Document:

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                                 LOAN AGREEMENT
                                (BORROWING BASE)

                                  BY AND AMONG

           MONTEREY HOMES CONSTRUCTION, INC., AN ARIZONA CORPORATION,
              MONTEREY HOMES ARIZONA, INC., AN ARIZONA CORPORATION,
          CHANDLER 110, LLC, AN ARIZONA LIMITED LIABILITY COMPANY, AND
                  MERITAGE HOMES OF NORTHERN CALIFORNIA, INC.,
                            A CALIFORNIA CORPORATION

                      SEVERALLY AND COLLECTIVELY, BORROWER

                             THE BANKS NAMED HEREIN

                   NORWEST BANK ARIZONA, NATIONAL ASSOCIATION,
                         A NATIONAL BANKING ASSOCIATION

                      ADMINISTRATIVE AGENT AND ISSUING BANK

            CALIFORNIA BANK & TRUST, A CALIFORNIA BANKING CORPORATION

                       DOCUMENTATION AND SYNDICATION AGENT

                                   DATED AS OF
                                DECEMBER 29, 1999

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                                TABLE OF CONTENTS

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SECTION 1. RECITALS........................................................... 1

SECTION 2. DEFINITIONS........................................................ 1
   2.1      Definitions......................................................  1
   2.2      Terms Generally.................................................. 18

SECTION 3. LOAN COMMITMENT................................................... 18
   3.1      Commitment....................................................... 18
   3.2      Advances......................................................... 19
   3.3      Notes; Repayment of Loan......................................... 19
   3.4      Interest on Loan................................................. 20
   3.5      Notice of Advances............................................... 20
   3.6      Default Interest................................................. 21
   3.7      Conversion and Continuation of Advances.......................... 21
   3.8      Prepayment....................................................... 22
   3.9      Payments......................................................... 22
   3.10     Reserve Requirements; Change in Circumstances.................... 23
   3.11     Change in Legality............................................... 25
   3.12     Redeployment Loss................................................ 25
   3.13     Taxes............................................................ 26
   3.14     Termination or Assignment of Commitments Under Certain
            Circumstances.................................................... 29
   3.15     Conversion Date.................................................. 29
   3.16     Advances During Conversion Period................................ 30
   3.17     Mandatory Prepayments............................................ 30
   3.18     Existing Loan.................................................... 30

SECTION 4. ADVANCES.......................................................... 30
   4.1      Method for Advances.............................................. 30
   4.2      Purpose of Advances.............................................. 31
   4.3      Determination of Amount of Advances.............................. 31

SECTION 5. BORROWING BASE CALCULATIONS....................................... 31
   5.1      Determination of Available Commitment............................ 31
   5.2      Determination of Collateral Value................................ 31
            (a) Entitled Land................................................ 31
            (b) Lots Under Development....................................... 31
            (c) Finished Lots................................................ 31
            (d) Units........................................................ 31
   5.3      Limitation on Adjustments........................................ 32

                                      -i-
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   5.4      Maximum Allowed Advance.......................................... 32
            (a) Entitled Land................................................ 32
            (b) Lots Under Development....................................... 32
            (c) Finished Lots................................................ 32
            (d) Units........................................................ 32
   5.5      Adjustments and Limitations...................................... 33
            (a) Maximum Term - Entitled Land................................. 33
            (b) Maximum Term - Lots Under Development........................ 33
            (c) Maximum Term - Finished Lots................................. 33
            (d) Maximum Term - Units......................................... 33
            (e) Conversion of Presold Units and Spec Units................... 34
            (f) Unit Ineligibility........................................... 34
   5.6      Occurrence of Certain Events..................................... 34
            (a) Foreclosure, Etc............................................. 34
            (b) Environmental Matters........................................ 34
            (c) Damage/Destruction........................................... 34
            (d) Condemnation................................................. 35
   5.7      Determinations................................................... 35
   5.8      Further Limitations on Collateral Values......................... 35
            (a) Collateral Value Limit on Availability for all
                Entitled Land, Lots Under Development and
                Finished Lots................................................ 35
            (b) Collateral Value Limit on Availability for all
                Spec Units and Model Units................................... 35
            (c) Inventory Limit for Spec Units and Model Units............... 35
            (d) Inventory Limit for Unsold Finished Lots and
                Unsold Lots Under Development................................ 35
            (e) Subdivision Size Limitation.................................. 35
            (f) Purchase Money Debt Limitation............................... 36
            (g) Commercial Entitled Land..................................... 36
   5.9      Collateral Inventory Report, Collateral Certificate,
            and Borrowing Base Report........................................ 36
            (a) Collateral Inventory Report.................................. 36
            (b) Collateral Certificate....................................... 37
            (c) Form of Report and Certificate............................... 37
            (d) Borrowing Base Report........................................ 37

SECTION 6. LETTERS OF CREDIT................................................. 38
   6.1      Issuance of Letters of Credit.................................... 38
   6.2      Issuance Procedure for Letters of Credit......................... 39
   6.3      Letter of Credit Fees and Costs.................................. 39
   6.4      Disbursements.................................................... 39
   6.5      Reimbursement Obligations of Borrower............................ 40
   6.6      Nature of Reimbursement Obligations.............................. 40
   6.7      Banks Obligation................................................. 41
   6.8      Certain Requirements as to Letters of Credit..................... 41

                                      -ii-
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   6.9      Risk Participations, Drawings, and Reimbursements................ 42
   6.10     Role of the Issuing Bank......................................... 42
   6.11     Cash Collateral Upon Event of Default............................ 43

SECTION 7. RELEASES.......................................................... 43
   7.1      Release of Collateral  Request of Borrower....................... 43
   7.2      Other Releases................................................... 44

SECTION 8. FEES.............................................................. 44
   8.1      Facility Fee..................................................... 45
   8.2      Agency Fee....................................................... 45
   8.3      Letter of Credit Fee............................................. 45
   8.4      Attorneys' Costs, Expenses, and Fees............................. 45
   8.5      Appraisal Fees, Title Insurance Premium, and Other Costs,
            Expenses, and Fees............................................... 45

SECTION 9. SECURITY.......................................................... 45
   9.1      Security......................................................... 45

SECTION 10. CONDITIONS PRECEDENT FOR EFFECTIVENESS OF
           AGREEMENT......................................................... 46
   10.1     Documents........................................................ 46
   10.2     Co-Lender Agreement.............................................. 47
   10.3     Insurance Policies............................................... 47
   10.4     Payment of Costs, Expenses, and Fees............................. 47
   10.5     Legal Opinion.................................................... 47
   10.6     Representations True............................................. 47
   10.7     No Defaults...................................................... 47

SECTION 11. CONDITIONS PRECEDENT TO APPROVAL OF SUBDIVISIONS................. 47
   11.1     Plat or Survey................................................... 48
   11.2     Preliminary Title Report......................................... 48
   11.3     Deed of Trust/Modification to Deed of Trust...................... 48
   11.4     Environmental Questionnaire...................................... 48
   11.5     Environmental Assessment......................................... 48
   11.6     Title Insurance.................................................. 48
   11.7     Flood Zone....................................................... 49
   11.8     Soils Tests...................................................... 49
   11.9     Insurance Policies............................................... 49
   11.10    Assessments, Charges, and Taxes.................................. 49
   11.11    Contracts........................................................ 49
   11.12    Projections...................................................... 49
   11.13    Payment of Costs, Expenses, and Fees............................. 50
   11.14    Other Actions by Borrower........................................ 50

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   11.15    Representations True............................................. 50
   11.16    No Defaults...................................................... 50

SECTION 12. CONDITIONS PRECEDENT TO APPROVAL OF ENTITLED
           LAND.............................................................. 50
   12.1     Approved Subdivision............................................. 50
   12.2     Fee Title........................................................ 50
   12.3     Documents........................................................ 50
            (a) Appraisal.................................................... 50
            (b) Other Items.................................................. 51
   12.4     Payment of Costs, Expenses, and Fees............................. 51
   12.5     Other Actions by Borrower........................................ 51
   12.6     Representations True............................................. 51
   12.7     No Defaults...................................................... 51
   12.8     Limitations...................................................... 51

SECTION 13. CONDITIONS PRECEDENT TO APPROVAL OF LOTS UNDER
            DEVELOPMENT...................................................... 51
   13.1     Approved Subdivision............................................. 52
   13.2     Fee Title........................................................ 52
   13.3     Documents........................................................ 52
            (a) Appraisal.................................................... 52
            (b) Budget....................................................... 52
            (c) Plans and Specifications..................................... 52
            (d) Construction................................................. 52
            (e) Other Items.................................................. 52
   13.4     Payment of Costs, Expenses, and Fees............................. 52
   13.5     Other Actions by Borrower........................................ 53
   13.6     Representations True............................................. 53
   13.7     No Defaults...................................................... 53
   13.8     Limitations...................................................... 53

SECTION 14. ADDITIONAL CONDITIONS PRECEDENT TO THE
            INCLUSION OF EACH FINISHED LOT IN THE BORROWING
            BASE............................................................. 53
   14.1     Approved Subdivision............................................. 53
   14.2     Fee Title........................................................ 53
   14.3     Plat............................................................. 53
   14.4     Documents........................................................ 53
            (a) Appraisal.................................................... 54
            (b) Improvements................................................. 54
            (c) Other Items.................................................. 54
   14.5     Payment of Costs, Expenses, and Fees............................. 54
   14.6     Other Actions by Borrower........................................ 54
   14.7     Representations True............................................. 54

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   14.8     No Defaults...................................................... 54
   14.9     Limitations...................................................... 54

SECTION 15. ADDITIONAL CONDITIONS PRECEDENT TO THE
            INCLUSION OF EACH UNIT IN THE BORROWING BASE..................... 54
   15.1     Approved Subdivision............................................. 55
   15.2     Fee Title........................................................ 55
   15.3     Plat............................................................. 55
   15.4     Documents........................................................ 55
            (a) Appraisal.................................................... 55
            (b) Budget....................................................... 55
            (c) Plans and Specifications..................................... 55
            (d) Purchase Contract............................................ 55
            (e) Public Reports............................................... 55
            (f) Other Items.................................................. 55
   15.5     Payment of Costs, Expenses, and Fees............................. 56
   15.6     Other Actions by Borrower........................................ 56
   15.7     Representations True............................................. 56
   15.8     No Defaults...................................................... 56
   15.9     Limitations...................................................... 56

SECTION 16. ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES...................... 56
   16.1     Representations and Warranties Accurate.......................... 56
   16.2     Defaults......................................................... 56
   16.3     Draw Request..................................................... 56
   16.4     Approvals and Inspections by Governmental Authorities............ 56
   16.5     Payment of Costs, Expenses, and Fees............................. 56

SECTION 17. REPRESENTATIONS AND WARRANTIES................................... 57
   17.1     Recitals and Statements.......................................... 57
   17.2     Organization; Powers; Etc........................................ 57
   17.3     Authorization; Etc............................................... 57
   17.4     Enforceability................................................... 58
   17.5     Litigation....................................................... 58
   17.6     Federal Reserve Regulations...................................... 58
   17.7     Investment Company Act........................................... 58
   17.8     Public Utility Holding Company Act............................... 58
   17.9     No Breach........................................................ 58
   17.10    Financial Statements True........................................ 59
   17.11    Significant Debt Agreements...................................... 59
   17.12    ERISA............................................................ 59
   17.13    Solvent.......................................................... 59
   17.14    Liens............................................................ 59
   17.15    Licenses......................................................... 59
   17.16    Filing of Taxes.................................................. 59

                                       -v-
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   17.17    Budgets and Plans and Specifications............................. 60
   17.18    Affirmation...................................................... 60

SECTION 18. AFFIRMATIVE COVENANTS............................................ 60
   18.1     Corporate, Limited Liability Company, or Partnership Existence... 60
   18.2     Books and Records; Access By Administrative Agent................ 60
   18.3     Information and Statements....................................... 60
            (a) Consolidating and Consolidated Quarterly Statements of the
                Meritage Group............................................... 60
            (b) Consolidating and Consolidated Annual Statements of the
                Meritage Group............................................... 61
            (c) Closing Report............................................... 61
            (d) Sales Reports and Inventory Reports.......................... 62
            (e) Collateral Inventory Report and Collateral Certificate....... 62
            (f) Certificate of Compliance.................................... 62
            (g) Other Items and Information.................................. 62
   18.4     Law; Judgments; Material Agreements; Approvals and Permits....... 62
   18.5     Taxes and Other Indebtedness..................................... 63
   18.6     Assets and Property.............................................. 63
   18.7     Insurance........................................................ 63
            (a) Property..................................................... 63
            (b) Liability.................................................... 63
            (c) Flood........................................................ 64
            (d) Workman's Compensation....................................... 64
            (e) Additional Insurance......................................... 64
            (f) Other........................................................ 64
            (g) Evidence..................................................... 65
   18.8     ERISA............................................................ 65
   18.9     Appraisals....................................................... 65
   18.10    Commencement and Completion...................................... 65
   18.11    Title Insurance.................................................. 66
   18.12    Rights of Inspection; Correction of Defects; Agency.............. 66
   18.13    Miscellaneous.................................................... 67
   18.14    Verification of Costs............................................ 67
   18.15    Cross-Collateralization.......................................... 67
   18.16    Administrative Agent's Inspector(s).............................. 67
   18.17    Further Assurances............................................... 67
   18.18    Costs and Expenses of Borrower's Performance of Covenants and
            Satisfaction of Conditions....................................... 68
   18.19    Payment of Release Price......................................... 68
   18.20    Construction and Sales Records................................... 68
   18.21    Guarantees....................................................... 68
   18.22    Services......................................................... 68
   18.23    CC&Rs............................................................ 69

                                      -vi-
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SECTION 19. NEGATIVE COVENANTS............................................... 69
   19.1     Change in Control or Management.................................. 69
   19.2     Amendments to Organizational Documents........................... 69
   19.3     Financial Covenants.............................................. 69
            (a) Minimum Liquidity............................................ 69
            (b) Maximum Leverage............................................. 69
            (c) Minimum Fixed Charge Coverage................................ 69
            (d) Minimum Adjusted Tangible Net Worth.......................... 69
            (e) Guaranties................................................... 70
   19.4     Mergers, Consolidations, Sales of Assets......................... 70
   19.5     Business of Borrower............................................. 70
   19.6     ERISA Liabilities................................................ 70
   19.7     Dissolution or Liquidation....................................... 70
   19.8     Joint Ventures................................................... 70

