price for each Option shall be determined by the Committee in
its sole discretion.

     6.3 Restrictions on Option Transferability and Exercisability. The
Committee may provide that an Option is transferable by the Participant and
exercisable by persons other than the Participant upon such terms and conditions
as it shall determine. In the absence of any such provision as to any Option,
however, the Option shall not be transferable by the Participant other than by
will or the laws of descent and distribution, and the Option shall be
exercisable, during the Participant's lifetime, only by the Participant.

7.   RESTRICTED STOCK

     7.1 Grant of Restricted Stock. The Committee may award Shares of Restricted
Stock and determine the purchase price, if any, therefor, the duration of the
Restricted Period, the conditions under which the Shares may be forfeited to or
repurchased by the Company and any other terms and conditions of the Awards. The
Committee may modify or waive any restrictions, terms and conditions with
respect to any Restricted Stock. Shares of Restricted Stock may be issued for
whatever consideration is determined by the Committee, subject to applicable
law.

     7.2 Transferability. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the
Committee, during the Restricted Period.

     7.3 Evidence of Award. Shares of Restricted Stock shall be evidenced in
such manner as the Committee may determine. Any certificates issued in respect
of Shares of Restricted Stock shall be registered in the name of the Participant
and, unless otherwise determined by the Committee, deposited by the Participant,
together with a stock power endorsed in blank, with the Company. At the
expiration of the Restricted Period, the Company shall deliver the certificates
and stock power to the Participant.

     7.4 Shareholder Rights. A Participant shall have all the rights of a
shareholder with respect to Restricted Stock awarded, including voting and
dividend rights, unless otherwise provided in the Award Agreement.

8.   GENERAL PROVISIONS APPLICABLE TO AWARDS

     8.1 Legal and Regulatory Matters. The grant of Awards and the delivery of
Shares shall be subject to compliance with (i) applicable federal and state laws
and regulations, (ii) if outstanding Shares are listed at the time on any stock
exchange, the listing requirements of such exchange, (iii) the Ownership Limit
and (iii) the Company's counsel's approval of all other legal matters in
connection with such Award and the issuance and delivery of the Shares. If the
sale of the Shares has not been registered under the Securities Act, the Company
may require, as a condition to

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delivery of the Shares, such representations or agreements as counsel for the
Company may consider appropriate to avoid violation of such Act and may require
that the certificates evidencing the Shares bear an appropriate legend
restricting transfer.

     8.2 Written Award Agreement. The terms and provisions of an Award shall be
set forth in an Award Agreement approved by the Committee and delivered or made
available to the Participant as soon as practicable following the Grant Date.

     8.3 Determination of Restrictions on the Award. The vesting,
exercisability, payment and other restrictions applicable to an Award (which may
include, without limitation, restrictions on transferability or provision for
mandatory resale to the Company) shall be determined by the Committee and set
forth in the applicable Award Agreement. Notwithstanding the foregoing, the
Committee may accelerate (i) the vesting or payment of any Award, (ii) the lapse
of restrictions on any Award (including an Award of Restricted Stock) and (iii)
the date on which any Option first becomes exercisable.

     8.4 Mergers, etc. Notwithstanding any other provision of the Plan, but
subject to the provisions of any particular Award Agreement, in the event of a
consolidation or merger in which the Company is not the surviving corporation or
which results in the acquisition of substantially all the Company's outstanding
shares by a single person or entity or by a group of persons and/or entities
acting in concert, or in the event of the sale or transfer of substantially all
the Company's assets (any of such events, a "Change in Control"), the Committee,
in its sole discretion (and in addition to or in lieu of any actions permitted
to be taken by the Company under the terms of any particular Award Agreement),
may (i) accelerate the exercisability, prior to the effective date of such
Change in Control, of all outstanding Options (and terminate the restrictions
applicable to any shares of Restricted Stock), (ii) arrange, if there is a
surviving or acquiring entity, subject to the consummation of such Change in
Control, to have that entity or an affiliate of that entity grant to
Participants replacement awards, (iii) cancel all outstanding Options for (or
permit the purchaser of the Company's stock or assets to deliver in exchange for
all outstanding Options) an amount equal to the value of the Shares, as
determined by the Committee in good faith, the Optionholder would have received
had the Option been exercised (to the extent then exercisable or to a greater
extent, including in full, as the Committee may determine) less the exercise
price therefor (upon any such cancellation such Options shall immediately
terminate and be of no further force or effect), (iv) repurchase (or permit the
purchaser of the Company's stock or assets to purchase) any Shares of Restricted
Stock for an amount equal to the amount that would have been paid therefor had
such Shares not been Restricted Stock, or (v) take any combination (or none) of
the foregoing actions.

     8.5 Termination of Employment. The date of a Participant's termination of
employment for any reason shall be determined in the sole discretion of the
Committee. For purposes of the Plan, the following events shall not be deemed a
termination of employment of a Participant: (i) a transfer of employment between
the Company and an Affiliated Entity or between two Affiliated Entities; or (ii)
an approved leave of absence for military service or sickness, or for any other
purpose approved by the Company, if the Participant's right to employment is
guaranteed either by a statute or by contract or under the policy pursuant to
which the leave of absence was granted or if the Committee otherwise so provides
in writing. For purposes of the Plan, employees of an Affiliated Entity shall

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be deemed to have terminated their employment on the date on which such
Affiliated Entity ceases to be an Affiliated Entity.

     8.6 Effect of Termination of Employment. The Committee shall have full
authority to determine and specify in the applicable Award Agreement the effect,
if any, that a Participant's termination of employment for any reason will have
on the vesting, exercisability, payment or lapse of restrictions applicable to
an outstanding Award.

     8.7 Grant of Awards. Each Award may be made alone, in addition to or in
relation to any other Award. The terms of each Award need not be identical, and
the Committee need not treat Participants uniformly.

     8.8 Settlement of Awards. No Shares shall be delivered pursuant to any
exercise of an Award until payment in full of the price therefor, if any, is
received by the Company. Such payment may be made in whole or in part in cash or
by certified or bank check or, to the extent permitted by the Committee at or
after the Grant Date, by delivery of a note or Shares, including Restricted
Stock, valued at their Fair Market Value on the date of delivery, or such other
lawful consideration as the Committee shall determine.

     8.9 Withholding Requirements and Arrangements. The Participant shall pay to
the Company, or make provision satisfactory to the Committee for payment of, any
taxes required by law to be withheld in respect of Awards under the Plan no
later than the date of the event creating the tax liability. In the Committee's
discretion, such tax obligations may be paid in whole or in part in Shares,
including Shares retained from the Award creating the tax obligation, valued at
Fair Market Value on the date of delivery, provided, however, that with respect
to any Participant subject to Section 16(a) of the Exchange Act, any such
retention of Shares shall be made in compliance with any applicable requirements
of Rule 16b-3(e) or any successor rule under the Exchange Act. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the Participant.

     8.10 No Effect on Employment. The Plan shall not give rise to any right on
the part of any Participant to continue in the employ of the Company or any
Affiliated Entity. The loss of existing or potential profit in Awards granted
under the Plan shall not constitute an element of damages in the event of
termination of the relationship of a Participant even if the termination is in
violation of an obligation of the Company to the Participant by contract or
otherwise.

     8.11 No Rights as Shareholder. Subject to the provisions of the Plan and
the applicable Award Agreement, no Participant shall have any rights as a
shareholder with respect to any Shares to be distributed under the Plan until he
or she becomes the holder thereof.

     8.12 Adjustments. Upon the happening of any of the following described
events, a Participant's rights with respect to Awards granted hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
Award Agreement.

         8.12.1 Stock Splits and Recapitalizations. In the event the Company
issues any of its Shares as a stock dividend upon or with respect to Shares, or
in the event Shares shall be subdivided

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or combined into a greater or smaller number of Shares, or if, upon a merger or
consolidation (except those described in Section 8.4), reorganization, split-up,
liquidation, combination, recapitalization or the like of the Company, Shares
shall be exchanged for other securities of the Company, securities of another
entity, cash or other property, each Participant upon exercising an Award (for
the purchase price to be paid under the Award) shall be entitled to purchase
such number of Shares, other securities of the Company, securities of such other
entity, cash or other property as the Participant would have received if the
Participant had been the holder of the Shares with respect to which the Award is
exercised at all times between the Grant Date of the Award and the date of its
exercise, and appropriate adjustments shall be made in the purchase price per
Share.

         8.12.2 Restricted Stock. If any person owning Restricted Stock receives
new or additional or different shares or securities ("New Securities") in
connection with a corporate transaction described in Section 8.12.1 or a stock
dividend described in Section 8.12.1 as a result of owning such Restricted
Stock, the New Securities shall be subject to all of the conditions and
restrictions applicable to the Restricted Stock with respect to which such New
Securities were issued.

         8.12.3 Fractional Shares. No fractional Shares shall be issued under
the Plan. Any fractional Shares which, but for this Section, would have been
issued shall be deemed to have been issued and immediately sold to the Company
for their Fair Market Value, and the Participant shall receive from the Company
cash in lieu of such fractional Shares.

         8.12.4 Recapitalization. The Committee may adjust the number of Shares
subject to outstanding Awards and the exercise price and the terms of
outstanding Awards to take into consideration material changes in accounting
practices or principles, extraordinary dividends, acquisitions or dispositions
of stock or property, or any other event if it is determined by the Committee
that such adjustment is appropriate to avoid distortion in the operation of the
Plan.

         8.12.5 Further Adjustment. Upon the happening of any of the events
described in Sections 8.12.1 or 8.12.4, the class and aggregate number of Shares
set forth in Section 5.1 hereof that are subject to Awards which previously have
been or subsequently may be granted under the Plan shall be appropriately
adjusted to reflect the events described in such Sections. The Committee shall
determine the specific adjustments to be made under this Section 8.12.5.

     8.13 Other Transfer Restrictions. Notwithstanding any other provision of
the Plan, in order to qualify for the exemption provided by Rule 16b-3 under the
Exchange Act, and any successor provision, (i) any Shares or other equity
security offered under the Plan to a Participant subject to Section 16 of the
Exchange Act (a "Section 16 Participant") may not be sold for six (6) months
after acquisition; and any Shares or other equity security acquired by a Section
16 Participant upon exercise of an Option may not be sold for six (6) months
after the date of grant of the Option; and (ii) any Option or other similar
right related to an equity security issued under the Plan shall not be
transferable except in accordance with the rules under Section 16 of the
Exchange Act, subject to any other applicable transfer restrictions under the
Plan or the Award Agreement. The Committee shall have no authority to take any
action if the authority to take such action, or the taking of such action, would
disqualify a transaction under the Plan from the exemption provided by Rule
16b-3 under the Act, and any successor provision.

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     8.14 Ownership Limit. Notwithstanding any other provision of the Plan, the
rights of any Participant to acquire Shares under the Plan are subject to the
Ownership Limit.

9.   AMENDMENT AND TERMINATION

     9.1 Amendment, Suspension, Termination of the Plan. The Committee may
modify, amend, suspend or terminate the Plan in whole or in part at any time;
provided, however, that no modification, amendment, suspension or termination of
the Plan shall be made without shareholder approval if such approval is
necessary to comply with any applicable tax, regulatory or stock exchange
requirement; provided, further, that such modification, amendment, suspension or
termination shall not, without a Participant's consent, affect adversely the
rights of such Participant with respect to any Award previously made.

     9.2 Amendment, Suspension, Termination of an Award. The Committee may
modify, amend or terminate any outstanding Award, including, without limitation,
substituting therefor another Award of the same or a different type and changing
the date of exercise or realization; provided, however, that the Participant's
consent to such action shall be required unless the Committee determines that
the action, taking into account any related action, would not materially and
adversely affect the Participant.

10.  NONDISCRETIONARY GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS

     On the date upon which a Non-Employee Director is first elected a member of
the Company's Board of Directors, such Non-Employee Director will receive the
grant of an Option to purchase 2,000 Shares. In addition, a Non-Employee
Director will receive a grant of an Option to purchase an additional 2,000
Shares as of the date of each subsequent meeting of the shareholders at which
such Non-Employee Director is re-elected to the Company's Board of Directors
(less the number of Shares subject to any option then granted to such
Non-Employee Director under the Company's 1997 Executive and Non-Employee
Director Stock Option Plan). The purchase price per Share of the Shares subject
to each Option granted to a Non-Employee Director shall be the Fair Market Value
on the date the Option is granted. Options granted to Non-Employee Directors
shall be fully vested and immediately exercisable. The term of each Option
granted to a Non-Employee Director pursuant to this Section 10 shall be one day
less than ten (10) years from its Grant Date, unless sooner terminated or
extended in accordance with Section 9. If a Non-Employee Director dies while
serving as a Director, such Non-Employee Director's Options shall be exercisable
by either his or her executor or administrator or, if not so exercised, by the
legatees or the distributees of his or her estate, only during the twelve (12)
months following his or her death. If a Non-Employee Director's membership on
the Board terminates for any reason other than death, such Non-Employee
Director's Options shall be exercisable only during the three (3) months
following the date of termination. Any Option, and the number and nature of
Shares subject to any such Option, held by a Non-Employee Director will be
subject to adjustment only to the extent set forth in Section 8.12 and not
pursuant to any other provision of the Plan.

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11.  LEGAL CONSTRUCTION

     11.1 Captions. The captions provided herein are included solely for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan or serve as a basis for interpretation or construction of
the Plan.

     11.2 Severability. In the event any provision of the Plan is held invalid
or illegal for any reason, the illegality or invalidity shall not affect the
remaining provisions of the Plan, and the Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.

     11.3 Governing Law. The Plan and all rights under the Plan shall be
construed in accordance with and governed by the internal laws of the State of
Maryland.

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                                    EXHIBIT B

                     HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
                           1999 EQUITY INCENTIVE PLAN

                             STOCK OPTION AGREEMENT

                           <<Firstname>> <<Lastname>>

     Hanover Capital Mortgage Holdings, Inc., a Maryland corporation (the
"Company"), hereby grants to <<Firstname>> <<Lastname>> (the "Grantee") an
option (the "Option") to purchase <<Numwords>> (<<Number>>) shares of the
Company's common stock, $.01 par value per share (the "Shares"), pursuant to the
Company's 1999 Equity Incentive Plan (the "Plan"), a copy of which is attached
hereto and is incorporated herein in its entirety by this reference. Except as
otherwise provided herein, all capitalized terms used but not defined herein
have the meanings they have in the Plan.

     The Grantee hereby accepts the Option granted subject to the terms and
provisions set forth in the Plan and the following additional terms and
provisions:

     1. The price at which Shares may be purchased pursuant to the Option is
$<<Price>> per Share, both the price and the number of Shares being subject to
adjustment only as provided in the Plan.

     2. (a) Subject to Sections 2(b) through 2(e) below, the Option may be
exercised in accordance with the following vesting schedule:

         During the first year commencing on the date of grant, the Option shall
not be exercisable to any extent. Commencing on the first day following the
first anniversary of the date of grant and until the second such anniversary,
the Option may be exercised for not more than one-third (1/3) of the Shares
subject to the Option. Commencing on the first day following the second
anniversary of the date of grant and until the third such anniversary, the
Option may be exercised for not more than two-thirds (2/3) of the Shares subject
to the Option. Commencing on the first day following the third anniversary of
the date of grant, the Option may be exercised in full.

         (b) Subject to Sections 2(c) through 2(e) below, if the employment of
the Grantee by the Company or any Affiliated Entity terminates for any reason
(and the Grantee does not continue to be employed by any member of the group
consisting of the Company and its Affiliated Entities), the Option shall be
exercisable by the Grantee only during the three (3) months following such
termination and only as to the number of Shares, if any, as to which it was
exercisable immediately prior to such termination.