SECTION 20. INSPECTION BY ADMINISTRATIVE AGENT............................... 70
   20.1     Enter Property................................................... 70
   20.2     No Duty to Inspect............................................... 71

SECTION 21. WAIVER........................................................... 71
   21.1     Waiver........................................................... 71
   21.2     Delay............................................................ 71

SECTION 22. DEFAULT.......................................................... 71
   22.1     Event of Default................................................. 71
   22.2     Remedies......................................................... 73
   22.3     Enforcement Costs................................................ 74

SECTION 23. ACTION UPON AGREEMENT............................................ 74
   23.1     No Third Party Beneficiaries..................................... 74
   23.2     Integration...................................................... 74
   23.3     Modifications.................................................... 74
   23.4     No Joint Venture................................................. 75

SECTION 24. GENERAL.......................................................... 75
   24.1     Waiver of Guaranty and Suretyship Defenses....................... 75
   24.2     Survival......................................................... 76
   24.3     Discretionary Rights............................................. 76
   24.4     Indemnity........................................................ 76
   24.5     Joint and Several................................................ 76
   24.6     Time of Essence.................................................. 76
   24.7     Notices.......................................................... 76
   24.8     Payment of Costs................................................. 77
   24.9     Choice of Law.................................................... 77
   24.10    Successors....................................................... 77

                                      -vii-
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   24.11    Headings......................................................... 78
   24.12    Participations and Assignments................................... 78
   24.13    Severability..................................................... 78
   24.14    Arbitration Provisions........................................... 78
            (a) Arbitration.................................................. 78
            (b) Motion Practice.............................................. 79
            (c) Discovery.................................................... 79
            (d) Payment of Arbitration Costs and Fees........................ 80
   24.15    JURY WAIVER...................................................... 80

SCHEDULE 3.1 Commitments of Banks
SCHEDULE 24.1 Joint Borrower Provisions

EXHIBIT "A" Promissory Note
EXHIBIT "B-1" Deed of Trust (Arizona)
EXHIBIT "B-2" Deed of Trust (California)
EXHIBIT "C-1" Modification of Deed of Trust (Arizona)
EXHIBIT "C-2" Modification of Deed of Trust (California)
EXHIBIT "D" Guarantee
EXHIBIT "E" Collateral Certificate
EXHIBIT "F" Proposed Initial Approved Subdivisions
EXHIBIT "G" Construction Schedule
EXHIBIT "H" Sample Collateral Inventory Report
EXHIBIT "I" Sample Sales and Inventory Reports
EXHIBIT "J" Sample Project Proforma

                                     -viii-
<PAGE>
                                 LOAN AGREEMENT
                                (Borrowing Base)

     BY THIS  AGREEMENT  (together  with any  amendments or  modifications,  the
"Agreement") made and entered into as of the 29th day of December,  1999, by and
among  MONTEREY  HOMES  CONSTRUCTION,  INC.,  an  Arizona  corporation  ("MHC"),
MONTEREY HOMES ARIZONA, INC., an Arizona corporation ("MHA"), CHANDLER 110, LLC,
an  Arizona  limited  liability  company  ("Chandler"),  and  MERITAGE  HOMES OF
NORTHERN CALIFORNIA, INC., a California corporation ("MHNC") (MHC, MHA, Chandler
and  MHNC  are  sometimes   hereinafter   severally  and   collectively   called
"Borrower"),  the banks and  financial  institutions  that are  parties  to this
Agreement  from time to time  (the  "Banks"),  NORWEST  BANK  ARIZONA,  NATIONAL
ASSOCIATION,  a national banking  association,  as administrative  agent for the
Banks (in such  capacity,  the  "Administrative  Agent") and as Issuing Bank (as
hereinafter  defined),  and  CALIFORNIA  BANK  &  TRUST,  a  California  banking
corporation,  as  documentation  and  syndication  agent  for the Banks (in such
capacity,  the "Documentation and Syndication  Agent"), for and in consideration
of the  recitals  and mutual  promises  contained  herein,  confirm and agree as
follows:

SECTION 1. RECITALS

     1.1 Borrower  has applied to the Banks for a revolving  line of credit loan
facility  in  the  aggregate  amount  of  SEVENTY  MILLION  AND  NO/100  DOLLARS
($70,000,000.00)  (the "Loan")  against  which  Borrower  may, from time to time
during the term hereof,  make draws, repay all or part of the same and then draw
additional  sums,  subject to the terms,  conditions  and  provisions  set forth
herein, for the purpose of financing the acquisition and development of entitled
land, lots under  development,  improved single family  residential lots and the
construction of single family residential units within  subdivisions  located in
the metropolitan  areas of Phoenix,  Tucson,  Sacramento and San Francisco,  and
other Northern  California  metropolitan  areas, and approved by  Administrative
Agent pursuant to the terms hereof.

<PAGE>
SECTION 2. DEFINITIONS

     2.1 DEFINITIONS. Unless otherwise defined herein, the following terms shall
have the following meanings:

     "ACQUISITION  COST"  means the actual  purchase  price paid by  Borrower to
acquire the Entitled Land or Lots in question, excluding any lot premiums.

     "ADJUSTED  TANGIBLE NET WORTH" means, as of any date of determination,  the
amount of  consolidated  Owners'  Equity of the  Meritage  Group as shown on its
consolidated  balance sheet,  plus  Subordinated  Debt, minus the Net Book Value
(after  deducting  reserves  applicable  thereto)  of all assets  classified  as
intangible  assets  under  GAAP,   including,   without  limitation,   goodwill,
trademarks, trade names, service marks, copyrights,  patents, licenses, permits,
covenants not to compete, and rights related thereto.

     "ADMINISTRATIVE  AGENT" shall have the meaning assigned to such term in the
Preamble, and any assign or successor thereto.

     "ADVANCE" means a disbursement of the proceeds of the Loan.

     "AGENCY  FEE"  means  the  Agency  Fee set forth in a side  letter  between
Borrower and Administrative Agent of even date herewith.

     "AGREEMENT"  means this Loan  Agreement,  as it may be  amended,  modified,
extended, renewed, restated, or supplemented from time to time.

     "APPLICABLE INTEREST RATE," with respect to a given Advance, shall mean the
interest rate in effect for that Advance.

     "APPRAISAL"  means, as the context  requires,  an appraisal of the Entitled
Land,  Lots  Under  Development,  Finished  Lots or Units  that  constitute  the
Borrowing Base which sets forth the Appraised  Value and which is (i) ordered by
Administrative   Agent,   (ii)   prepared  by  an  appraiser   satisfactory   to

                                      -2-
<PAGE>
Administrative  Agent,  (iii) in compliance with all federal and state standards
for  appraisals,  (iv)  reviewed by  Administrative  Agent,  and (v) in form and
substance  satisfactory  to  Administrative  Agent  in  its  sole  and  absolute
discretion.

     "APPRAISED VALUE" means:

          (a) With respect to Entitled  Land, the market value for such Entitled
     Land on a bulk "as is" value basis as set forth in the Appraisal.

          (b) With respect to Lots Under Development,  the market value for such
     Lots Under Development on a bulk "as complete" value basis, as set forth in
     the Appraisal.

          (c) With respect to Finished  Lots, the market value for the Lots on a
     bulk "as complete"  value basis,  as set forth in the Appraisal or, if such
     Finished Lots are purchased under an option agreement (but not to exceed 25
     Finished  Lots per  Subdivision  at any one time),  the retail value of the
     Finished Lots as set forth in the Appraisal of the applicable Units.

          (d) With  respect  to Units,  the  value of a Unit and a typical  Lot,
     without lot premiums, options, and upgrades, as set forth in the Appraisal.

     "APPROVALS  AND  PERMITS"  means  each and all  approvals,  authorizations,
bonds, consents,  certificates,  franchises,  licenses, permits,  registrations,
qualifications,  entitlements and other actions and rights granted by or filings
with any Person  necessary,  or appropriate  for  acquisition and development of
Entitled Land,  Lots Under  Development or Finished  Lots, for  construction  of
Units and Improvements,  for the sale of Units and Finished Lots, for occupancy,
ownership,  and use by Borrower  and other  Persons of the Entitled  Land,  Lots
Under  Development,  Finished Lots or Units, or otherwise for the conduct of, or
in connection with, the business and operations of Borrower.

     "APPROVED  SUBDIVISION"  means a  Subdivision  that  has been  approved  as
provided in Section 11. Subject to the  satisfaction of the conditions set forth

                                      -3-
<PAGE>
in Section 11, the parties intend to include the Subdivisions  listed on EXHIBIT
"F" as the initial Approved Subdivisions under the Loan.

     "AVAILABLE COMMITMENT" means, at any time, the lower of:

          (a) The Commitment Amount; or

          (b) The  Collateral  Value of the Borrowing  Base, as reflected in the
     most recent Borrowing Base Report,

LESS in either case any remargining  payment  required  pursuant to Section 3.17
but not yet paid.

     "BANK" and  "BANKS"  shall have the  meaning  assigned to such terms in the
Preamble.

     "BOARD" shall mean the Board of Governors of the Federal  Reserve System of
the United States.

     "BORROWER": See initial paragraph hereof.

     "BORROWING BASE" means the Entitled Land, Lots Under Development,  Finished
Lots and Units that meet the requirements of this Agreement for inclusion in the
Borrowing  Base and that are  included in a  Borrowing  Base Report from time to
time prior to the Termination Date.

     "BORROWING BASE REPORT" means a report,  prepared by  Administrative  Agent
setting  forth  the  Collateral  then   constituting  the  Borrowing  Base,  the
Collateral  Value of the  Borrowing  Base,  and  certain  other  information  as
required by this Agreement,  in the format  prescribed by  Administrative  Agent
from time to time.

     "BUDGET" means the amount  allocated by Borrower to the hard and soft costs
associated  with the  construction  of  Improvements  or each Unit (which  shall
include an  estimate  for  options  and  upgrades  that shall not exceed  thirty
percent (30%) of the base hard and soft costs for such Improvements).

                                      -4-
<PAGE>
     "BUSINESS  DAY" shall mean any day (other  than a day which is a  Saturday,
Sunday or legal holiday in the State of Arizona) on which  commercial  banks are
open for business in Phoenix,  Arizona;  PROVIDED,  HOWEVER,  that, when used in
connection  with a LIBOR Advance,  the term "Business Day" shall exclude any day
on which  banks are not open for  dealings  in  dollar  deposits  in the  London
interbank market.

     "CB&T  FACILITY" means that revolving line of credit from California Bank &
Trust, a California  banking  corporation,  to Meritage  pursuant to that Credit
Agreement  dated  September 17, 1999, by and between  California Bank & Trust as
administrative  agent for the banks  from time to time  parties  thereto  and as
issuing bank, and Meritage as borrower.

     "CALENDAR  MONTH" shall mean the twelve (12)  calendar  months of the year.
Any  payment or  obligation  that is due or required  to be  performed  within a
specified  number of Calendar  Months shall become due on the day in the last of
such specified  number of Calendar  Months that  corresponds  numerically to the
date on which such payment or obligation  was incurred or  commenced,  provided,
however,  that with respect to any  obligation  that is incurred or commences on
the 29th,  30th, or 31st day of any Calendar  Month and if the Calendar Month in
which  such  payment  or  obligation  would  otherwise  be due  does  not have a
numerically  corresponding  date, such payment or obligation shall become due on
the first day of the next succeeding Calendar Month.

     "CAPITALIZED  LEASE" of a Person means any lease of property by such Person
as lessee which would be capitalized on a balance sheet of such Person  prepared
in accordance with GAAP.

     "CAPITALIZED  LEASE  OBLIGATIONS"  of a  Person  means  the  amount  of the
obligations  of such Person under  Capitalized  Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with GAAP.

     "CHANGE IN CONTROL"  means the  occurrence  or  existence  of either of the
following   events  or  conditions   without  the  prior   written   consent  of
Administrative  Agent,  if different than the state of affairs as of the closing
of the Loan:

                                      -5-
<PAGE>
          (a) the  acquisition  by any Person or two or more  Persons  acting in
     concert  of  "beneficial  ownership"  (within  the  meaning  of Rule  13d-3
     promulgated  by the SEC  under  the  Securities  Exchange  Act of 1934,  as
     amended,  or as otherwise specified under the provisions of this Agreement)
     of securities  of any member of the Meritage  Group having more than 50% of
     the ordinary voting power for the election of directors; or

          (b) the  acquisition  by any Person or two or more  Persons  acting in
     concert of Control of any member of the Meritage Group.

     "CO-LENDER  AGREEMENT"  shall mean that  Co-Lender  Agreement  of even date
herewith,  by and among the Administrative Agent, the Co-Agent and the Banks, as
it may be amended,  modified,  supplemented,  restated or replaced  from time to
time.

     "COLLATERAL"  means the  property,  interests  in  property,  and rights to
property securing any or all Obligations from time to time.

     "COLLATERAL  CERTIFICATE"  means the  certificate of Borrower,  in form and
substance   satisfactory   to   Administrative   Agent   and   containing   such
certifications   as  Administrative   Agent  may  require,   setting  forth  the
information required by Section 5.9.

     "COLLATERAL  INVENTORY  REPORT"  means the report  prepared  by Borrower as
required by Section 5.9.

     "COLLATERAL  VALUE"  means,  from time to time,  the amounts  determined in
accordance with Section 5.2.

     "COMMITMENT"  shall mean, with respect to each Bank, the commitment of such
Bank as set forth in Schedule  3.1, as such  Bank's  Commitment  may be modified
from time to time pursuant to the terms  hereof.  Each Bank's  Commitment  shall

                                      -6-
<PAGE>
fully, automatically and permanently terminate on the Termination Date.

     "COMMITMENT  AMOUNT"  means the lesser of (i) the  aggregate  amount of the
Banks'  Commitment  as set  forth  on  Schedule  3.1,  and (ii)  the  amount  of
$70,000,000.00, as the same may be reduced from time to time pursuant to Section
3.15.

     "COMPLETION PERCENTAGE" means:

          (a) For any Unit, the current percentage of construction  completed as
     reflected in each Borrowing Base Report and/or Collateral Inventory Report,
     based upon the Construction Schedule attached hereto as EXHIBIT "G" and the
     Budget for that Unit; and

          (b) For Lots Under  Development,  the current percentage of completion
     of Improvements in an Approved  Subdivision as determined by Administrative
     Agent  based on its review of the  current  Borrowing  Base  Report  and/or
     Collateral Inventory Report and inspections of the Collateral made pursuant
     to this Agreement.