         (c) Notwithstanding Section 2(b) but subject to Section 2(e), if the
employment of the Grantee by the Company or any Affiliated Entity terminates as
a result of the Grantee's death or
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permanent and total disability (as defined in Section 22(e)(3) of the Code), the
Option shall be exercisable (in the case of the Grantee's death, either by the
Grantee's executor or administrator or, if not so exercised, for the legatees or
distributees of the Grantee's estate) only during the one (1) year following
such termination. During such one (1) year period, the Option shall be
exercisable only as to the number of Shares, if any, as to which it was
exercisable immediately prior to such termination.

     (d) Notwithstanding Section 2(b), if the employment of the Grantee by the
Company or any Affiliated Entity terminates for "good cause" (and the Grantee
does not continue to be employed by any member of the group consisting of the
Company and its Affiliated Entities), the Option shall terminate immediately.
For purposes of this Agreement, "for cause" shall mean (i) the willful or
reckless failure by the Grantee to perform his or her duties under, or the
willful or reckless violation by the Grantee of, any written employment
agreement, which failure or violation shall not have been cured within the cure
period, if any, provided in such agreement, (ii) the commission by the Grantee
of an act of fraud or theft against the Company or any Affiliated Entity or
(iii) the conviction of the Grantee of, the plea by the Grantee of nolo
contendere to, any felony.

     (e) Notwithstanding any other provision of this Agreement, the Option shall
expire at the close of the day immediately preceding the tenth anniversary of
the date of grant.

WARNING: THE OPTION EXERCISE PERIOD MAY BE CUT SHORT IN THE EVENT OF A CHANGE IN
         CONTROL OF THE COMPANY. SEE SECTION 8.4 OF THE PLAN.

     3. The Option shall not be exercisable unless either (a) a registration
statement under the Securities Act of 1933, as amended, with respect to the
Option and the Shares to be issued on the exercise thereof shall have become,
and continues to be, effective, or (b) the Grantee (i) shall have represented,
warranted and agreed, in form and substance satisfactory to the Company, at the
time of exercising the Option, that he or she is acquiring the Shares to be
issued on the exercise thereof for his or her own account, for investment and
not with a view to or in connection with any distribution, (ii) shall have
agreed to restrictions on transfer in form and substance satisfactory to the
Company and (iii) shall have agreed to an endorsement which makes appropriate
reference to such representations, warranties, agreements and restrictions on
the certificate(s) representing the Shares.

     SHARES ISSUED UPON EXERCISE OF THE OPTION WILL BE SUBJECT TO ALL
RESTRICTIONS ON TRANSFER IMPOSED BY THE COMPANY'S ARTICLES OF INCORPORATION OR
BY-LAWS AND BY APPLICABLE STATE OR FEDERAL SECURITIES LAWS.

     4. The Option may be exercised, subject to such conditions as the Committee
may require in accordance with the Plan, by the delivery, by certified or
registered mail, to the Company's Treasurer at its principal place of business
in New York, New York, of a Notice of Exercise in the form attached hereto as
Exhibit A, which notice shall specify, among other things, the number of Shares
to be so purchased, and shall be accompanied by full payment for the Shares
purchased,

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together with any tax or excise due in respect of issue of such shares, in cash
or by certified or bank cashier's check.

     5. Notwithstanding anything to the contrary contained herein, no Shares
shall be issued to the Grantee pursuant to the Option until the Company and the
Grantee have made appropriate arrangements for the withholding of applicable
income taxes, if any, attributable to the exercise of the Option with respect to
such Shares or, in the sole discretion of the Company, the disposition by the
Grantee of such Shares, and the Company may require the Grantee to make a cash
payment to the Company or to provide the Company with other security in respect
of such taxes.

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     THE OPTION IS NOT TRANSFERABLE BY THE GRANTEE OTHERWISE THAN BY WILL OR THE
LAWS OF DESCENT AND DISTRIBUTION AND, DURING THE LIFETIME OF THE GRANTEE, MAY BE
EXERCISED ONLY BY THE GRANTEE.

     WITNESS the execution hereof under seal as of the 29th day of July, 1999.

                                         "GRANTEE"

                                         ----------------------------------
                                         <<Firstname>> <<Lastname>>

                                         "COMPANY"

                                         Hanover Capital Mortgage Holdings, Inc.

                                         By:
                                            --------------------------------
                                         Name:
                                              ------------------------------
                                         Title:
                                               -----------------------------

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                                    EXHIBIT A

                     HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
                           1999 EQUITY INCENTIVE PLAN

                               NOTICE OF EXERCISE

TO:  Treasurer, Hanover Capital Mortgage Holdings, Inc.

FROM: <<Firstname>> <<Lastname>>
       Optionholder's Name

     I elect to exercise my option to purchase shares of Hanover Capital
Mortgage Holdings, Inc. common stock as follows:

     Date of Option Grant: July 23, 1999

     Exercise Price: $______/share

     Number of Shares to Be Purchased: ___________

     Total Exercise Price Enclosed: $__________

Full payment, in cash or certified or bank cashier's check, for the shares I am
electing to purchase is enclosed with this notice. I understand that issuance of
the purchased shares may be conditioned on my payment of any tax or excise due
thereon and on fulfillment of requirements specified in the Stock Option
Agreement, dated as of July 23, 1999, between Hanover Capital Mortgage Holdings,
Inc. and me.

                                             -----------------------------------
                                             Optionholder's Signature

                                             -----------------------
                                             Date

Received by:

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

Date:
     --------<PAGE>   1
                            SECOND AMENDMENT OF LEASE

                  THIS AGREEMENT, made as of December 22, 1998, between FGP 90
WEST STREET, INC. ("LANDLORD"), a Delaware corporation having an office at 292
Madison Avenue, 5th Floor, New York, New York, 10017, HANOVER CAPITAL PARTNERS,
LTD. ("TENANT"), a New York corporation, having an office at 90 West Street, New
York, New York 10006.

                               W I T N E S E T H:

         WHEREAS, by Agreement of Lease dated as of May 6, 1991, Landlord's
predecessor-in-interest, Irwin Kahn, as Receiver, did demise and let unto Tenant
and Tenant did hire and take a portion of the Fifteenth (15th) Floor designated
as Room 1508 as more particularly described in the Lease (the "ORIGINAL
PREMISES") in the building (the "BUILDING") known by the street address 90 West
Street, New York, New York, which Agreement of Lease was amended by a First
Amendment of Lease (the "FIRST AMENDMENT" ) made between Landlord and Tenant and
dated as of July 1, 1996 (the Agreement of Lease, as so amended, being the
"LEASE"), which, among other things demised to Tenant certain storage space on
the Sixth (6th) Floor of the Building (such storage space, together with the
Original Premises, being the "EXISTING PREMISES"), which Lease is scheduled to
expire at noon on November 30, 2001, all terms used herein and not otherwise
defined having the meanings ascribed thereto in the Lease; and

         WHEREAS, Tenant desires to modify the Lease to extend the term of the
Lease, to substitute for the Existing Premises certain space (the "SUBSTITUTE
PREMISES") on the Twenty-Second (22nd) Floor of the Building, designated as
Suite 2210, as more particularly shown on EXHIBIT A annexed hereto and made a
part hereof, and to make certain other modifications to the Lease, and Landlord
is agreeable thereto on the terms and conditions hereinafter set forth, the
Lease, as hereby modified and amended, being the "MODIFIED LEASE."

         NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00)
paid by Tenant to Landlord and for other good and valuable consideration, the
mutual receipt and legal sufficiency of which is hereby acknowledged, the
parties agree as follows:

         1. Effective as of the date (the "EFFECTIVE DATE") of the substantial
completion of Landlord's Work (as defined in SUBPARAGRAPH 5.A hereof) and the
Common Area Upgrade Work (as defined in PARAGRAPH 10 hereof), the Lease is
amended, upon all of the terms, covenants and conditions therein (except as
otherwise modified hereby), such that the term of the Lease, unless sooner
terminated in accordance with its terms, is extended through and including noon
on the day (the "EXPIRATION DATE") which is 123 months after the last day of the
calendar month in which the Effective Date shall occur (or, if the Effective
Date shall be the first day of a calendar month, until the last day of the
calendar month which is 123 months after the Effective Date). Upon the
occurrence of the Effective Date, the parties will enter into an agreement
prepared by Landlord and

                                        1

<PAGE>   2

reasonably acceptable to Tenant confirming the Effective Date, but the failure
of either or both of the parties to enter into such an agreement shall not
impair the effectiveness of the Effective Date as set forth in this Agreement.

         2. Effective as of the date hereof, the following changes shall be
effective in the Modified Lease:

                  A. The security deposit presently being held under the Lease
shall be increased by $50,372.14, which amount Tenant shall pay to Landlord
simultaneously with the execution of this Agreement by Tenant, to $54,058.14.

                  B. Paragraph 7 (Tenant's Termination Option) of the First
Amendment is deleted in its entirety.

         3. On the Effective Date, possession of the Substitute Premises shall
be delivered to Tenant, and Tenant shall surrender possession of the Existing
Premises to Landlord in such condition as if that date were the expiration date
of the Lease.

         4. Notwithstanding anything to the contrary contained herein, if, on or
before the Effective Date there is a default or event of default or a condition
or event which, with notice or the passage of time or both, would constitute a
default or an event of default under the Lease, then, at Landlord's sole option,
the Lease shall expire as provided therein and this Agreement shall be of no
force or effect.

         5. With respect to the condition of Substitute Premises:

         A. Tenant has inspected the Substitute Premises and the Building and
agrees to take the Substitute Premises in their "as is" condition, as of the
date hereof, except that Landlord shall cause to be done the items of work
("LANDLORD'S WORK") substantially in accordance with plans and specifications
being prepared by Tenant's architect, Turner Design, which shall be subject to
Landlord's approval as provided with respect to Alterations in this lease (said
plans and specifications, upon approval by Landlord, being, collectively, the
"LANDLORD'S WORK PLANS"). Tenant shall submit said plans and specifications to
Landlord for approval not later than thirty (30) days after the date of
execution and unconditional delivery of this lease by both parties hereto. It is
expressly agreed that (i) in no event shall said plans and specifications and
materials proposed by Tenant be of a standard lower than the Building standards
as determined by Landlord, and (ii) Landlord's Work shall not include the
following items which are to be furnished and installed by Tenant at Tenant's
sole cost and expense: (a) computer cabling, cable splicing, outlets, connectors
and attachments; (b) furniture and furnishings; and (c) telephone and
communications equipment installation. Except for Landlord's Work, Landlord
shall not be required to spend any money or to do any work to prepare the
Substitute Premises for Tenant's occupancy. In all instances where Tenant is
required to supply information or authorizations with regard to Landlord's Work,
Tenant shall supply the same within three (3) business days after written
request therefor by Landlord.

                                        2

<PAGE>   3

         B. The cost of Landlord's Work shall be borne by Landlord to and
including Two Hundred Fifty-Nine Thousand Four Hundred Seventy-Nine and No/100
Dollars ($259,479.00) (the "CAP"), and if the cost shall exceed the Cap such
excess shall be reimbursed by Tenant to Landlord, as additional rent hereunder,
within ten (10) days after demand therefor. Alternatively, Landlord may require
Tenant to post the amount reasonably estimated by Landlord to constitute such
excess with Landlord prior to Landlord's Work, within ten (10) days after demand
therefor, and when the actual amount of such excess is determined, an
appropriate payment shall be made by Landlord or Tenant, as the case may be, to
the other within ten (10) days. The cost of Landlord's Work shall be inclusive
of all costs and expenses incurred by Landlord in connection therewith,
including, without limitation, architect's and engineer's fees in connection
with preparation of the Plans, insurance costs in connection with Landlord's
Work, and obtaining and maintaining all permits and other filings required in
connection with Landlord's Work. It is agreed that Landlord shall be entitled to
a fee of ten percent (10%) of the total cost of Landlord's Work (exclusive of
such fee) on account of Landlord's supervisory and administrative costs in
connection with Landlord's Work, and that such fee shall be a part of the total
cost of Landlord's Work. Landlord shall have no obligation to make any other
alterations or changes to the Substitute Premises.

         C. The Substitute Premises shall be ready for occupancy when Landlord's
Work is substantially completed. Landlord's Work shall be deemed to be
substantially completed when all major construction is completed (or when all
major construction would have been completed but for Tenant Delays as
hereinafter defined) although minor items are not substantially completed. Such
unfinished work shall include, but not be limited to, any uncompleted
construction or improvements which do not materially interfere with Tenant's use
and occupancy of the Substitute Premises. Tenant shall promptly submit to
Landlord a "punch-list" of such minor unfinished work which punch-list items,
after approval by Landlord, will be diligently completed. Upon Landlord's
request, Tenant shall periodically inspect Landlord's Work and make any
objections thereto, if called for, without delay, so as to mitigate changes,
delays and costs.

         Tenant specifically acknowledges and agrees that the cost of Landlord's
Work will increase and there will be delay in completion of Landlord's Work by
reason of the following causes ("TENANT'S DELAYS"): (i) interference by Tenant,
its employees, agents, contractors (at any level), licensees (at any level)or
invitees (all of the foregoing being, collectively, the "TENANT PARTIES") with
the performance of Landlord's Work; (ii) unreasonable delay or failure by any of
the Tenant Parties in supplying information, approving estimates or giving
authorizations; (iii) request by Tenant for any material changes or additions in
the Landlord's Work Plans originally approved, it being agreed that any change
which results in any delay to Landlord shall be deemed "material" for the
purposes of this clause; (iv) the failure or unreasonable delay of any of the
Tenant Parties to consult with Landlord to enable Landlord to prepare plans or
specifications;(v) delay or failure of any special or additional new materials
selected by Tenant; (vi) any resubmissions or revisions of the landlord's Work
Plans (without regard to any time periods granted to Tenant hereunder for making
such resubmissions or revisions); and (vii) work, materials, components and
other items specified by Tenant which are not Building standard, and/or are not
readily available to Landlord

                                       3

<PAGE>   4

or Landlord's designated contractor, or require special manufacturing,
fabrication or installation, or require additional time to obtain or install
thereby delaying the date that Landlord's Work would otherwise be substantially
completed. Landlord shall not be responsible for any Tenant Delays, and, at
Landlord's option, the substantial completion date of Landlord's Work shall be
deemed to have occurred on the date on which Landlord's Work would have been
substantially completed if not for the occurrence of any such Tenants Delays. In
addition, Tenant shall reimburse Landlord, as additional rent, for any and all
losses, costs and damages suffered by Landlord caused by any Tenant Delays.
Tenant acknowledges that it has been informed by Landlord that it is of material
significance to Landlord that the Effective Date shall occur as soon as
practicable.

         D. The taking of possession of the Substitute Premises by Tenant shall
be conclusive evidence that the Substitute Premises and the Building were both
in good and satisfactory condition at the Delivery Date. Tenant acknowledges
that Landlord has made no representations regarding the condition, operation or
expenses of the Substitute Premises or the Building, except as expressly
provided in this Agreement.

         E. Subject to the provisions of Article 3 of the Lease, all work
performed by Landlord shall, upon installation, become Landlord's property and
shall be surrendered at the expiration or sooner termination of the term of the
Lease, in good condition, reasonable wear and tear excepted.

         F. Landlord has made and makes no representation of the date on which
it will complete Landlord's Work, and Landlord shall be under no penalty or
liability to Tenant whatsoever by reason of any delay in such performance and
the Modified Lease shall not be affected thereby; except for Tenant's
termination option as expressly provided in SUBPARAGRAPH 5.I hereof. If Landlord
is delayed in its ability to give possession of the Substitute Premises to
Tenant in the condition required under this Agreement because of the holding
over or retention of possession of any tenant or other occupant, or for any
other reason, Landlord shall not be subject to any liability for failure to give
possession on said date nor shall the validity of the Lease and this Agreement
be impaired under such circumstances, and Tenant shall continue in possession of
the Existing Premises until the Substitute Premises are available for Tenant's
occupancy. The provisions of this Paragraph are intended to constitute "an
express provision to the contrary" within the meaning of Section 233-a of the
New York Real Property Law.