     "CONSOLIDATED  NET INCOME" means,  for any period,  the combined Net Income
(or loss) of the Meritage  Group for such period (taken as a cumulative  whole),
as determined in accordance with GAAP, after  eliminating all offsetting  debits
and credits  between or among the Meritage Group and all other items required to
be  eliminated  in the  course  of the  preparation  of  consolidated  financial
statements of the Meritage Group in accordance with GAAP.

     "CONTINGENT  OBLIGATION"  of a Person means any  agreement,  undertaking or
arrangement by which such Person  assumes,  guarantees,  endorses,  contingently
agrees to purchase or provide funds for the payment of, or otherwise  becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other  Person,  or  otherwise  assures any  creditor of such other Person
against loss,  including,  without  limitation,  any comfort  letter,  operating

                                      -7-
<PAGE>
agreement,  take-or-pay  contract and  reimbursement  agreements  with financial
institutions  (including the Banks) relating to letters of credit issued by such
financial institutions for the account of such Person.

     "CONTROL" when used with respect to any Person means the power, directly or
indirectly,  to direct the management  policies of such Person,  whether through
the  ownership of voting  securities,  by contract or  otherwise;  and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.

     "CONTROLLED  GROUP" means,  severally and collectively,  the members of the
group  controlling,  controlled by and/or in common control of Borrower,  within
the meaning of Section 4001(b) of ERISA.

     "CONVERSION  DATE" means  December 29, 2001;  provided,  however,  that the
Banks may, in the Banks' sole and  absolute  discretion,  extend the  Conversion
Date pursuant to Section 3.15.

     "CONVERSION  PERIOD" means the period of time following the Conversion Date
during  which the  Commitment  Amount is reduced  from time to time  pursuant to
Section 3.15.

     "DEED OF TRUST" and "DEEDS OF TRUST" mean, respectively, each and all Deeds
of Trust,  Assignments of Rent, Security Agreements and Fixture Filings, in each
case securing the Note and the other  Obligations,  each being  substantially in
the form of EXHIBIT "B-1" for Subdivisions  located in Arizona and EXHIBIT "B-2"
for Subdivisions  located in California,  granted from time to time by Borrower,
as trustor, for the benefit of Administrative Agent, as beneficiary, as the same
may be  amended  from  time to  time by a  Modification  of  Deed  of  Trust  in
substantially the form of EXHIBIT "C-1" for Subdivisions  located in Arizona and
EXHIBIT "C-2" for  Subdivisions  located in California,  to encumber  additional
real  property,  and as the same may be amended,  modified,  extended,  renewed,
restated,  or  supplemented  from time to time. Deed of Trust shall also mean an
Existing  Deed of Trust as modified  by the  Modification  of Existing  Deeds of
Trust.

                                      -8-
<PAGE>
     "DEFAULT RATE" shall mean a rate per annum (computed as provided in Section
3.7) equal to the Applicable  Interest Rate plus three percent (3%) and changing
in conformity with each change in the Applicable Interest Rate.

     "DISBURSEMENT": See Section 6.4 hereof.

     "DOCUMENTATION  AND SYNDICATION  AGENT" shall have the meaning  assigned to
such term in the Preamble. The Documentation and Syndication Agent shall have no
rights,  duties or  responsibilities  under the Loan Documents beyond those of a
Bank.

     "DOLLARS" or "$" shall mean lawful money of the United States of America.

     "DRAW REQUEST" means a completed,  written  request in a form acceptable to
or specified by Administrative  Agent from Borrower to Administrative  Agent for
an Advance, together with such other documents and information as Administrative
Agent may require or specify from time to time.

     "EBITDA" means,  for any period,  an amount equal to (a)  Consolidated  Net
Income for such period,  plus (b) gross accrued interest expense of the Meritage
Group on a  consolidated  basis (other than  capitalized  interest)  during such
period, plus (c) accruals for federal, state and local income taxes attributable
to such Consolidated Net Income, plus (d) depreciation and amortization  expense
of the Meritage Group on a consolidated  basis during such period.  EBITDA shall
be adjusted to add back any non-cash writedowns.

     "ELIGIBILITY DATE" means:

          (a) With  respect to Entitled  Land,  the date on which such  Entitled
     Land  is  first  included  in the  Borrowing  Base  as  Entitled  Land in a
     Borrowing Base Report.

          (b) With  respect  to Lots  Under  Development,  the date on which the
     Entitled  Land is  first  included  in the  Borrowing  Base  as Lots  Under
     Development in a Borrowing Base Report;

                                      -9-
<PAGE>
          (c) With  respect to  Finished  Lots,  the date on which such Lots are
     first  included in the Borrowing  Base as Finished Lots in a Borrowing Base
     Report; and

          (d) With  respect to each  Unit,  the date on which that Unit is first
     included in the Borrowing  Base as a Unit in a Borrowing  Base Report,  and
     regardless of whether  periods exist during which such Unit is not included
     in the Borrowing Base.

     "ENTITLED  LAND" means land located in a Subdivision  with respect to which
all of the following is correct:

          (a)  Borrower  has  received a vested  zoning  classification  that is
     consistent with Borrower's actual and proposed use of such land;

          (b) A preliminary subdivision plat or tentative map has been completed
     and has been approved by all applicable Governmental Authorities; and

          (c) Borrower has satisfied the other conditions precedent set forth in
     Section 12.

     "ENVIRONMENTAL    AGREEMENT"   and   "ENVIRONMENTAL    AGREEMENTS"   means,
respectively,  each  and all  Environmental  Indemnity  Agreements  in form  and
substance  satisfactory  to  Administrative  Agent,  executed  by  Borrower  and
Guarantors  from time to time, for the benefit of  Administrative  Agent and the
Banks,  and relating to the  Collateral,  as the same may be amended,  modified,
extended, renewed, restated, or supplemented from time to time.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
the same may be amended from time to time.

                                      -10-
<PAGE>
     "ERISA  AFFILIATE"  shall  mean  any  trade  or  business  (whether  or not
incorporated)  that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.

     "ERISA  LIABILITIES"  shall  mean at any time the  minimum  liability  with
respect  to Plans  that  would be  required  to be  reflected  at such time as a
liability on the consolidated balance sheet of the Borrower under GAAP.

     "EURODOLLAR  LENDING  OFFICE," with respect to any Bank (or  transferee) or
the  Administrative  Agent,  shall  mean such  office or branch as such Bank (or
transferee) or the Agent has  designated to the Borrower  herein in Schedule 3.1
as the office or branch of such Bank (or transferee) or the Administrative Agent
which shall constitute the Lending Office thereof for LIBOR Advances.

     "EVENT OF DEFAULT"  has the meaning  specified  in  Paragraph  19.1 and the
other Loan Documents.

     "EXISTING  DEEDS OF TRUST"  means the deeds of trust  executed  by Borrower
securing payment of the Existing Loans.

     "EXISTING LOANS" means those loans to Borrower in a principal amount not to
exceed $80,000,000.00 pursuant to that Credit Agreement dated December 20, 1996,
as amended,  by and among  Borrower,  Administrative  Agent,  as agent,  and the
lenders named therein.

     "FACILITY FEE": See Section 8.1 hereof.

     "FEES"  shall mean the  Facility  Fee, the Agency Fee, the Letter of Credit
Fee and all other  fees and  charges,  if any  (other  than  interest),  payable
hereunder or otherwise payable in connection with the Loan.

     "FINANCIAL  COVENANTS" means the financial  covenants  described in Section
19.3.

     "FINISHED  LOT(S)"  means  any Lot in an  Approved  Subdivision  for  which
substantially all Improvements for such Subdivision have been completed and that
has  satisfied  the  requirements  in Section 14 for  inclusion in the Borrowing
Base.

                                      -11-
<PAGE>
     "GAAP" means generally accepted accounting principles consistently applied.

     "GOVERNMENTAL  AUTHORITY" means any government,  any court, and any agency,
authority, body, bureau, department, or instrumentality of any government.

     "GUARANTEE"  means  each  Continuing  Guarantee  substantially  in the form
attached hereto as EXHIBIT "D".

     "GUARANTOR"  or  "GUARANTORS"  means  Meritage  and  all of its  direct  or
indirect  wholly owned  Subsidiaries  now or  hereinafter  existing that are not
Borrower,  including,  without  limitation,  MTH - TEXAS GP,  INC.,  an  Arizona
corporation, MTH - TEXAS LP, INC., an Arizona corporation, LEGACY/MONTEREY HOMES
L.P., an Arizona  limited  partnership  and TEXAS HOME MORTGAGE  CORPORATION,  a
Texas corporation.

     "HILTON" means Steven J. Hilton.

     "IMPROVEMENT  CONSTRUCTION  COSTS"  means the  aggregate  "hard" and "soft"
costs to plan, design, and construct the applicable Improvements as set forth in
the applicable Budget;  PROVIDED,  HOWEVER,  that with respect to Finished Lots,
the  Improvement  Construction  Costs  shall be the  lesser of (a) the amount of
"hard" costs and "soft" costs to plan, design, and construct the Improvements as
set forth in the  applicable  Budget or (b) the  amount of such  costs  actually
incurred by Borrower to plan, design, and construct such Improvements.

     "IMPROVEMENTS"  means offsite  improvements which may exist or which are to
be  constructed  (including,  without  limitation,  curbs,  grading,  landscape,
sprinklers,  storm  and  sanitary  sewers,  paving,  sidewalks,  and  utilities)
necessary to make the land suitable for the  construction of single family homes
and any common area improvements which may exist or which are to be constructed,
together  with the  associated  fixtures and other  tangible  personal  property
located or used in or on land on which such improvements are constructed.

                                      -12-
<PAGE>
     "INDEBTEDNESS"  of a Person means such  Person's (i) secured and  unsecured
obligations  for borrowed  money,  (ii)  obligations  representing  the deferred
purchase  price of  property  or  services,  (iii)  obligations,  whether or not
assumed,  secured by Liens or payable  out of the  proceeds or  production  from
property now or hereafter  owned or acquired by such  Person,  (iv)  obligations
which are evidenced by notes, acceptances, or other instruments, (v) Capitalized
Lease  Obligations,  (vi) guarantees,  and (vii)  reimbursement  obligations for
letters of credit.  With respect to  Borrower,  Indebtedness  includes,  without
limitation, all obligations under the Loan.

     "INTEREST PERIOD" shall mean as to any LIBOR Advance, the period commencing
on the  date of such  Advance  and  ending  the day  preceding  the  numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2 or 3 months thereafter,  as the Borrower
may elect, or, if earlier, on the Termination Date; PROVIDED,  HOWEVER,  that if
any Interest  Period would end on a day other than a Business Day, such Interest
Period  shall be extended to the next  succeeding  Business Day unless such next
succeeding  Business Day would fall in the next  calendar  month,  in which case
such Interest  Period shall end on the next  preceding  Business  Day.  Interest
shall  accrue from and  include the first day of an Interest  Period and include
the last day of such Interest Period.

     "ISSUANCE  DATE" means the date on which a Letter of Credit is delivered to
the beneficiary thereof.

     "ISSUANCE  REQUEST" means a request for a Letter of Credit duly executed by
Borrower in a form satisfactory to the Issuing Bank.

     "ISSUE"  means,  with  respect  to any  Letter of  Credit,  to issue or, by
amendment  or  otherwise,  to extend the expiry of, or to renew or  increase  or
decrease the amount of, such Letter of Credit; and the terms "ISSUED," "ISSUING"
and "ISSUANCE" have corresponding meanings.

                                      -13-
<PAGE>
     "ISSUING BANK" means  Administrative Agent in its capacity as issuer of one
or more Letters of Credit hereunder,  together with any successor or replacement
Letter of Credit issuer arising under this Agreement.

     "LC BORROWING"  means an extension of credit resulting from a drawing under
any Letter of Credit which shall not have been  reimbursed  on the day after the
date when made nor converted into a Variable Rate Advance.

     "LC  OBLIGATIONS"  means  at any  time  the sum of (a) the  Outstanding  LC
Balance under the Loan, plus (b) the amount of all  unreimbursed  drawings under
all Letters of Credit, including all outstanding LC Borrowings.

     "LAND ALLOCATION"  means, with respect to each Lot Under  Development,  the
Maximum  Allowed  Advance for the Lot, if such Lot was a Finished  Lot, less the
hard and soft costs of construction of the Improvements on such Lot as set forth
in the applicable Budget.

     "LANDON" means John R. Landon.

     "LENDING OFFICE," with respect to any Bank or any transferee of the Loan or
the Administrative  Agent, shall mean such office or branch as such Bank or such
transferee or the Agent has  designated to the Borrower  herein as the office or
branch of that Bank or such  transferee or the  Administrative  Agent from which
Loan is to be made.

     "LETTER OF CREDIT" means a letter of credit,  either as a standby financial
or a performance letter of credit, issued by the Issuing Bank for the account of
Borrower pursuant to Section 6 hereof.

     "LETTER OF CREDIT FEE": See Section 6.3(a) hereof.

     "LIABILITIES" of a Person means all items included in the liability section
of a balance sheet of that person prepared in accordance with GAAP applied as of
the date of calculation  LESS accounts  payable less than 60 days old arising in
the ordinary course of such Person's  business payable on terms customary in the
trade,  accrued liabilities and buyer deposits.  Without limiting the generality

                                      -14-
<PAGE>
of the foregoing,  the term  "Liabilities"  shall include:  (i) all Indebtedness
secured by any mortgage, lien, pledge, security interest,  charge or encumbrance
upon or in property  owned by that Person,  to the extent  attributable  to that
Person's  interest in the  property,  even though that Person has not assumed or
become liable for the payment of the Indebtedness; and (ii) the aggregate amount
of the reserves established on the books of that Person in respect of contingent
Liabilities and other contingencies  (except reserves which are properly treated
as  deductions  from assets) and in any event shall  include with respect to the
Borrower the outstanding amount of the Loan.

     "LIBOR RATE" shall mean, with respect to any LIBOR Advance for any Interest
Period, an interest rate per annum (rounded upwards, if necessary,  at the third
decimal  place) equal to the offered rate for U.S.  Dollar  deposits of not less
than  $1,000,000.00  for a period of time  equal to each  Interest  Period as of
11:00 A.M.  City of London,  England time two London  Business Days prior to the
first  date of each  Interest  Period  as shown  on the  display  designated  as
"British  Bankers  Assoc.  Interest  Settlement  Rates" on the  Telerate  System
("Telerate"), Page 3750 or Page 3740, or such other page or pages as may replace
such pages on  Telerate  for the  purpose  of  displaying  such rate;  provided,
however,  that if such rate is not  available on Telerate then such offered rate
shall be otherwise independently  determined by the Administrative Agent from an
alternate,   substantially   similar   independent   source   available  to  the
Administrative  Agent or shall be  calculated by the  Administrative  Agent by a
substantially  similar  methodology as that  theretofore  used to determine such
offered  rate in  Telerate.  "London  Business  Day"  means any day other than a
Saturday, Sunday or a day on which banking institutions are generally authorized
or obligated by law or executive order to close in the City of London, England.