          G. If Landlord, in its sole discretion, shall permit Tenant to enter
into the Substitute Premises or any portion thereof prior to substantial
completion of Landlord's Work therein, for any reason, Tenant agrees that (i)
such entry shall be at Tenant's sole risk, (ii)that such entry shall not
interfere in any way with Landlord's Work to be done by Landlord, and (iii)if
Landlord notifies Tenant that such entry is interfering with or delaying
Landlord's Work or any other work being done by Landlord, Tenant shall forthwith
discontinue any further work and shall remove from the Substitute Premises and
shall cause its workmen or contractors to remove any equipment, materials or
installations which are the subject of Landlord's notice.

                                       4
<PAGE>   5

         H. If Tenant shall fail to make timely payment of any sums payable to
Landlord, whether pursuant this PARAGRAPH 5 or otherwise required under the
Modified Lease, then, in addition to all other rights and remedies afforded
Landlord in the event of such non-payment, Landlord may, without notice to
Tenant, discontinue the performance of Landlord's Work (or any items thereof)
until such time as Tenant makes payment to Landlord of all such past due sums
and provides Landlord with adequate assurance of the timely payment of all
additional sums which may or shall be payable by Tenant pursuant to this
PARAGRAPH 5. Any delay resulting from the discontinuance of Landlord's Work
pursuant to this Section shall be deemed a Tenant Delay.

         I. If Landlord's Work shall not be substantially complete within six
(6) months (subject to extension for force majeure and Tenant Delays) after the
commencement of construction thereof (it being acknowledged that such
construction cannot commence until all necessary permits have been obtained),
then, in such event, Tenant shall have the option, to be exercised by the giving
of written notice to Landlord within five (5) business days (with respect to
which time is of the essence) after the expiration of said six (6) months, to
declare that the provisions of this Agreement other than PARAGRAPH 11 hereof
ineffective, in which event the Lease shall continue in force and effect for the
remainder of the term thereof as if this Agreement had not been made. Such
option shall be Tenant's only right or remedy in the event of such a delay in
substantial completion of Landlord's Work.

         J. If Landlord's Work shall not be substantially complete within twelve
(12) months (subject to extension for Tenant Delays but not for force majeure)
after the commencement of construction thereof (it being acknowledged that such
construction cannot commence until all necessary permits have been obtained),
then, in such event, Tenant shall have the option, to be exercised by the giving
of written notice to Landlord within five (5) business days (with respect to
which time is of the essence) after the expiration of said twelve (12) months,
to declare that the provisions of this Agreement other than PARAGRAPH 11 hereof
ineffective, in which event the Lease shall continue in force and effect for the
remainder of the term thereof as if this Agreement had not been made. Such
option shall be Tenant's only right or remedy in the event of such a delay in
substantial completion of Landlord's Work.

         6. As of the Effective Date, the following changes shall be effective
in the Modified Lease:

                  A. The fixed annual rent (also referred to in the Lease as
"Basic Rent" and "Base Rent"), as that term is used in the Lease, and subject to
future increases, if any, as provided in the Modified Lease, shall be Two
Hundred Sixteen Thousand Two Hundred Thirty-Two and 50/100 Dollars
($216,232.50), payable in equal monthly installments of Eighteen Thousand
Nineteen and 38/100 Dollars ($18,019.38).

                  B. Provided Tenant is not in default under the Modified Lease,
beyond any applicable notice and cure period, then Tenant shall be entitled to
an abatement of the fixed annual rent payable under SUBPARAGRAPH 6.A for the
first three (3) months following the Effective Date.

                                       5
<PAGE>   6

If the Modified Lease shall be terminated at any time because of a default by
Tenant thereunder, then, in addition to all other amounts owed to Landlord on
account thereof, Tenant shall also be required to pay to Landlord the amount of
any abatement allowed to Tenant pursuant to this SUBPARAGRAPH 6.B.

                  C. Article 49 (Electricity) of the Original Lease is hereby
deleted in its entirety and the provision on EXHIBIT B annexed hereto and made a
part hereof is substituted therefor.

                  D. Article 50 (A) (2) of the Original Lease (as previously
modified by Subparagraph 6 (d) (i) of the First Amendment), which defines the
Base Rate for the Cost (porter wage) Increase, shall be modified so that the
"Base Rate" shall mean the Rate in effect in for the calendar year 1999, and the
term "Multiplication Factor" as defined in Article 50 (A) (3) of the Lease shall
mean 7,863.

                  E. Article 51 (A) (1) of the Original Lease (as previously
modified by Subparagraph 6 (d) (ii) of the First Amendment), which defines the
"Base Tax Year" for the purpose of determining real estate tax escalation shall
be modified so that the "Base Tax Year" shall mean the New York City real estate
tax year commencing July 1, 1998 and ending June 30, 1999, and the term "The
Percentage" as defined in Article 51 (a) (2) of the Original Lease shall be Two
and Three Hundred Thirteen Thousandths percent (2.313%).

                  F. Paragraph 8 of the First Amendment, dealing with the
Storage Space (which is being surrendered on the Effective Date along with the
remainder of the Existing Premises) shall be of no further force and effect.

                  G. The Substitute Premises shall be substituted for the
Existing Premises as the "demised premises" for the purposes of the Modified
Lease.

         7. Tenant represents and warrants that it has dealt with no broker,
finder or like agent in connection with this Agreement other than Cushman &
Wakefield, and Tenant does hereby agree to indemnify and hold Landlord harmless
of and from any and all loss, costs, damage or expense (including, without
limitation, attorneys fees and disbursements) incurred by Landlord by reason of
any claim of, or liability to, and other broker, finder or like agent who shall
claim to have dealt with Tenant in connection with this Agreement.

         8. Tenant, at its own expense, may make application for a real estate
tax abatement and/or commercial rent tax special reduction under the New York
City Commercial Revitalization Program (the "TAX ABATEMENT PROGRAM") with
respect to the Substitute Premises. Landlord shall, at no cost or expense to
Landlord, cooperate with Tenant in the preparation of such application and any
future filings which may be required to maintain such abatement throughout the
applicable benefit period. Landlord does not warrant that any such abatement or
reduction is available or will be obtained for the Substitute Premises. Landlord
shall have no liability to Tenant, and the rent set forth in the Modified Lease
will not be abated or reduced, if and to the extent that such abatement or
reduction under the Tax Abatement Program is denied, reduced, suspended, revoked
or terminated for any reason.

                                       6
<PAGE>   7

         (a) Tenant's percentage share of the taxes for the Building is deemed
to be The Percentage (as defined in PARAGRAPH 6 (E) hereof), determined by
dividing the net rentable square footage contained in the Substitute Premises by
the net rentable square footage contained in the Building.

         (b) Tenant is informed hereby that:

                  (i) an application for abatement of real property taxes should
 be timely made for the Substitute Premises;

                  (ii) the rent, including amounts payable by Tenant for real
property taxes, will accurately reflect any abatement of real property taxes;

                  (iii) in order to receive an abatement under Title 4 at least
$10 per square foot or $35 per square foot, or, if by the 60th day following the
rent commencement date Tenant employs 125 or fewer employees, then at least $5
per square foot or $35 per square foot must be spent on improvements to the
Substitute Premises and the common areas, the amount being dependent upon the
length of the lease and whether it is a new, renewal or expansion lease.

                  (iv) all abatements granted will be revoked if, during the
benefit period, real estate taxes, water or sewer charges or other lienable
charges are unpaid for more than one year, unless such delinquent amounts are
paid as provided in the relevant law.