     "LIBOR ADVANCE" shall mean an Advance bearing interest at a rate determined
by reference to the LIBOR Rate.

     "LIBOR MARGIN" shall mean one and three-quarters percent (1.75%) per annum.

                                      -15-
<PAGE>
     "LIEN" means any lien (statutory or other),  mortgage  (including,  without
limitation,  purchase  money  mortgages),  pledge,  hypothecation,   assignment,
deposit  arrangement,  encumbrance  or  preference,  priority or other  security
agreement  or  preferential   arrangement  of  any  kind  or  nature  whatsoever
[including,  without  limitation,  the  interest of a vendor or lessor under any
conditional  sale,  Capitalized  Lease or other title  retention  agreement  and
contractual obligations for payment of marketing,  advertising and promotion (in
excess of 10% of the estimated sales price of the applicable  Unit) and deferred
lot premiums (in excess of 25% of the  estimated  sales price of the  applicable
Unit)],  but specifically  excluding ad valorem real estate taxes,  assessments,
community facilities district and other similar improvement lien assessments not
yet delinquent.

     "LIQUIDITY"  means  available   unrestricted  cash  and  cash  equivalents,
unrestricted  investments  with  federally  insured  institutions  and available
undrawn funds under the Loan.

     "LOAN" has the meaning specified in Section 1.1.

     "LOAN  BALANCE"  means the sum of (i) with respect to the Loan on any date,
the aggregate outstanding  principal amount thereof,  after giving effect to any
borrowings  and  prepayments  or repayments of Advances  occurring on such date;
plus (ii) with  respect  to any  outstanding  LC  Obligations  on any date,  the
aggregate amount of such LC Obligations on such date, after giving effect to any
Issuances of Letters of Credit  occurring on such date and any other  changes in
the aggregate  amount of the LC Obligations as of such date,  including  changes
occurring as a result of any reimbursements of outstanding unpaid drawings under
any Letters of Credit or any  reductions  in the maximum  amount  available  for
drawing under Letters of Credit taking effect on such date.

     "LOAN  DOCUMENTS"  means this Agreement,  the Note, the Deeds of Trust, the
Environmental Agreements, the Guarantees,  and any other agreements,  documents,
or instruments evidencing,  guarantying,  securing, or otherwise relating to the
Note, as such agreements,  documents, and instruments may be amended,  modified,
extended, renewed, or supplemented from time to time.

                                      -16-
<PAGE>
     "LOAN PARTY" means Borrower and each Guarantor that from time to time is or
becomes obligated under any Loan Document.

     "LOT" means an individual lot designated on the final  subdivision  plat or
filing for each Subdivision.

     "LOTS UNDER DEVELOPMENT" means Entitled Land with respect to which Borrower
has commenced  construction of the Improvements and has satisfied the conditions
precedent in Section 13 but which does not yet constitute Finished Lots.

     "MARGIN STOCK" shall have the meaning given such term under Regulation U.

     "MATERIAL  ADVERSE  CHANGE"  means  any  change  in the  assets,  business,
financial  condition,  operations,  prospects,  or results of  operations of any
party  or any  other  event  or  condition  that in the  reasonable  opinion  of
Administrative  Agent (i) could affect the likelihood of performance by Borrower
or  Guarantors  of any of the  Obligations,  (ii) could  affect  the  ability of
Borrower or Guarantors to perform any of the Obligations, (iii) could affect the
legality,  validity,  or binding nature of any of the Obligations or any lien or
encumbrance  securing any of the Obligations,  or (iv) could affect the priority
of any lien or encumbrance securing any of the Obligations.

     "MAXIMUM ALLOWED ADVANCE" has the meaning set forth in Section 5.4.

     "MERITAGE" means MERITAGE CORPORATION, a Maryland corporation.

     "MERITAGE GROUP" means Meritage and all parties reporting on a consolidated
basis with Meritage in accordance with GAAP.

     "MINIMUM  AMOUNT"  as to a LIBOR  Advance  shall mean  $5,000,000.00,  with
increments of $1,000,000.00 thereafter.

                                      -17-
<PAGE>
     "MODEL  UNIT"  means  a  Unit  constructed  and  furnished   initially  for
inspection by prospective  purchasers  that is not intended to be sold until all
or substantially all of the other Units in the Subdivision are sold.

     "MODIFICATION  OF EXISTING DEEDS OF TRUST" means one or more  Modifications
of Existing Deeds of Trust executed by Borrower, modifying the Existing Deeds of
Trust to secure repayment of the Loan, all in form and substance satisfactory to
Administrative Agent.

     "MULTIEMPLOYER  PLAN" shall mean a multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other than one
considered an ERISA  Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code) is making or accruing an obligation to make  contributions,  or
has within any of the preceding five plan years made or accrued an obligation to
make contributions.

     "NET SALES PROCEEDS" means the gross sales price of a Unit set forth in the
Purchase Contract therefor, less (i) customary tax prorations, (ii) ordinary and
customary  real estate  brokerage  commissions  paid to outside  brokers,  (iii)
reasonable and customary escrow fees,  closing costs and title  insurance,  (iv)
any landscape or pool  holdbacks,  and (v) any lot premium revenue sharing to be
disbursed to the lot developer.

     "NET BOOK VALUE"  means,  with respect to an asset owned by a member of the
Meritage Group, the gross investment of that member of the Meritage Group in the
asset, less all reserves (including loss reserves and reserves for depreciation)
attributable to that asset, all determined in accordance with GAAP.

     "NET INCOME" means, for any period,  after-tax consolidated net income from
continuing  operations,  less any  extraordinary  income,  non-operating  income
(except  interest  income)  or non-  cash  income  recorded  by such  Person  as
determined  in  accordance  with GAAP and less any  income in the  aggregate  in
excess of 20% of Net Income from mortgage Subsidiaries or title company,  escrow
agent or title underwriter Subsidiaries.

                                      -18-
<PAGE>
     "1934 ACT" shall mean the United States Securities Exchange Act of 1934, as
amended.

     "NON-RECOURSE  DEBT"  means  Indebtedness  of  Borrower  or  any  Guarantor
incurred  to acquire  property  for use in the  ordinary  course of  business of
Borrower or such  Guarantor  for which  Borrower  and/or such  Guarantor  is not
personally liable and recourse is limited to specific collateral.

     "NOTE" and "NOTES" shall mean, severally and collectively, promissory notes
of the  Borrower  executed and  delivered as provided in Section  3.3(a) as such
notes might be amended, modified, extended and restated from time to time.

     "OBLIGATIONS"  means the  obligations of Borrower and Guarantors  under the
Loan Documents.

     "OUTSTANDING LC BALANCE" in effect at any time means the maximum  aggregate
amount  available  to be drawn at such time  under all  outstanding  Letters  of
Credit,  the  determination of such maximum amount to assume compliance with all
conditions for a Disbursement.

     "OWNER'S EQUITY" means such Person's total assets minus total  Liabilities,
each as determined in accordance with GAAP.

     "PBGC" shall mean the Pension Benefit Guaranty  Corporation referred to and
defined in ERISA.

     "PERMITTED EXCEPTIONS" has the meaning specified in the Deed of Trust.

     "PERSON"  means a  natural  person,  a  partnership,  a joint  venture,  an
unincorporated association, a corporation, a limited liability company, a trust,
any other legal entity, or any Governmental Authority.

     "PLAN" shall mean any pension plan (other than a  Multiemployer  Plan) that
is (i) a qualified  plan under Section  401(a) of the Code,  (ii) subject to the
provisions of Title IV of ERISA or Section 412 of the Code, and (iii) maintained
for employees of the Borrower or any ERISA Affiliate.

                                      -19-
<PAGE>
     "PLANS AND SPECIFICATIONS" means (A) with respect to Lots Under Development
and  Finished  Lots,  the  plans  and  specifications  for  construction  of the
applicable  Improvements  that have been  prepared by an  architect or engineer,
together with any amendments or modifications to those plans and specifications,
and (B) with respect to Units, the plans and  specifications for construction of
a particular type of Unit that have been prepared by an architect.

     "PRIME RATE" shall mean the interest  rate per annum  designated by Norwest
Bank Arizona,  National  Association,  a national  banking  association,  or its
successors, as its "Prime Rate," as publicly announced by that bank from time to
time as a means of pricing  credit  extensions to some  customers and is neither
tied to any external  interest rate or index nor  necessarily the lowest rate of
interest  charged  by that bank at any given  time for any  particular  class of
customer or credit extension.

     "PRESOLD UNIT" means a Unit that is subject to a Purchase Contract.

     "PRODUCT  LINE" means a group of Units  which,  in the  ordinary  course of
Borrower's  business,  are marketed  together under a common plan based upon the
type of Unit constructed and the price of such Units.

     "PROJECT" means all of the Entitled Land, Lots Under Development,  Finished
Lots and Units that are owned by Borrower and are  encumbered by a Deed of Trust
from time to time.

     "PRO RATA SHARE" with respect to any  individual  Bank,  or Pro Rata Shares
with  respect  to all of the  Banks,  as the case may be,  means the  applicable
percentage or percentages of the Commitment assigned to each of the Banks as set
forth on Schedule 3.1 hereto or in the Co-Lender Agreement, as applicable.

     "PURCHASE  CONTRACT" means a bona fide written  agreement  between Borrower
and a third  Person  purchaser  for sale in the  ordinary  course of  Borrower's
business of any Unit and the related Lot,  contingent  solely on the sale of the

                                      -20-
<PAGE>
purchaser's  existing  residence,   and  such  agreement  is  accompanied  by  a
non-refundable  cash earnest money deposit or down payment in an amount not less
than  two  percent  (2%) of the  purchase  price  and  such  purchaser  has been
pre-qualified for permanent mortgage financing by a financial institution in the
business   of   making   residential   mortgage   loans  (or  in  lieu  of  such
pre-qualification,  a non-refundable  cash earnest money deposit or down payment
in an amount not less than twenty percent (20%) of the purchase price).

     "RECLASSIFICATION  ADJUSTMENT"  means, for any Unit reclassified as to type
pursuant to any  provision of this  Agreement,  a change in the Maximum  Allowed
Advance for such Unit to that applicable to the type of Unit as so reclassified.

     "REDEPLOYMENT LOSS" shall have the meaning assigned to such term in Section
3.12.

     "REGULATION D" shall mean Regulation D of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.

     "REGULATION G" shall mean Regulation G of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.

     "REGULATION T" shall mean Regulation T of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.

     "REGULATION U" shall mean Regulation U of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.

     "REGULATION X" shall mean Regulation X of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.

     "REPORTABLE  EVENT" shall mean any  reportable  event as defined in Section
4043(b) of ERISA or the  regulations  issued  thereunder  with respect to a Plan
(other than a Plan maintained by an ERISA Affiliate which is considered an ERISA
Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code).

                                      -21-
<PAGE>
     "REQUIREMENTS"  means any and all obligations,  other terms and conditions,
requirements,  and restrictions in effect now or in the future by which Borrower
or any or all of the Project is bound or which are  otherwise  applicable to any
or all of the Project,  construction of any Improvements or Units, or occupancy,
operation, ownership, or use of the Project (including, without limitation, such
obligations, other terms and conditions,  restrictions, and requirements imposed
by: (i) any law, ordinance, regulation, or rule (federal, state, or local); (ii)
any Approvals and Permits;  (iii) any Permitted Exceptions;  (iv) any condition,
covenant, restriction,  easement, right-of-way, or reservation applicable to the
Project;  (iv) any insurance  policies;  (v) any other agreement,  document,  or
instrument  to which  Borrower is a party or by which  Borrower or any or all of
the Project or the  business  or  operations  of Borrower is bound;  or (vi) any
judgment,  order, or decree of any  arbitrator,  other private  adjudicator,  or
Governmental  Authority to which Borrower is a party or by which Borrower or any
of the Project is bound.

     "SEC" shall mean the United States Securities and Exchange Commission.

     "SIGNIFICANT   DEBT  AGREEMENT"   means  all  documents,   instruments  and
agreements executed by any member of the Meritage Group, evidencing, securing or
ensuring any  Indebtedness  of any member of the Meritage Group or any guaranty,
in each case in excess of  $5,000,000  in  outstanding  principal  (or principal
equivalent) amount, including,  without limitation,  that $80,000,000.00 line of
credit  from  Guaranty  Federal  FSB  to  Legacy/Monterey  Homes  L.P.  and  any
refinancings thereof, but excluding any Indebtedness that is Non-Recourse Debt.

     "SPEC  UNIT"  means a Unit  constructed  for the  purpose  of  addition  to
Borrower's  inventory  of Units and not subject to a Purchase  Contract.  A Unit
that is not a Presold Unit or a Model Unit shall be deemed a Spec Unit.

                                      -22-
<PAGE>
    "STATED  AMOUNT" of a Letter of Credit means the stated amount as stated in
the Letter of Credit.

     "STATED  EXPIRY DATE" of a Letter of Credit means the Stated Expiry Date as
stated in the Letter of Credit.

     "SUBORDINATED DEBT" of a Person means any Indebtedness of that Person which
by its terms is subordinated, in form and substance and in a manner satisfactory
to  Administrative  Agent in lien and right of payment  to the prior  payment in
full of the Loan.

     "SUBDIVISION" means each single family residential project (or with respect
to  commercial   Entitled   Land,  a  commercial   project)  owned  by  Borrower
differentiated  by location  and/or  product  type and Lot size,  located in the
metropolitan  areas of Phoenix,  Tucson,  Sacramento and San Francisco and other
Northern   California   metropolitan   areas,   which  have  been   approved  by
Administrative Agent or for which Borrower is requesting approval. A Subdivision
may include one or more portions or phases of such a project.

     "SUBSIDIARIES" of a Person means (i) any corporation of which more than 50%
of the outstanding  securities having ordinary voting power shall at the time be
owned or controlled,  directly or indirectly,  by such Person, by one or more of
such  Person's  Subsidiaries,  or  by  such  Person  and  one  or  more  of  its
Subsidiaries, or (ii) any partnership,  association,  limited liability company,
joint  venture or similar  business  organization  of which more than 50% of the
ownership  interests  having ordinary voting power shall at the time be owned or
controlled,  directly  or  indirectly,  by such  Person,  by one or more of such
Person's Subsidiaries, or by such Person and one or more of its Subsidiaries.

     "TERMINATION" shall mean the payment in full of the principal amount of all
Loans, all accrued  interest thereon and all Fees with respect thereto,  coupled
with  termination  of all  obligations  (if any) of all of the Banks to  advance
funds or extend  credit  to or for the  benefit  of  Borrower  pursuant  to this
Agreement.

                                      -23-
<PAGE>
     "TERMINATION  DATE" means the date that is twenty-four (24) Calendar Months
after the Conversion Date.

     "TITLE  COMPANY"  means  one or  more  title  insurance  companies  and any
reinsurers or co- insurers  required by  Administrative  Agent issuing the Title
Policies required herein, which companies,  reinsurers, and co-insurers shall be
satisfactory to Administrative Agent in its reasonable discretion.

     "TITLE POLICY" and "TITLE POLICIES" mean, respectively,  each and all title
insurance  policies and  endorsements  thereto and  reinsurance or  co-insurance
agreements and  endorsements  described in this Agreement  insuring the Deeds of
Trust.

     "TOTAL  COST"  means the sum of the  Acquisition  Cost and the  Improvement
Construction Costs.

     "TYPE,"  when used in respect of any  Advance,  shall  refer to the rate by
reference to which interest on such Advance is determined.  For purposes hereof,
"rate" shall mean the LIBOR Rate or the Variable Rate.

     "UNIT" means a detached  single-family  residential dwelling constructed or
to be constructed on a Finished Lot.

     "UNIT COST" for a particular Unit means the typical hard costs for material
and labor and typical soft costs to construct the base Unit  (including  options
and  upgrades  up to a maximum  of 30% of the base  hard and soft  costs of such
Unit), plus the Acquisition Cost of the applicable Lot.

     "UNMATURED EVENT OF DEFAULT" means any condition or event that with notice,
passage of time, or both would be an Event of Default.

     "VARIABLE  RATE" shall mean the Prime Rate in effect from time to time. The
Variable  Rate shall change from time to time on the  effective  date of, and in
conformity with, changes in the Prime Rate.

                                      -24-
<PAGE>
     "VARIABLE  RATE ADVANCE" shall mean an Advance  bearing  interest at a rate
determined by reference to the Variable Rate.

     2.2 TERMS GENERALLY.

          (a) The  definitions  in Section 2.1 shall  apply  equally to both the
     singular and plural forms of the terms defined.

          (b) Whenever the context may require,  any pronoun  shall  include the
     corresponding masculine, feminine and neuter forms.

          (c) All references herein to Articles, Sections, Paragraphs,  Exhibits
     and  Schedules  shall  be  deemed  references  to  Articles,  Sections  and
     Paragraphs  of, and Exhibits and  Schedules to, this  Agreement  unless the
     context shall otherwise require.

          (d) Except as otherwise  expressly  provided  herein,  all terms of an
     accounting or financial  nature shall be construed in accordance with GAAP,
     as in effect from time to time.

SECTION 3. LOAN COMMITMENT

     3.1 COMMITMENT.  Each Bank agrees, severally but not jointly, to loan to or
for the benefit of  Borrower,  and  Borrower  shall be entitled to draw upon and
borrow,  in the  manner  and upon the terms  and  conditions  contained  in this
Agreement,  an amount  that shall not exceed  that  Bank's Pro Rata Share of the
Available  Commitment.  Subject  to the terms and  conditions  set forth in this
Agreement,  each Bank is providing to Borrower its  Commitment,  against which a
Bank  shall  fund its Pro Rata  Share of each  Advance  to be made to  Borrower,
repaid by Borrower, and readvanced to Borrower, as Borrower may request, and the
Issuing Bank shall issue such Letters of Credit as Borrower shall request, which
may be terminated or repaid by Borrower and reissued, provided that (i) there is
no Event of Default under any provision of this Agreement, (ii) no Advance shall
be made or Letter of Credit issued that would exceed the  Available  Commitment,

                                      -25-
<PAGE>
(iii) the Loan Balance shall not exceed the Available  Commitment,  (iv) no Bank
shall be obligated under any  circumstances to fund an Advance in excess of that
Bank's Pro Rata Share of the requested  Advance,  (v) the aggregate  amount of a
Bank's  funding of the Loan Balance and  participations  in Letters of Credit at
any one time  outstanding  shall not exceed its Pro Rata Share of the  Available
Commitment,  and (vi) no Letter of Credit  shall be issued with a Stated  Expiry
Date later than the  Termination  Date. The Banks shall not be obligated to fund
their Pro Rata Share of any Advance if, after giving effect thereto,  any of the
foregoing limitations would be exceeded.

     3.2 ADVANCES.

          (a) Each Advance shall be a single LIBOR Advance or a single  Variable
     Rate Advance,  as Borrower may request.  Advances of more than one Type may
     be outstanding at the same time; PROVIDED, HOWEVER, that (i) Borrower shall
     not be entitled to request a LIBOR Advance which, if made,  would result in
     an  aggregate  of  more  than  three  (3)  separate  LIBOR  Advances  being
     outstanding  collectively  under  the Loan at any one time,  (ii)  Borrower
     shall not be  entitled to request a LIBOR  Advance  which,  if made,  would
     result in an  aggregate  of more  than  seventy-five  percent  (75%) of the
     outstanding  principal  balance of the Loan consisting of LIBOR Advances at
     the time such LIBOR Advance is made,  and (iii) each LIBOR Advance shall be
     in a  principal  amount  which is not less  than the  Minimum  Amount.  For
     purposes  of  the  foregoing,  LIBOR  Advances  having  different  Interest
     Periods,  regardless  of whether they  commence on the same date,  shall be
     considered separate LIBOR Advances.

          (b) Each Advance shall be made by the Banks ratably in accordance with
     their Pro Rata Share of the Available Commitment;  PROVIDED,  HOWEVER, that
     the failure of any Bank to make any Advance shall not in itself relieve any
     other  Bank of its  obligation  to lend  hereunder  (it  being  understood,

                                      -26-
<PAGE>
     however,  that no Bank shall be  responsible  for the  failure of any other
     Bank to make any  Advance  required  to be made by such other Bank) and any
     Event of Default that occurs as a result of such failure shall be deemed to
     have been irrevocably waived by the Banks.

     3.3 NOTES; REPAYMENT OF LOAN.

          (a) The Loan  made by each Bank  shall be  evidenced  by a Note,  duly
     completed and executed on behalf of Borrower, dated the date of said Bank's
     Commitment, in substantially the form of EXHIBIT "A" hereto, payable to the
     order of such Bank in a principal  amount equal to said Bank's  Commitment.
     Each Note  shall bear  interest  from the date  thereof on the  outstanding
     principal  balance  thereof as set forth in Section 3.4. Each Bank may (and
     is hereby authorized by Borrower, at said Bank's discretion, to) endorse on
     a schedule  attached to the Note held by such Bank (or on a continuation of
     such  schedule  attached  to each  such Note and made a part  thereof),  or
     otherwise  to  record  in such  Bank's  internal  records,  an  appropriate
     notation  evidencing the date and amount of each Advance of such Bank, each
     payment  or  prepayment  of  principal  of any such  Advance  and the other
     information  provided for on such  schedule;  PROVIDED,  HOWEVER,  that the
     failure of any Bank to make such a notation or any error  therein shall not
     in any  manner  affect  the  obligation  of  Borrower  to repay the Loan in
     accordance with the terms of the relevant Note.

          (b) All unpaid and  accrued  interest  shall be due and payable on the
     first day of each and every month commencing with the first month after the
     date hereof.

          (c) The  entire  unpaid  principal  balance,  all  accrued  and unpaid
     interest and all other amounts due and payable under the Notes shall be due
     and payable in full on the Termination Date.

                                      -27-
<PAGE>
     3.4 INTEREST ON LOAN.

          (a)  Subject to the  provisions  of Sections  3.6 and 3.7,  each LIBOR
     Advance shall bear interest  (computed on the basis of the actual number of
     days  elapsed  over a year of 360 days) at a rate per annum  equal to,  the
     LIBOR Rate for the  Interest  Period in effect for such LIBOR  Advance plus
     the  LIBOR  Margin.  The  LIBOR  Rate for  each  Interest  Period  shall be
     determined by  Administrative  Agent in accordance  with the  provisions of
     this Agreement,  and such determination shall be conclusive absent manifest
     error. Administrative Agent shall promptly advise Borrower and each Bank of
     such LIBOR Rate.

          (b) Subject to the  provisions  of Sections 3.6 and 3.7, each Variable
     Rate  Advance  shall  bear  interest  (computed  on the basis of the actual
     number of days  elapsed  over a year of 360 days,  as the case may be) at a
     rate per annum  equal to the  Variable  Rate.  The  Variable  Rate shall be
     determined by  Administrative  Agent in accordance  with the  provisions of
     this Agreement,  and such determination shall be conclusive absent manifest
     error. Administrative Agent shall promptly advise Borrower and each Bank of
     such Variable Rate.

     3.5 NOTICE OF ADVANCES. In order to request an Advance,  Borrower shall, in
addition to any other  requirements  contained  herein,  give to  Administrative
Agent written or telecopy  notice (or  telephone  notice  promptly  confirmed in
writing  or by  telecopy)  (an  "Advance  Notice"),  (a) in the  case of a LIBOR
Advance,  not later than 9:00 a.m.,  Arizona time,  three Business Days before a
proposed Advance and (b) in the case of a Variable Rate Advance,  not later than
9:00 a.m.,  Arizona time, on the same Business Day of a proposed  Advance.  Each
Advance Notice shall be irrevocable,  shall in each case specify (i) whether the
Advance  then  being  requested  is to be a LIBOR  Advance  or a  Variable  Rate
Advance;  (ii) the date of such Advance  (which shall be a Business Day) and the
amount  thereof;  (iii) if such Advance is to be a LIBOR  Advance,  the Interest
Period with respect thereto; and (iv) if such Advance is to refinance all or any

                                      -28-
<PAGE>
part of any  outstanding  Advance,  the identity and amount of such Advance that
Borrower  requests to be refinanced;  and shall be accompanied by a Disbursement
Request. If no election as to the Type of Advance, or if no Interest Period with
respect to any LIBOR  Advance,  is  specified  in any Advance  Notice,  then the
requested  Advance shall be a Variable Rate Advance.  Subject to Section 3.7, if
Borrower  shall not have given  notice in  accordance  with this  Section of its
election to refinance a LIBOR Advance prior to the end of the Interest Period in
effect for such Advance, then Borrower (unless such Advance is repaid at the end
of such Interest  Period) shall be deemed to have given notice of an election to
refinance such Advance with a Variable Rate Advance.

     3.6  DEFAULT  INTEREST.  If  Borrower  shall  default in the payment of the
principal of or interest on the Loan or any other amount becoming due hereunder,
whether by scheduled maturity, notice of prepayment,  acceleration or otherwise,
Borrower shall on demand from time to time pay interest, to the extent permitted
by law,  on such  defaulted  amount up to but not  including  the date of actual
payment (after as well as before judgment) at the Default Rate.

     3.7 CONVERSION AND CONTINUATION OF ADVANCES.  Borrower shall have the right
at any time upon prior irrevocable notice to Administrative  Agent (i) not later
than 9:00 a.m., Arizona time, two Business Days prior to conversion,  to convert
any LIBOR Advance into a Variable  Rate Advance,  (ii) not later than 9:00 a.m.,
Arizona time,  three (3) Business Days prior to conversion or  continuation,  to
convert any Variable  Rate Advance into a LIBOR Advance or to continue any LIBOR
Advance as a LIBOR  Advance for an  additional  Interest  Period,  and (iii) not
later than 9:00 a.m., Arizona time, three (3) Business Days prior to conversion,
to convert  the  Interest  Period with  respect to any LIBOR  Advance to another
permissible Interest Period, subject in each case to the following:

          (a) If less than all the outstanding  principal  amount of any Advance
     shall be converted or continued as a LIBOR Advance, the aggregate principal
     amount of such Advance  converted  or continued  shall be not less than the
     Minimum Amount;

                                      -29-
<PAGE>
          (b) Any LIOR Advance may be converted only at the end of the Interest
     Period applicable thereto;

          (c) Any  portion of an Advance  maturing  or  required to be repaid in
     less than one  month  may not be  converted  into or  continued  as a LIBOR
     Advance;

          (d) Any portion of a LIBOR  Advance  which  cannot be  continued  as a
     LIBOR Advance by reason of clauses (b) and (c) above shall be automatically
     converted at the end of the Interest Period in effect for such Advance into
     a Variable Rate Advance; and

          (e) Each conversion or  continuation  shall be made pro rata among the
     Banks in accordance with the respective  principal amounts of the converted
     or continued Advances.

     Each notice  pursuant to this Section shall be irrevocable  and shall refer
to this  Agreement  and specify (i) the  identity and amount of the Advance that
Borrower requests be converted or continued,  (ii) whether such Advance is to be
converted to or continued as a LIBOR Advance or a Variable  Rate Advance,  (iii)
if such notice requests a conversion,  the date of such conversion  (which shall
be a Business  Day) and (iv) if such  Advance is to be converted to or continued
as a LIBOR Advance,  the Interest  Period with respect  thereto.  If no Interest
Period is  specified  in any such notice with  respect to any  conversion  to or
continuation  as a LIBOR  Advance,  Borrower shall be deemed to have selected an
Interest Period of one month's duration.  Administrative  Agent shall advise the
other  Banks of any notice  given  pursuant  to this  Section and of each Bank's
portion of any converted or continued Advance.  If Borrower shall not have given
notice in  accordance  with this  Section to continue  any LIBOR  Advance into a
subsequent  Interest  Period  (and  shall not  otherwise  have  given  notice in
accordance  with this Section to convert such Advance),  such Advance shall,  at

                                      -30-
<PAGE>
the end of the Interest Period applicable thereto (unless repaid pursuant to the
terms hereof), automatically be continued as a Variable Rate Advance.

     3.8 PREPAYMENT.

          (a) Borrower shall have the right at any time and from time to time to
     prepay any Variable Rate Advance without prior notice.