         (c) Landlord shall be relieved from all obligations under this
Paragraph (other than to pass through to Tenant the benefit of any abatement
actually received as required by law) if Tenant shall be in default under this
lease beyond any applicable notice and grace periods. Tenant shall promptly pay
to Landlord, as additional rent hereunder, the amount of any costs incurred by
Landlord in connection with the performance of Landlord's obligations pursuant
to this Paragraph, including, without limitation, the amount of any
administrative charges or fees imposed by the governmental authority
administering the Abatement, and the cost of any attorneys' fees and expenses in
connection with the Tax Abatement Program.

         9. Provided that Tenant has not defaulted under the Lease, as amended,
and subject to the provisions of this PARAGRAPH 9, Tenant shall have the one
time only option (the "TERMINATION OPTION") to terminate the Lease, as amended,
and the term and estate granted thereby, only if exercised in strict compliance
with this Article. Tenant may, subject to the provisions of this Article,
exercise the Termination Option so as to end the term of the Modified Lease as
of the day (the "TERMINATION DATE") which is five (5) years and three (3) months
after the Effective Date. In order to exercise the Termination Option, Tenant
must do the following:

         (1) Tenant must exercise the Termination Option by the giving of
advanced written notice thereof (the "TERMINATION NOTICE") to Landlord in the
manner provided in Article 28 of the Original

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<PAGE>   8

Lease, with a copy by regular first class mail, at the address indicated above,
or at such other address as Landlord shall designate in the future by written
notice, not later than the twelve (12) months prior to the Termination Date,
time being of the essence with respect to the giving of such notice.

         (2) Tenant must deliver with the written Termination Notice a certified
check made payable to the Landlord in the agreed and liquidated amount of
$230,399.04, representing reimbursement to Landlord for the unamortized costs of
Landlord's work, commissions, legal fees and other expenses and as consideration
to Landlord for the acceptance of such early termination ("TERMINATION
PAYMENT"). The Termination Payment shall not be credited to Tenant as a payment
of Fixed Annual Rent or Additional Rent.

         In event that Tenant strictly complies with the provisions hereof, the
Modified Lease and the term and estate thereby granted (unless the same shall
have expired sooner pursuant to the provisions of the Lease, as amended, or of
the law) shall terminate on the corresponding Termination Date with the same
effect as if such date were the date hereinbefore specified as the expiration
date of the Lease, as amended. The failure by Tenant to timely make the
Termination Payment or to otherwise fail to comply with the provisions of this
Article shall, at Landlords' option, invalidate the termination of the Lease, as
amended, and, in such event, this Article shall be void and of no further force
and effect.

         10. Landlord shall upgrade the common corridors and common area
lavatory facilities of the Twenty-Second (22nd) Floor of the Building to a
standard consistent with the upgrading which Landlord has done to the common
corridors and common area lavatory facilities on the eighth (8th) floor of the
Building, and Landlord shall also install new package air conditioning units on
the Twenty-Second (22nd) Floor consistent with the Building standards for air
conditioning (the foregoing items being the "COMMON AREA UPGRADE WORK"). Tenant
acknowledges that such work may be done while Tenant is in occupancy of space on
that floor, and Tenant agrees (i) that Landlord shall have no liability to
Tenant, whether by rent abatement or otherwise, with respect thereto, and (ii)
that Tenant shall cooperate with the reasonable requests of Landlord in pursuit
of such work so that the same can be done in a safe, timely and cost-efficient
manner.

         11. Landlord and Tenant hereby each acknowledges that to its best
knowledge no defaults presently exist on behalf of the other party pursuant to
the Lease. Each of Landlord and Tenant does hereby release the other from any
and all claims which the releasing party may have against other, if any, arising
or accruing prior to the date hereof under the Lease or otherwise with respect
to the Existing Premises, other than (a) any amounts which are or may become due
with respect to fixed annual rent, escalation payments or other amounts of
additional rent under the Lease, and (b) claims by third parties for personal
injury or property damage.

         12.      RENEWAL OPTION.

         12.1. EXTENSION TERM. Subject to the provisions of PARAGRAPH 12.5,
         Tenant shall have the right to extend the term of the Modified Lease
         for one (1) additional term (the "EXTENSION

                                       8
<PAGE>   9

         TERM") of five (5) years, commencing on the day following the
         expiration of the immediately preceding term of the Modified Lease (the
         "COMMENCEMENT DATE OF THE EXTENSION TERM") provided that:

                  (a) Tenant shall give Landlord notice (the "EXTENSION NOTICE")
                  of its election to extend the Term at least twelve (12) months
                  prior to the expiration of the then existing term of the
                  Modified Lease; and

                  (b) The Modified Lease is in full force and effect and Tenant
                  is not in default under the Modified Lease as of the time of
                  the giving of the Extension Notice or the relevant
                  Commencement Date of the Extension Term, and Tenant's
                  Termination Option pursuant to Paragraph 9 of this Agreement
                  Lease has either expired or been waived by Tenant.

         12.2. FIXED ANNUAL RENT. The fixed annual rent payable by Tenant during
         the Extension Term shall be the fair market rent for the demised
         premises as determined as of the date occurring six (6) months prior to
         the Commencement Date of the Extension Term (the "DETERMINATION DATE"),
         such amount to be determined pursuant to the provisions of PARAGRAPH
         12.3, but such fixed rent shall in no event be less than the fixed rent
         in effect under the Modified Lease for the last month of the
         immediately preceding term hereof (without giving effect to any
         temporary abatement of fixed annual rent under the provisions of
         ARTICLE 9 or any other Article of the Modified Lease). Fair market rent
         shall be determined at the highest and best use of the demised premises
         regardless of whether such use is the use permitted hereunder. In
         determining the fair market rent, the provisions of ARTICLES 50 and 51
         (and any other escalation payments that may be provided for in the
         Modified Lease) shall remain in effect during any Extension Term with
         the same base periods as set forth therein, and such base periods shall
         be recognized in making such determination of fair market value.

         12.3     DETERMINATION OF FAIR MARKET RENT.

                  12.3.1. Landlord and Tenant shall endeavor to agree as to the
                  amount of the fair market rent for the demised premises
                  pursuant to the provisions of PARAGRAPH 12.2, during the
                  thirty (30) day period following a Determination Date. If
                  Landlord and Tenant cannot so agree within such thirty (30)
                  day period, then Landlord or Tenant may initiate the appraisal
                  process provided for herein by giving notice to that effect to
                  the other, and the party so initiating the appraisal process
                  (the "INITIATING PARTY") shall specify in such notice the name
                  and address of the person designated to act as an arbitrator
                  on its behalf. Within thirty (30) days after the designation
                  of such arbitrator, the other party (the "OTHER PARTY") shall
                  give notice to the Initiating Party specifying the name and
                  address of the person designated to act as an arbitrator on
                  its behalf. If the Other Party fails to notify the Initiating
                  Party of the appointment of its arbitrator within the time
                  above specified, then the appointment of the second arbitrator
                  shall be made in the same manner as hereinafter provided for
                  the

                                       9
<PAGE>   10

                  appointment of a third arbitrator in a case where the two (2)
                  arbitrators appointed hereunder and the parties are unable to
                  agree upon such appointment. The two (2) arbitrators so chosen
                  shall meet within ten (10) days after the second arbitrator is
                  appointed and if, within sixty (60) days after the second
                  arbitrator is appointed, the two (2) arbitrators shall not
                  agree, they shall together appoint a third arbitrator. In the
                  event of their being unable to agree upon such appointment
                  within eighty (80) days after the appointment of the second
                  arbitrator, the third arbitrator shall be selected by the
                  parties themselves if they can agree thereon within a further
                  period of fifteen (15) days. If the parties do not so agree,
                  then either party, on behalf of both and on notice to the
                  other, may request such appointment by the American
                  Arbitration Association (or organization successor thereto) in
                  New York City in accordance with its rules then prevailing.

                  12.3.2. Each party shall pay the fees and expenses of the
                  original arbitrator appointed by or for such party, and the
                  fees and expenses of the third arbitrator and all other
                  expenses (not including the attorneys fees, witness fees and
                  similar expenses of the parties which shall be borne
                  separately by each of the parties) of the arbitration shall be
                  borne by the parties equally.

                  12.3.3. The majority of the arbitrators shall determine the
                  fair market rent of the demised premises and render a written
                  certified report of their determination to both Landlord and
                  Tenant within sixty (60) days of the appointment of the first
                  two arbitrators or sixty (60) days from the appointment of the
                  third arbitrator if such third arbitrator is appointed
                  pursuant to this SUBPARAGRAPH 12.3. If no two (2) arbitrators
                  can agree, then the fair market rent shall be the average of
                  the two (2) closest determinations. The fair market rent, so
                  determined, shall be applied to determine the fixed rent
                  pursuant to SUBPARAGRAPH 12.2.

                  12.3.4. Each of the arbitrators selected as herein provided
                  shall have at least ten (10) years experience in the leasing
                  and renting of space for a comparable use in similar buildings
                  in the general area (neighborhood) of Manhattan, New York in
                  which the demised premises are located.

                  12.3.5. If Landlord notifies Tenant that the fixed rent for
                  the Extension Term shall be equal to the fixed rent for the
                  last year of the immediately preceding term (without regard to
                  any abatements that may have been in effect during all or any
                  part of such year), then the provisions of SUBPARAGRAPH 12.3.1
                  shall be inapplicable and have no force or effect with respect
                  to the Extension Term.

                  12.3.6. If Landlord or Tenant initiates the appraisal process
                  and, as of the Commencement Date of the Extension Term, the
                  amount of the fair market rent has not been determined, Tenant
                  shall pay fixed rent computed upon the fair market rent

                                       10
<PAGE>   11

                  determined by Landlord and when the final determination has
                  been made, an appropriate retroactive adjustment shall be made
                  if necessary.

         12.4 TERMS OF OCCUPANCY. Except as provided in PARAGRAPHS 12.1 and
         12.2, Tenant's occupancy of the demised premises during the Extension
         Term shall be on the same terms and conditions as are in effect
         immediately prior to the expiration of the immediately preceding term
         of the Modified Lease; provided, however, that Tenant shall have no
         further right to extend the Term beyond the second Extension Term. If
         Tenant exercises its right to extend the term of the Modified Lease for
         the Extension Term pursuant to this Article, the phrases "the term of
         this lease", or "the term hereof" as used in the Modified Lease, shall
         be construed to include, when practicable, the Extension Term.

         12.5 REQUIRED NOTICE. If Tenant does not timely send the Extension
         Notice pursuant to the provisions of this Article, it being expressly
         agreed that time shall be of the essence with respect to all notices to
         be given by Tenant pursuant to this Article, then this Article shall
         have no further force or effect with respect to any future Extension
         Term and the Modified Lease shall expire at the end of the then current
         term unless sooner terminated in accordance with its terms..

         12.6. CONFIRMATORY AMENDMENT. If the Modified Lease is renewed in
         accordance with the provisions of this Article, then at Landlord's
         request Tenant shall execute an instrument in form for recording
         setting forth the exercise of Tenant's right to extend the term of the
         Modified Lease, the last day of the relevant Extension Term, and the
         fixed annual rent for such Extension Term, but the failure of Tenant to
         do so shall not impair the effectiveness of such extension.

         13. As modified and amended by this Agreement all of the terms,
covenants and conditions of the Lease are hereby ratified and confirmed and
shall continue to be and remain in full force and effect throughout the
remainder of the term thereof.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.

                                    LANDLORD:

                                    FGP 90 WEST STREET, INC.

                                    By:
                                       ---------------------------

                                       11
<PAGE>   12

                                    TENANT:

                                    HANOVER CAPITAL PARTNERS, LTD.

                                    By:
                                       ----------------------------
                                       Name:
                                       Title:
                                       Federal I.D. No. 13-3508242

STATE OF NEW YORK       )
                        ) SS.:
COUNTY OF NEW YORK      )

                  On this day of _________, 1998, before me personally came
_______________, to me known, who being by me duly sworn, did depose and say
that _he resides in

that _he is the

of HANOVER CAPITAL PARTNERS, LTD., the corporation described in and which
executed the foregoing instrument as TENANT; that _he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation,
and that _he signed h name thereto by like order.

                                       --------------------------------
                                       NOTARY PUBLIC

                                       12
<PAGE>   13

                                    EXHIBIT A

                             THE SUBSTITUTE PREMISES

Note: This floor plan is annexed to and made a part of this Agreement solely to
indicate the Substitute Premises by outlining and marking. All areas,
conditions, dimensions and locations are approximate.

<PAGE>   14

                                    EXHIBIT B

                          SUBSTITUTE ELECTRICITY CLAUSE

"49.     ELECTRICITY:

         49.1     DEFINITIONS.  As used herein:

         (a) "UTILITY" shall mean the public utility, if any, providing
electricity to the Building.

         (b) "ALTERNATE SUPPLIER" means any energy services company, whether or
not affiliated with Landlord, that is permitted by federal, state or local law,
rule or regulation or by the Utility to supply electricity to the Building or
directly to Tenant, regardless of whether such Alternate Supplier generates its
own electricity at or near the Building or delivers such electricity over the
transmission and distribution system of the Utility currently or in the future
providing electricity and/or electric transmission and distribution services to
the Building.

         49.2 METHOD OF ELECTRIC SUPPLY. At the commencement of the term,
electricity shall be supplied to the demised premises as provided in SUBSECTION
49.2.1 (submetering) . However, at any time Landlord shall have the option of
having electricity supplied to the demised premises as provided in SUBSECTION
49.2.2 (rent inclusion) or SUBSECTION 49.2.3 (direct metering) upon not less
than sixty (60) days prior notice to Tenant, which notice shall state the
scheduled effective date of the conversion (the "CONVERSION DATE"). Landlord may
exercise such option more than once during the term, including, without
limitation, returning to the provision of a Section under which electricity was
previously supplied to Tenant. The cost, if any, in connection with any such
change in the method of supplying electricity to the demised premises shall be
borne by Landlord unless such change is made as a result of a change in
applicable laws, rules or regulations pertaining to the provision of electricity
(including, without limitation, any change in rate or redistribution schedules
which would adversely impact on Landlord), in which event the cost of such
conversion with respect to the demised premises shall be paid by Tenant as
additional rent within ten (10) days after demand therefor by Landlord. .

                  49.2.1 SUBMETERING. Using the method of supplying electricity
described in this SUBSECTION 49.2.1, Landlord shall furnish electricity to the
demised premises on a submetered basis and Tenant covenants and agrees to
purchase the same from Landlord, Landlord's designated agent, or an Alternate
Supplier, at charges, terms and rates set, from time to time, during the term of
this lease by Landlord, which shall not be higher than either (i) those
specified in the service classification then in effect pursuant to which
Landlord then purchased electric current from the Utility, together with a
surcharge in the amount of ten (10%) percent of such charges in order to
reimburse Landlord for its administrative expenses in connection with such
submetering, or (ii) if Landlord uses an Alternate Supplier, the per kilowatt
hour rate and other charges pursuant to which