          (b) Borrower shall have the right at any time and from time to time to
     prepay any LIBOR  Advance,  in whole or in part,  upon  written or telecopy
     notice (or  telephone  notice  promptly  confirmed  by written or  telecopy
     notice)  to  Administrative  Agent  three  (3)  Business  Days in  advance;
     PROVIDED, HOWEVER, that each partial prepayment shall be in an amount which
     is not less than the Minimum Amount.

          (c) Each notice of  prepayment  of a LIBOR  Advance  shall specify the
     prepayment date and the principal  amount of each LIBOR Advance (or portion
     thereof) to be prepaid,  shall be irrevocable  and shall commit Borrower to
     prepay such LIBOR Advance (or portion thereof) by the amount stated therein
     on the date stated  therein.  All  prepayments of LIBOR Advances under this
     Section shall be subject to Section 3.12 but otherwise  without  premium or
     penalty.

     3.9 PAYMENTS.

               (a)  Borrower   shall  make  each  payment   (including   without
          limitation  principal  of or  interest  on any  Advance or any Fees or
          other  amounts)  hereunder  and under any other Loan Document no later
          than  11:00  a.m.,  Arizona  time,  on the date when due in Dollars to
          Administrative  Agent  at its  offices  at 100 West  Washington,  11th
          Floor, Phoenix, Arizona 85003, Attention:  Regional Real Estate Group,
          MAC  S4101-110,  in  immediately  available  funds  or at  such  other

                                      -31-
<PAGE>
          location  as  Administrative  Agent may notify  Borrower in writing at
          least three (3) Business Days prior to such payment.  Borrower  agrees
          that  Administrative   Agent  may  electronically   debit  an  account
          designated  by  Borrower  in  a  separate   written   agreement   with
          Administrative  Agent, for each such payment.  Any payment received by
          Administrative  Agent  after 11:00 a.m.,  Arizona  time,  other than a
          payment  made by  electronic  debit,  shall  be  deemed  to have  been
          received by Administrative Agent on the next Business Day.

               (b) Whenever any payment (including without limitation  principal
          of or interest on any Advance or any Fees or other amounts)  hereunder
          or under any other Loan Document shall become due, or otherwise  would
          occur,  on a day that is not a Business  Day, such payment may be made
          on the next succeeding  Business Day, and such extension of time shall
          in such case be included in the  computation  of interest or Fees,  if
          applicable.

     3.10 RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.

               (a) If any Bank shall have determined that the adoption after the
          date  hereof  of any law,  rule,  regulation  or  guideline  regarding
          capital  adequacy,  or any change  after the date hereof in any of the
          foregoing or in the  interpretation  or  administration  of any of the
          foregoing by any  Governmental  Authority,  central bank or comparable
          agency charged with the interpretation or administration  thereof,  or
          compliance  by any Bank (or any  Lending  Office of such  Bank) or any
          Bank's holding company with any request or directive promulgated after
          the date hereof regarding  capital adequacy (whether or not having the
          force  of law) of any such  Governmental  Authority,  central  bank or
          comparable  agency,  has or would have the effect of reducing the rate
          of return on such  Bank's  capital or on the  capital  of such  Bank's
          holding  company,  if any, as a consequence  of this  Agreement or the

                                      -32-
<PAGE>
          Loan made by such Bank to a level  below  that which such Bank or such
          Bank's  holding  company  could have  achieved but for such  adoption,
          change or compliance  (taking into  consideration such Bank's policies
          and the  policies  of such  Bank's  holding  company  with  respect to
          capital adequacy and any change to the Variable Rate or the LIBOR Rate
          as a result of any such adoption  change or  compliance)  by an amount
          deemed by such Bank in good  faith to be  material,  then from time to
          time Borrower shall pay to such Bank such additional amount or amounts
          as will  compensate  such Bank or such Bank's holding  company for any
          such reduction suffered.

               (b) Notwithstanding any other provision herein, if after the date
          of this Agreement any change in applicable  law or regulation  (either
          by way of changes in existing laws or  regulations  or the adoption of
          new laws or regulations) or in the  interpretation  or  administration
          thereof by any Governmental  Authority charged with the interpretation
          or  administration  thereof  (whether  or not having the force of law)
          shall  change the basis of  taxation  of  payments  to any Bank of the
          principal of or interest on any LIBOR Advance made by such Bank,  Fees
          or other amounts payable  hereunder  (other than changes in respect of
          taxes imposed on the net income of such Bank), or shall impose, modify
          or deem applicable any reserve, special deposit or similar requirement
          against  assets  of,  deposits  with or for the  account  of or credit
          extended  by such  Bank,  including  without  limitation  any  reserve
          requirement that may be applicable to "eurocurrency liabilities" under
          and as defined in  Regulation  D, or shall  impose on such Bank or the
          London interbank  market any other condition  affecting this Agreement
          or any LIBOR  Advance made by such Bank,  and the result of any of the
          foregoing  shall be to  increase  the cost to such  Bank of  making or
          maintaining  any  LIBOR  Advance  or to reduce  the  amount of any sum
          received or receivable  by such Bank  hereunder or under the Notes (in

                                      -33-
<PAGE>
          respect of LIBOR  Advance  only),  whether of  principal,  interest or
          otherwise,  by an  amount  deemed  by such  Bank in good  faith  to be
          material,  then, Borrower will pay to such Bank such additional amount
          or  amounts as will  compensate  such Bank for such  additional  costs
          incurred or reduction suffered.

               (c) A certificate of a Bank, setting forth such amount or amounts
          as shall be necessary to compensate  such Bank or its holding  company
          as specified in  paragraph  (a) or (b) above,  as the case may be, and
          setting forth in reasonable  detail the manner in which such amount or
          amounts have been determined, shall be delivered to Borrower and shall
          be conclusive absent manifest error.  Borrower shall pay each Bank the
          amount  shown as due on any such  certificate  delivered  by it within
          thirty (30) days after its receipt of the same.

               (d) Except as otherwise  provided herein,  failure on the part of
          any Bank to demand  compensation  for any increased costs or reduction
          in amounts received or receivable with respect to any period shall not
          constitute a waiver of said Bank's right to demand  compensation  with
          respect to such period or any other  period.  The  protection  of this
          Section  shall be  available  to any Bank  regardless  of any possible
          contention of the  invalidity  or  inapplicability  of the law,  rule,
          regulation,  guideline or other  change or condition  which shall have
          occurred or been imposed,  provided  that if such Bank is  compensated
          for such increased costs or reduction by any Governmental Authority or
          third party in the event such invalidity or inapplicability is finally
          determined,  then such Bank shall  return to Borrower  the  respective
          compensation  paid by Borrower,  up to the lesser of such amount as is
          received by such Bank or such amount as was paid by Borrower.

                                      -34-
<PAGE>
               (e) Without  prejudice  to the  survival  of any other  agreement
          contained  herein,  the agreements and  obligations  contained in this
          Section shall survive  Termination,  provided that Borrower shall have
          no  further  obligation  to the  Banks  under  this  Section  unless a
          certificate  setting  forth the amount of such  obligation  shall have
          been  delivered by the Banks  pursuant to  paragraph  (c) above within
          ninety  (90)  calendar   days  after  the  last  event   required  for
          Termination to occur.

               (f) Each  Bank or  Administrative  Agent on  behalf  of the Banks
          shall give  notification to Borrower of any event or prospective event
          which will give rise to the operation of paragraphs (a), (b) or (d) of
          this Section,  such notification to be sent within thirty (30) days of
          the date of the public  promulgation of the effective date of any such
          law, rule, regulation, guidelines or change therein.

     3.11 CHANGE IN LEGALITY.

               (a) Notwithstanding any other provision herein, if after the date
          of  this  Agreement  any  change  in any law or  regulation  or in the
          interpretation  thereof by any Governmental Authority charged with the
          administration  or  interpretation  thereof shall make it unlawful for
          any Bank to make or  maintain  any LIBOR  Advance or to give effect to
          its  obligations  as  contemplated  hereby  with  respect to any LIBOR
          Advance,   then  by  written  notice  to  Borrower  setting  forth  in
          reasonable  detail the relevant  circumstances and the effect thereof,
          such Bank may:

                    (i) declare that LIBOR  Advances will not thereafter be made
               by such Bank  hereunder,  whereupon any request by Borrower for a
               LIBOR  Advance  shall be  deemed  a  request  to such  Bank for a
               Variable   Rate  Advance   unless  such   declaration   shall  be
               subsequently  withdrawn  (but such  request  shall be for a LIBOR
               Advance as to the other Banks); and

                                      -35-
<PAGE>
                    (ii) require that all outstanding  LIBOR Advances made by it
               be converted to Variable Rate  Advances,  in which event all such
               LIBOR Advances shall be automatically  converted to Variable Rate
               Advances as of the  effective  date of such notice as provided in
               paragraph (b) below.

In the event any Bank shall  exercise  its rights  under (i) or (ii) above,  all
payments and prepayments of principal which would otherwise have been applied to
repay the LIBOR Advances that would have been made by such Bank or the converted
LIBOR  Advances of such Bank shall instead be applied to repay the Variable Rate
Advances made by such Bank in lieu of, or resulting from the conversion of, such
LIBOR Advances.

          (b) For  purposes  of this  Section,  a notice to Borrower by any Bank
     shall be effective as to each LIBOR Advance,  if lawful, on the last day of
     the Interest  Period  currently  applicable to such LIBOR  Advance;  in all
     other  cases  such  notice  shall be  effective  on the date of  receipt by
     Borrower.

          (c) Each Bank shall use its best  efforts to give prompt  notification
     to Borrower of any event or  prospective  event which will give rise to the
     operation of paragraph (a) of this Section.

     3.12  REDEPLOYMENT  LOSS.  Borrower  may prepay  all or any  portion of the
principal amount of the Loans bearing interest at a LIBOR Rate, provided that if
Borrower  makes any such  prepayment  other than on the last day of an  Interest
Period  (except  pursuant  to  Section  3.14(a)(ii)),  Borrower  (a)  with  such
prepayment,  shall pay all accrued  interest  on the  principal  amount  prepaid
(unless less than all of the principal  amount of the Loan is being prepaid,  in
which case such interest shall be due and payable on the next scheduled interest
payment date),  (b) with such  prepayment,  shall pay an  administrative  fee of
$250.00 to each Bank, and (c) on demand,  shall reimburse the Banks and hold the

                                      -36-
<PAGE>
Banks harmless from all losses and expenses incurred by the Banks as a result of
such prepayment (the "Redeployment Loss"),  including,  without limitation,  any
losses and expenses  arising from the  liquidation or  reemployment  of deposits
acquired to fund or maintain the principal  amount prepaid.  Such  reimbursement
shall be  calculated  as though each Bank funded the  principal  amount  prepaid
through the purchase of U.S.  Dollar deposits in the London,  England  interbank
market having a maturity  corresponding  to such Interest  Period and bearing an
interest rate equal to the LIBOR Rate for such Interest Period,  whether in fact
that  is the  case or not.  Each  Bank's  determination  of the  amount  of such
reimbursement shall be conclusive in the absence of manifest error.

     3.13 TAXES.

          (a) All  payments  by  Borrower  under  this  Agreement  shall be made
     without setoff or  counterclaim  and in such amounts as may be necessary in
     order that all such  payments  after  deduction  or  withholding  for or on
     account  of  any  present  or  future  taxes,  levies,   imposts,   duties,
     withholdings or other charges of whatsoever nature and all liabilities with
     respect  thereto,  other than any taxes on or  measured by the gross or net
     income of a Bank  pursuant to (i) the income  and/or  franchise tax laws of
     the  jurisdictions  in which such Bank is  incorporated  or organized or in
     which the  principal  office of such Bank or the branch  that is a party to
     this  Agreement  of that  Bank is  located,  and  (ii)  the  income  and/or
     franchise tax laws of the  jurisdictions in which the Lending Office or the
     Eurodollar  Lending  Office  of  that  Bank  are  then  located  (all  such
     nonexcluded taxes, levies,  imposts,  duties,  withholdings and liabilities
     being  hereinafter  referred  to as  "Taxes"),  shall  not be less than the
     amounts otherwise specified to be paid by Borrower to or for the account of
     Administrative  Agent or Bank  (or any  transferee  or  assignee  (each,  a
     "Transferee"))  under this Agreement.  Upon request of Borrower in writing,

                                      -37-
<PAGE>
     each Bank shall designate a different Lending Office or Eurodollar  Lending
     Office,  as the case may be, if such  designation will avoid the imposition
     of Taxes and if such  designation  will not,  in the sole  judgment of such
     Bank,  be  otherwise  disadvantageous  to such Bank.  With  respect to each
     deduction or withholding  for or on account of any Taxes of  Administrative
     Agent or any Bank (or  Transferee),  Borrower  shall  promptly  (and in any
     event not later than 45 days thereafter)  furnish to such Agent or Bank (or
     Transferee) a receipt evidencing payment thereof.

          (b) In addition, Borrower agrees to pay any present or future stamp or
     documentary taxes or any other excise or property taxes, charges or similar
     levies which arise from any payment made  hereunder or from the  execution,
     delivery or  registration  of, or otherwise with respect to, this Agreement
     or any other Loan Document (hereinafter referred to as "Stamp Taxes"). Each
     Bank that is organized  outside the United States  represents  and warrants
     that as of the  closing  date,  it is not aware of any Stamp Tax imposed by
     the jurisdiction in which it is incorporated that applies to this Agreement
     or any payment made to such Bank hereunder.

          (c)  Borrower   will   indemnify   each  Bank  (or   Transferee)   and
     Administrative  Agent  for  the  full  amount  of  Taxes  and  Stamp  Taxes
     (including  without  limitation  any Taxes or Stamp  Taxes  imposed  by any
     jurisdiction  on amounts  payable under this Section) paid by such Bank (or
     Transferee) or Administrative  Agent, as the case may be, and any liability
     (including  without  limitation  penalties,  interest and expenses) arising
     therefrom or with respect thereto, whether or not such Taxes or Stamp Taxes
     were  correctly  or legally  asserted by the relevant  taxing  authority or
     other Governmental Authority.  Such indemnification shall be made within 30
     days after the date any Bank (or  Transferee) or  Administrative  Agent, as

                                      -38-
<PAGE>
     the case may be, makes written demand therefor. If a Bank, as the result of
     any Tax with  respect  to which  Borrower  is  required  to make a  payment
     pursuant  to this  Section  shall  realize  a tax  credit  or refund in its
     country or other  jurisdiction of  incorporation  or organization or in the
     jurisdiction in which its principal  office or Lending Office or Eurodollar
     Lending  Office is then located,  which tax credit or refund would not have
     been realized but for  Borrower's  payment of such Tax, such Bank shall pay
     to Borrower an amount  equal to such tax credit or refund (to the extent of
     amounts that have been paid by Borrower  under this Section with respect to
     such  credit or refund)  net of all  out-of-pocket  expenses  of such Bank;
     PROVIDED that Borrower, upon the request of the Bank, agrees to return such
     credit or refund (plus  penalties,  interest or other charges) to such Bank
     in the event such Bank is  required  to repay such  credit or refund to the
     relevant taxing authority. Any amount required to be calculated pursuant to
     this Section shall be calculated in good faith by the Bank (or  Transferee)
     or  Administrative  Agent,  and such  calculation  shall be conclusive  and
     binding  upon the  parties  hereto  absent  manifest  error.  In the  event
     Borrower  is required  to make any  payment  pursuant to this  Section to a
     Bank, such Bank shall promptly and in a timely manner take all such actions
     as may be  reasonably  available to it to pursue any possible tax credit or
     refund of such payment.