                                       B-1

<PAGE>   15

Landlord purchases electricity from the Alternate Supplier, together with a
surcharge in the amount of ten (10%) percent of such charges in order to
reimburse Landlord for its administrative expenses in connection with such
submetering. In either event, such charges shall be increased in the same
percentage as any percentage increase in the billing to Landlord for
electricity, for the entire Building, by reason of increase in Landlord's
electric rates, charges, fuel adjustment or service classifications, or by taxes
or charges of any kind imposed thereon, or for any other such reason. Any such
percentage increase in Landlord's billing for electricity shall be computed by
the application of the average consumption (energy and demand) of electricity
for the entire Building for the twelve (12) full months immediately prior to the
rate change, other change, or any changed methods of or rules on billing for
same, on a consistent basis to the new rate and to the service classification
then in effect. If the average consumption of electricity for the entire
Building for such prior twelve (12) months cannot reasonably be applied to and
used with respect to changed methods of or rules on billing, then the percentage
increase shall be computed by the use of the average consumption (energy and
demand) for the entire Building for the first three (3) months after such
change, projected to a full twelve (12) months and that same consumption, so
projected, shall be applied to the service classification then in effect or the
rate charged by the Alternate Supplier, if any. Where more than one meter
measures the service of Tenant in the Building, the service rendered through
each meter may be computed and billed separately in accordance with the
provisions hereof. If such bills are not paid within ten (10) days, Landlord
may, without further notice, discontinue the service of electric current to the
demised premises without releasing Tenant from any liability for any damage or
loss sustained by Tenant by such discontinuance of service; provided, however,
that if Landlord shall discontinue furnishing electric service to the demised
premises pursuant to this sentence and Tenant shall pay to Landlord such
delinquent amounts, then, unless Landlord shall have terminated this lease,
Landlord shall resume providing such electrical service to the demised premises.
If at any time any submeter(s) which measure electricity to be paid by Tenant
hereunder shall not be properly functioning, or shall not yet have been
installed, then for such period Tenant shall pay for such electricity service on
a rent inclusion basis as provided in SUBSECTION 49.2.2.

                  49.2.2 RENT INCLUSION. For the purposes of SUBSECTION 49.2.2,
Landlord and Tenant agree that:

                           49.2.2.1 The term "ELECTRIC RATE" shall mean the
greater of the following, in all events including all applicable surcharges,
demand charges, energy charges, fuel adjustment charges, time of day charges,
taxes and other sums payable in respect thereof:

                           (i) The service classification pursuant to which
Landlord purchases electricity from the Utility; or

                           (ii) The service classification pursuant to which
Tenant would purchase electricity directly from the Utility; provided, however,
at no time shall the amount payable by Tenant for electricity be less than the
"Cost per Kilowatt Hour" (as defined in SUBSECTION 49.2.2.2), or

                                       B-2

<PAGE>   16

                                    (iii) The per kilowatt hour rate and other
charges pursuant to which Landlord purchases electricity from an Alternate
Supplier.

                           49.2.2.2 The term "COST PER KILOWATT HOUR" shall mean
the total cost for electricity incurred by Landlord to service the Building
during a particular time period (including all applicable surcharges, demand
charges, energy charges, fuel adjustment charges, time of day charges, taxes and
other sums payable in respect thereof) divided by the total kilowatt hours
purchased by Landlord during such period.

                           49.2.2.3 As long as Tenant is not in default under
any of the covenants of this lease, Landlord shall furnish Tenant, either
through the Utility or an Alternate Supplier with all such electric energy
reasonably required in connection with the permitted use and occupancy of the
demised premises. In addition to the fixed annual rent payable hereunder, Tenant
shall pay for the cost of such service at the initial rate per annum (the
"MINIMUM ELECTRIC CHARGE") equal to the amount then being asked for such purpose
by Landlord with respect to new leases at the Building, which payments shall be
made in monthly installments, with monthly installments of fixed annual rent, as
additional rent. At any time and from time to time, Landlord may cause a survey
to be made by an independent electrical engineer or consultant selected by
Landlord of the consumption of electric energy in the demised premises. The
survey will include a determination of the power requirements of Tenant's
equipment (including, but not limited to, any air conditioning equipment
provided by the Landlord) and of the lighting in the demised premises and a
determination of the periods of use of such air conditioning equipment and
lighting. The results of the survey will be projected with such adjustments as
may be appropriate to arrive at an estimate of the annual consumption of
electric energy in the demised premises. The estimated cost attributable to the
furnishing by Landlord of such quantity of electric energy to the demised
premises shall be determined by applying the Electric Rate to Tenant's estimated
usage, and then increasing the resulting amount by an additional ten percent
(10%) in order to reimburse Landlord for its administrative and equipment
expenses in providing such electric service. If such estimated cost shall be
greater than the Minimum Electric Charge, then the electric inclusion charge
hereunder shall be increased as of the date of such survey by the amount of such
additional cost. The determination of Landlord's consultant or engineer shall be
conclusive hereunder. Notwithstanding anything to the contrary herein, if the
cost to Landlord of furnishing electricity service shall increase because of an
increase in the Electric Rate, then Landlord may, upon written notice to Tenant,
increase the additional rent by an amount equal to the amount set forth above
multiplied by the percentage increase in the cost to Landlord without the need
of a survey therefor. The increased additional rent payable by virtue of such
notice shall commence as of the date of such increase in the rate payable by
Landlord to such Utility or Alternate Supplier. Under no circumstances shall the
electrical inclusion charge be less than the Minimum Electric Charge.

                  49.2.3 DIRECT METER. Using this method, Tenant, at its sole
cost and expense, shall obtain electricity directly from the Utility or an
Alternate Supplier designated by Landlord. The cost of such service shall be
paid by Tenant directly to such Utility or Alternate Supplier in accordance

                                       B-3
<PAGE>   17

with its billing schedule. From and after the Conversion Date, Landlord shall no
longer be obligated to furnish Tenant with electric energy; provided, however,
that if Tenant, upon being notified of the conversion to direct meter has
promptly contacted the Utility (or Alternate Supplier, as the case may be) and
taken such other actions as may be required for direct metering, and
notwithstanding such timely action by Tenant the demised premises shall not be
able to receive electricity by direct metering on the date set forth by Landlord
for such conversion, then the Conversion Date shall be extended for such time as
is reasonably necessary for Tenant to make arrangements to obtain electric
service directly from the Utility or Alternate Supplier, as the case may be. If
Landlord exercises such right of termination, this lease shall remain unaffected
thereby and shall continue in full force and effect; and thereafter Tenant shall
obtain electric service directly from the Utility, or the Alternate Supplier
designated by Landlord, and may utilize the then existing electric feeders,
risers, and wiring servicing the demised premises to the extent available and
safely capable of being used for such purposes and only to the extent of
Tenant's then authorized connected load.

         49.3 COMPLIANCE WITH LAWS AND CAPACITY. Tenant's use of electric
current shall not at any time exceed the capacity of any of the electrical
conductors and equipment in or otherwise serving the demised premises. Tenant
shall not make or perform or permit the making of, any alterations to wiring,
installations or other electrical facilities in or serving the demised premises
without the prior consent of Landlord in each instance. Should Landlord grant
any such consent, all additional risers or other equipment required therefor
shall be installed by Landlord, and the cost thereof shall be paid by Tenant
upon Landlord's demand. If Tenant installs any electrical equipment, Tenant
shall at its own expense make whatever changes are necessary to comply with the
requirements of the insurance underwriters and governmental authorities having
jurisdiction.

         49.4 FAILURE OF UTILITY OR ALTERNATE SUPPLIER. Unless the same shall
arise due to the willful act of Landlord in default or any of the terms and
conditions of this lease, Landlord shall not be liable in any way to Tenant for
any failure or defect in the supply or character of electric energy furnished to
the demised premises by reason of any requirement, act or omission of the
Utility or Alternate Supplier or for any other reason whatsoever.

         49.5 SOURCE OF ELECTRICITY. Landlord shall have the right to determine,
in its sole discretion, the provider of electricity to the Building, whether the
same be the Utility or an Alternate Supplier, and Landlord may, in its sole
discretion, change such determination from time to time. It is expressly agreed
that Landlord may designate itself as an Alternate Supplier.

         49.6 ELECTRICAL TAXES. If any tax (other than, a federal, state or city
income tax) is imposed in connection with Landlord's or Tenant's use of an
Alternate Supplier or upon Landlord's receipt from the sale or resale of
electricity to Tenant by any federal, state or municipal authority, Tenant
covenants and agrees that, where permitted by law, Tenant's pro rata share of
such taxes shall be passed on to and included in the bill of, and paid by,
Tenant to Landlord, as additional rent or, if applicable, to the Alternate
Supplier."

                                       B-4

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