          (d) Without prejudice to the survival of any other agreement contained
     herein,  the  agreements  and  obligations  contained in this Section shall
     survive   Termination,   provided  that  Borrower  shall  have  no  further
     obligation  to the Banks under this Section  unless a  certificate  setting
     forth the amount of such obligation  shall have been delivered by the Banks
     to Borrower  within ninety (90)  calendar days after the  occurrence of the
     last event to occur required for the Termination to occur.

                                      -39-
<PAGE>
          (e) Each Bank (or  Transferee)  that is  organized  outside the United
     States (i) on or before the date it becomes a party to this  Agreement  and
     (ii) with  respect to each  Lending  Office or  Eurodollar  Lending  Office
     located  outside  the  United  States of such Bank (or  Transferee),  on or
     before  the date  such  office  or  branch  becomes  a  Lending  Office  or
     Eurodollar  Lending  Office,  shall deliver to Borrower and  Administrative
     Agent such  certificates,  documents or other evidence,  as required by the
     Code or Treasury  Regulations  issued pursuant thereto,  including Internal
     Revenue Service Form 1001 and W-8 or any successor form or Form 4224 or any
     successor  form,  properly  completed  and duly  executed  by such Bank (or
     Transferee)  establishing  that  payments  received  hereunder  are (i) not
     subject to  withholding  under the Code because such payment is effectively
     connected  with the  conduct  by such  Bank (or  Transferee)  of a trade or
     business in the United States in which case such Bank or  Transferee  shall
     deliver to Borrower  Internal  Revenue  Service Form 4224 or any  successor
     form or (ii) totally  exempt from United  States  Federal  withholding  tax
     under a provision of an applicable tax treaty. In addition,  each such Bank
     (or Transferee)  shall, if legally able to do so,  thereafter  deliver such
     certificates,  documents or other  evidence from time to time  establishing
     that payments  received  hereunder are not subject to such withholding upon
     receipt of a written  request  therefor  from  Borrower  or  Administrative
     Agent.  Unless  Borrower and  Administrative  Agent have received  forms or
     other documents  satisfactory to them indicating that payments hereunder or
     under the Notes are not subject to United States Federal  withholding  tax,
     Borrower  or  Administrative  Agent  shall  withhold  such  taxes from such
     payments at the applicable statutory rate.

                                      -40-
<PAGE>
          (f) Borrower  shall not be required to pay any  additional  amounts to
     any Bank (or  Transferee)  or  Administrative  Agent in  respect  to United
     States  Federal  withholding  tax  pursuant to  paragraph  (a) above if the
     obligation to pay such  additional  amounts would not have arisen but for a
     failure by such Bank (or Transferee) or Administrative Agent to deliver the
     certificates,  documents  or  other  evidence  specified  in the  preceding
     paragraph  (e)  unless  such  failure  is  attributable  to (i) a change in
     applicable law,  regulation or official  interpretation  thereof or (ii) an
     amendment or  modification  to or a revocation of any applicable tax treaty
     or  a  change  in  official   position   regarding   the   application   or
     interpretation  thereof,  in each  case on or after  the date such Bank (or
     Transferee) or Administrative  Agent becomes a party to this Agreement (or,
     if applicable,  on or after the date a Lending Office or Eurodollar Lending
     Office of such Bank (or  Transferee)  or Agent  became a Lending  Office or
     Eurodollar Lending Office hereunder).

          (g)  Nothing  contained  in this  Section  shall  require any Bank (or
     Transferee)  or  Administrative  Agent  to  make  available  any of its tax
     returns (or any other information  relating to its taxes) which it deems to
     be confidential.

          (h) Each Bank or  Administrative  Agent on  behalf of the Banks  shall
     give  notification to Borrower of any event or prospective event which will
     give rise to the operation of  paragraphs  (a), (b) or (c) of this Section,
     such  notification  to be sent  within  thirty (30) days of the date of the
     public promulgation of the effective date of any such Taxes or Stamp Taxes.

     3.14 TERMINATION OR ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES.

          (a) If any Bank (or  Transferee)  or  Administrative  Agent claims any
     additional  amounts  payable  pursuant to Section  3.10 or Section  3.13 or

                                      -41-
<PAGE>
     exercises its rights under Section  3.11, it shall  (consistent  with legal
     and  regulatory   restrictions)   (i)  promptly  notify  Borrower  (through
     Administrative  Agent) of the circumstances  giving rise to such additional
     amounts or the  exercise  of such rights and (ii) file any  certificate  or
     document requested by Borrower or change the jurisdiction of its applicable
     Lending  Office or take any other  action if the making of such a filing or
     change or the taking of such action  would avoid the need for or reduce the
     amount of any such additional  amounts which may thereafter accrue or avoid
     the  circumstances  giving rise to such exercise and would not, in the sole
     determination of such Bank (or Transferee), be otherwise disadvantageous to
     such Bank (or Transferee).

          (b) In the  event  that any Bank  shall  have  delivered  a notice  or
     certificate  pursuant  to  Sections  3.10 or  3.11,  or  Borrower  shall be
     required  to make  additional  payments  to any Bank  under  Section  3.13,
     Borrower shall have the right,  at its option and own expense,  upon notice
     to such Bank and  Administrative  Agent,  (i) in the case of Sections 3.10,
     3.11 or 3.13 only, to terminate the Commitments of such Bank or (ii) in all
     cases  described  in this  Section,  to require  such Bank to transfer  and
     assign without recourse (in accordance with and subject to the restrictions
     contained herein and in the Co-Lender Agreement) all its interests,  rights
     and  obligations  under this  Agreement  to another  financial  institution
     reasonably  acceptable  to  Administrative  Agent which  shall  assume such
     obligations;  PROVIDED that (i) no such  termination  or  assignment  shall
     conflict  with any law,  rule or  regulation  or order of any  Governmental
     Authority and (ii) Borrower or the assignee,  as the case may be, shall pay
     to the affected  Bank in  immediately  available  funds on the date of such
     termination or assignment the principal of and interest accrued to the date
     of payment on the Loans made by it hereunder and all other amounts  accrued
     for its  account  or owed to it  hereunder,  including  without  limitation
     amounts payable and owed to it pursuant to Sections 3.10, 3.11 and 3.12.

                                      -42-
<PAGE>
          (c) Each Bank  represents and warrants to Borrower that as of the date
     hereof it is not aware of any claims  available to it under  Sections 3.10,
     3.11 or 3.13 or any circumstances which it has determined will enable it to
     make any such claims.

     3.15 CONVERSION  DATE. Upon each  anniversary  date of this Agreement,  the
Banks  may,  at the  request  of  Borrower,  in the  Bank's  sole  and  absolute
discretion,  extend the Conversion Date for a period of twelve (12) months, upon
such terms and  conditions as the Banks may require,  in their sole and absolute
discretion,  and with such changes to this Agreement or the terms and conditions
herein as the Banks may require, in their sole and absolute discretion. From and
after the Conversion Date, the Loan shall cease to be a revolving line of credit
and the Commitment Amount shall be automatically  reduced on the last day of the
third Calendar Month in the Conversion  Period and on the last day of each third
Calendar Month thereafter, with the amount of each such reduction to be equal to
one-eighth  of  the  Commitment  Amount  in  effect  as  of  the  day  prior  to
commencement of the Conversion Period.

     3.16 ADVANCES DURING  CONVERSION  PERIOD.  Borrower may continue to request
Advances   during  the  Conversion   Period.   Such  Advances  may  be  made  by
Administrative  Agent to the terms and conditions of this Agreement.  During the
Conversion  Period,  Issuing Bank shall have no  obligation  to issue Letters of
Credit  and  Administrative  Agent  shall  have no  obligation  to  approve  any
additional  Collateral  in the Borrowing  Base.  During the  Conversion  Period,
Advances  shall only be  available  with  respect to Entitled  Land,  Lots Under
Development,  Finished Lots and Units in Approved  Subdivisions which constitute
the Borrowing Base on such date.

     3.17 MANDATORY PREPAYMENTS.  If for any reason at any time the Loan Balance
exceeds the Available  Commitment,  Borrower shall  immediately  upon receipt of
notice from Administrative  Agent, make a payment to Administrative  Agent in an

                                      -43-
<PAGE>
amount  equal to the sum of (i) such  excess  principal,  and (ii)  accrued  and
unpaid  interest  thereon.  Administrative  Agent, in its sole  discretion,  may
suspend the commitment to make any further Advances until  Administrative  Agent
shall have received such payment.

     3.18 EXISTING LOAN. The Loan is intended to amend,  restate and replace the
Existing  Loan.  Upon the  satisfaction  of the  conditions  precedent set forth
herein for the  inclusion in the  Borrowing  Base of Entitled  Loan,  Lots Under
Development,  Finished  Lots and Units covered by the Existing  Loan,  the Banks
shall make  Advances  to the extent  available  hereunder  in  repayment  of the
Existing  Loan. To the extent that such Advances are not sufficient to repay the
Existing Loan in full,  Borrower  shall repay such excess from its own funds and
not the proceeds of the Loan.  The Existing  Deeds of Trust shall be modified by
the  Modification  of  Existing  Deeds of Trust to  secure  payment  of the Loan
pursuant to the terms  hereof.  Upon such  repayment in full,  the Existing Loan
shall be terminated.

SECTION 4. ADVANCES

     4.1 METHOD FOR ADVANCES.  Advances  shall be made by  Administrative  Agent
(upon receipt of such funds from the Banks) in minimum amounts of $500,000.00 no
more frequently than daily on the same Business Day that notice is received,  if
received by 9:00 a.m.,  Arizona  time,  or on the next Business Day if notice is
received  after 9:00 a.m. on a Business Day, at the written  request of a Person
or Persons  listed on a signature  authorization  form  executed by Borrower and
delivered  to   Administrative   Agent  from  time  to  time,  and  approved  by
Administrative  Agent.  Such Person or Persons are hereby authorized by Borrower
to direct the  disposition  of the proceeds of Advances  until written notice of
the  revocation of such  authority is received  from Borrower by  Administrative
Agent  and  Administrative  Agent  has had a  reasonable  time to act upon  such
notice.  Administrative  Agent shall have no duty to monitor for  Borrower or to
report to Borrower the use of proceeds of Advances.

                                      -44-
<PAGE>
     4.2 PURPOSE OF ADVANCES.  Advances  shall be used first to pay interest and
fees due under the Loan  Documents  and to pay or reimburse  Borrower for costs,
expenses,  and  fees  actually  incurred  by  Borrower  in  connection  with the
acquisition  of  the  Project,   the  construction  of  the  Improvements,   the
construction  of Units,  and other costs  incurred  by Borrower in the  ordinary
course of  Borrower's  business  and  provided  that all such  amounts  that are
currently due in the ordinary course of business have been paid, Advances may be
used for general working capital purposes of Borrower.

     4.3  DETERMINATION  OF AMOUNT OF ADVANCES.  The Available  Commitment,  the
Collateral Value, the Maximum Allowed  Advances,  and the amount of each Advance
shall be  determined  by  Administrative  Agent based upon:  (i) the  Collateral
Certificate  most recently  submitted by Borrower  (adjusted to reflect Entitled
Land,  Lots  Under  Development,  Finished  Lots and Units  sold,  the effect of
Collateral losing eligibility  hereunder and limitations pursuant to Section 5),
(ii) Administrative Agent's inspections made pursuant to this Agreement (as such
inspections  may result in any  adjustments to reflect any variance  between (A)
the Collateral Certificate, and (B) the results of such inspections),  and (iii)
such other information as Administrative  Agent may reasonably  require in order
to verify such amounts.

SECTION 5. BORROWING BASE CALCULATIONS

     5.1 DETERMINATION OF AVAILABLE  COMMITMENT.  The Available Commitment shall
be determined  in accordance  with this Section 5 and shall be the lesser of (i)
the  Commitment  Amount as  adjusted  from time to time and (ii) the  Collateral
Value.

     5.2 DETERMINATION OF COLLATERAL VALUE. The "COLLATERAL VALUE," from time to
time, is equal to the aggregate  Collateral Values for Entitled Land, Lots Under
Development,  Finished Lots and Units  included in the Borrowing  Base as of the
time  that the  Collateral  Value is  determined.  The  "Collateral  Value" is a
valuation  of the  Borrowing  Base based on, in the case of Units,  the stage of
construction, determined on a cumulative basis for the Entitled Land, Lots Under

                                      -45-
<PAGE>
Development,  Finished  Lots and  Units  within  each  Approved  Subdivision  as
follows:

          (a) ENTITLED LAND.  With respect to Entitled Land, the Maximum Allowed
     Advance for such Entitled Land.

          (b)  LOTS  UNDER   DEVELOPMENT.   With   respect  to  each  Lot  Under
     Development:  (i) the Maximum  Allowed  Advance for such Lot MINUS the Land
     Allocation  for such Lot, with the end result  multiplied by the Completion
     Percentage; PLUS (ii) the Land Allocation for such Lot.

          (c) FINISHED LOTS.  With respect to each Finished Lot, an amount equal
     to the Maximum Allowed Advance with respect to such Lot.

          (d) UNITS.  With respect to each Unit, (i) the Maximum Allowed Advance
     (taking into account any applicable  Reclassification  Adjustment)  for the
     Unit MINUS the Collateral  Value of the related  Finished Lot, with the end
     result  multiplied by the  Completion  Percentage,  PLUS (i) the Collateral
     Value of the related Finished Lot.

     5.3 LIMITATION ON  ADJUSTMENTS.  Once the Collateral  Value and the Maximum
Allowed  Advance are initially  established for a particular item of Collateral,
the Collateral Value and the Maximum Allowed Advance are not subject to increase
(except as the result of  reclassification  of the Collateral and changes in the
Completion   Percentage),   notwithstanding  any  subsequent  Appraisal  of  the
Borrowing Base and notwithstanding any increase in a Budget.

     5.4 MAXIMUM ALLOWED ADVANCE.  In order to determine each Collateral  Value,
the Maximum Allowed Advance shall be:

          (a) ENTITLED LAND.  With respect to Entitled Land, the Maximum Allowed
     Advance  shall be the lesser of (i) fifty  percent  (50%) of the  Appraised
     Value, or (ii) fifty percent (50%) of the Acquisition Cost.

                                      -46-
<PAGE>
          (b) LOTS UNDER  DEVELOPMENT.  With respect to Lots Under  Development,
     the Maximum  Allowed Advance shall be the lesser of (i) sixty percent (60%)
     of the Appraised Value, or (ii) sixty percent (60%) of the Total Cost.

          (c) FINISHED LOTS.  With respect to Finished Lots, the Maximum Allowed
     Advance  shall  equal  the  lesser  of (i)  seventy  percent  (70%)  of the
     Appraised Value, or (ii) seventy percent (70%) of the Total Cost.

          (d) UNITS. With respect to Units, the Maximum Allowed Advance shall be
     determined in accordance with the following:

               (i) With respect to each Presold  Unit,  the lesser of 90% of the
          Appraised Value for that Unit or 90% of the price at which the Unit is
          to be sold to a purchaser under the applicable  Purchase  Contract for
          that  Unit;  PROVIDED,  HOWEVER,  that in no event  will  the  Maximum
          Allowed  Advance for any Presold  Unit exceed 90% of the Unit Cost for
          that Unit.

               (ii) With respect to each Spec Unit,  80% of the Appraised  Value
          for that Unit;  PROVIDED,  HOWEVER,  that in no event will the Maximum
          Allowed Advance for any Spec Unit exceed 80% of the Unit Cost for that
          Unit.

               (iii) With respect to each Model Unit, 80% of the Appraised Value
          for that Unit;  PROVIDED,  HOWEVER,  that in no event will the Maximum
          Allowed  Advance  for any Model  Unit  exceed 80% of the Unit Cost for
          that Unit.

     5.5 ADJUSTMENTS AND LIMITATIONS.  Notwithstanding any contrary provision of
this Section 5, the following  adjustments  and  limitations  shall apply to the
determination of the Collateral Value of the Borrowing Base:

                                      -47-
<PAGE>
          (a) MAXIMUM TERM - ENTITLED  LAND. No Entitled Land may be included in
     Borrowing  Base beyond the date that is nine (9) Calendar  Months after the
     date upon which such Entitled Land was first  classified as "Entitled Land"
     for purposes of  determining  the Borrowing Base  PROVIDED,  HOWEVER,  such
     Entitled  Land may  thereafter  be included as  Collateral in the Borrowing
     Base  constituting  Lots Under  Development  upon the  satisfaction  of the
     conditions precedent set forth in this Agreement.

          (b) MAXIMUM TERM - LOTS UNDER  DEVELOPMENT.  No Lots Under Development
     may be included in the  Borrowing  Base beyond the date that is twelve (12)
     Calendar  Months after the date upon which such Lots Under  Development was
     first  classified as "Lots Under  Development"  for purposes of determining
     the Borrowing  Base;  PROVIDED,  HOWEVER,  such Lots Under  Development may
     thereafter be included as Collateral  in the  Borrowing  Base  constituting
     Finished Lots upon the  satisfaction of the conditions  precedent set forth
     in this Agreement.

          (c) MAXIMUM TERM - FINISHED  LOTS. No Finished Lots may be included in
     the Borrowing Base beyond the date that is twenty-four (24) Calendar Months
     after the date upon  which  such Lots were first  classified  as  "Finished
     Lots" for purposes of determining the Borrowing Base.

          (d)  MAXIMUM  TERM - UNITS.  No Presold  Unit may be  included  in the
     Borrowing  Base beyond the date that is twelve (12)  Calendar  Months after
     the date upon which such Unit was first  classified as a "Presold Unit" for
     purposes of determining the Borrowing Base. No Spec Unit may be included in
     the  Borrowing  Base  beyond the date that is twelve (12)  Calendar  Months
     after the date upon which such Unit was first  classified  as a "Spec Unit"
     for  purposes  of  determining  the  Borrowing  Base.  No Model Unit may be

                                      -48-
<PAGE>
     included in the  Borrowing  Base beyond the date that is  twenty-four  (24)
     Calendar Months after the date upon which such Unit was first classified as
     a "Unit" for purposes of determining the Borrowing Base, provided,  that if
     such Model  Unit is used for a phased,  active  subdivision,  and the floor
     plan of such  Model  Unit  continues  to be  offered  in such  Subdivision,
     Administrative  Agent shall consider extending the period during which such
     Model Unit may be included in the Borrowing Base. If Presold unit or a Spec
     Unit is  reclassified  a  different  type of Unit,  other than a Model Unit
     (i.e.  Presold Unit to Spec Unit or vice  versa),  then for the purposes of
     determining  the  maximum  term  that  such  Unit  may be  included  in the
     Borrowing  Base such  reclassification  date shall be deemed to be the that
     such Unit is first  classified as a Presold Unit or a Spec Unit,  provided,
     that in no event  shall any such Unit be  included  in the  Borrowing  Base
     beyond the date that is  eighteen  (18)  Calendar  Months in the  aggregate
     after the date upon  which such Unit was first  classified  as a "Unit" for
     the purposes of determining the Borrowing Base.

          (e)  CONVERSION  OF PRESOLD  UNITS AND SPEC  UNITS.  If a Spec Unit is
     reclassified  as a Presold Unit (by reason of the execution and delivery of
     a Purchase Contract),  such Unit shall be included in the Borrowing Base as
     a Presold Unit and, on reclassification,  such Presold Unit will be subject
     to a  Reclassification  Adjustment.  If a Presold Unit is reclassified as a
     Spec Unit (by reason of the termination of a Purchase Contract),  such Unit
     shall  be  included  in  the  Borrowing   Base  as  a  Spec  Unit  and,  on
     reclassification,  such  Spec Unit will be  subject  to a  Reclassification
     Adjustment.

          (f) UNIT  INELIGIBILITY.  Units that are sold, that have been included
     as  Collateral  in the  Borrowing  Base for the maximum term  determined in
     accordance  with the  provisions of this Section 5.5, or that are otherwise
     not eligible to be included in the Borrowing Base pursuant to any provision

                                      -49-
<PAGE>
     of this  Agreement  will no longer be included in the  Borrowing  Base upon
     sale and release in compliance with the provisions of this Agreement,  upon
     expiration of such term,  or upon such Units  becoming  ineligible,  as the
     case may be. However, a Unit (but not Entitled Land, Lots Under Development
     or Finished Lots) that is no longer  included in the Borrowing Base because
     of  expiration  of the term  during  which  such  Unit was  entitled  to be
     included  in the  Borrowing  Base or  because  of its  becoming  ineligible
     pursuant to any provision of this Agreement will  nevertheless  remain part
     of the Collateral until released as permitted by this Agreement.

     5.6  OCCURRENCE  OF  CERTAIN  EVENTS.  Upon  the  occurrence  of any of the
following events, any Collateral constituting any part of the Borrowing Base may
be declared by  Administrative  Agent to no longer be included in the  Borrowing
Base:

          (a)  FORECLOSURE,  ETC. The filing or  commencement of any foreclosure
     proceeding, forfeiture proceeding, notice of trustee's sale or other action
     by any Person to realize upon any such Collateral.

          (b) ENVIRONMENTAL  MATTERS.  In the event any Collateral is subject to
     any  environmental  claim  or  Borrower  is  otherwise  in  breach  of  the
     Environmental Agreement.

          (c) DAMAGE/DESTRUCTION.  In the event any Collateral is subject to any
     damage or destruction (including,  without limitation, fire, earthquake and
     flood)  that   Administrative   Agent   determines   is  material,   unless
     Administrative  Agent  is  holding,  and  has a  first  priority  perfected
     security  interest  in,  insurance  proceeds and other sums  sufficient  to
     repair and reconstruct such Collateral.

                                      -50-
<PAGE>
          (d)  CONDEMNATION.  In the  event any  Collateral  is  subject  to any
     material condemnation as determined by Administrative Agent.

     5.7  DETERMINATIONS.  Any  determination  by  Administrative  Agent  in its
reasonable  discretion  as to whether  Entitled  Land,  Lots Under  Development,
Finished  Lots or Units  are  included  in the  Borrowing  Base  will be  final,
conclusive,  binding  and  effective  immediately.  Entitled  Land,  Lots  Under
Development,  Finished  Lots or Units that are sold,  that have been included in
the  Borrowing  Base for the maximum  term  determined  in  accordance  with the
provisions  of this  Section  5.7,  or that are  otherwise  not  eligible  to be
included in the Borrowing  Base pursuant to any provision of this Agreement will
no longer be included in the Borrowing  Base upon sale and release in compliance
with  the  terms  of this  Agreement,  upon  expiration  of such  term,  or upon
otherwise becoming ineligible, as the case may be.

     5.8 FURTHER  LIMITATIONS ON COLLATERAL  VALUES.  Any other provision of the
Loan Documents to the contrary  notwithstanding,  in  determining  the Borrowing
Base and Collateral  Values, the following  additional  restrictions shall apply
and such  restrictions  shall  be  computed  and  reflected  in each  Collateral
Inventory Report and Borrowing Base Report:

          (a) COLLATERAL VALUE LIMIT ON AVAILABILITY FOR ALL ENTITLED LAND, LOTS
     UNDER  DEVELOPMENT AND FINISHED LOTS. The aggregate  Collateral  Value with
     respect to all Entitled  Land,  Lots Under  Development  and Finished  Lots
     included  in the  Borrowing  Base  shall not at any time  exceed 40% of the
     aggregate Collateral Value of all of the Borrowing Base.

          (b)  COLLATERAL  VALUE  LIMIT ON  AVAILABILITY  FOR ALL SPEC UNITS AND
     MODEL UNITS. The aggregate  Collateral Value with respect to all Spec Units
     and Model Units included in the Borrowing Base shall not at any time exceed
     30% of the aggregate Collateral Value of all of the Borrowing Base.

                                      -51-
<PAGE>
          (c) INVENTORY LIMIT FOR SPEC UNITS AND MODEL UNITS. The maximum number
     of Spec Units and Model Units that  constitute the Borrowing Base shall not
     at any time exceed twenty (20) such Units per Subdivision.

          (d)  INVENTORY  LIMIT FOR UNSOLD  FINISHED  LOTS AND UNSOLD LOTS UNDER
     DEVELOPMENT.  The maximum  number of unsold  Finished Lots plus unsold Lots
     Under  Development  under  construction in Arizona and California shall not
     exceed  at any time 2.5  times  the  number  of  closings  in  Arizona  and
     California on a rolling four-quarter basis.

          (e) SUBDIVISION SIZE LIMITATION. The maximum number of Lots comprising
     a Subdivision  shall not exceed 200 Lots,  unless such Subdivision is to be
     developed in phases  satisfactory to Administrative  Agent. With respect to
     any Subdivision  with more than 200 Lots, the Collateral  Value of Entitled
     Land, Lots Under Development,  Finished Lots and Units related to such Lots
     in excess of 200 shall not be included in the Borrowing Base.

          (f)  PURCHASE  MONEY  DEBT  LIMITATION.  The  Collateral  Value of any
     Entitled  Land,  Lots Under  Development,  Finished Lots or Units  securing
     purchase  money debt  (other  than the Loan)  shall not be  included in the
     Borrowing Base.

          (g)  COMMERCIAL  ENTITLED LAND.  The aggregate  Collateral  Value with
     respect to all Entitled Land constituting  commercial  property or intended
     to be used for commercial rather than residential  purposes included in the
     Borrowing Base shall not at any time exceed $2,000,000.00.

If any of the  limitations  on the Borrowing  Base,  Maximum  Allowed  Advances,
Collateral Value, outstanding Advances or Loan Balance set forth in this Section
5.8 or  elsewhere  in this  Agreement  are  exceeded,  Administrative  Agent may
exclude items from the Borrowing Base as selected by Administrative Agent in its
sole and absolute  discretion until such  requirements  are met.  Borrower shall

                                      -52-
<PAGE>
make a  remargining  payment  pursuant to Section 3.17  resulting  from any such
adjustments by Administrative Agent.

     5.9 COLLATERAL INVENTORY REPORT, COLLATERAL CERTIFICATE, AND BORROWING BASE
REPORT.

          (a) COLLATERAL  INVENTORY REPORT. On or before the dates that are four
     (4) Business Days prior to the tenth (10th) and twenty-fifth  (25th) day of
     each Calendar  Month,  Borrower  will prepare and submit to  Administrative
     Agent  a  Collateral   Inventory  Report  for  all  of  the  Collateral  in
     substantially  the form of the  sample  attached  hereto  as  EXHIBIT  "H",
     including,  among other things that  Administrative  Agent may require from
     time to time, the following:  (i) the total number,  and a description  of,
     Entitled Land, Lots Under  Development,  Presold Units,  Spec Units,  Model
     Units and Finished Lots that  constitute the Borrowing  Base; (ii) the name
     of the  Approved  Subdivision;  (iii) the Lot  number as  indicated  on the
     recorded  plat of the Approved  Subdivision;  (iv) the Unit plan type;  (v)
     whether  the  Unit  is a  Presold  Unit,  a Spec  Unit,  a Model  Unit,  or
     ineligible  collateral;  (vi) the Unit  Budget;  (vii)  the  percentage  of
     completion up to the date of the report and the hard construction  costs to
     complete the Lots Under Development and Units;  (viii) the Appraised Value;
     (ix) the listing price of the Unit or the amount of the Purchase  Contract,
     as applicable;  (x) the applicable  Eligibility  Date;  (xi) the Collateral
     Value and the Maximum  Allowed  Advance by Lot and  Subdivision;  (xii) the
     Acquisition Cost, Improvement  Construction Cost and Total Cost; (xiii) the
     amount of Loan proceeds  that are available for Advances  against each item
     included in the Borrowing  Base based on the terms of this  Agreement;  and
     (ix) a list of all Collateral  that is not included in the Borrowing  Base.
     The  Collateral  Inventory  Report  will  also set forth  such  information
     concerning  construction of the Units and  Improvements  as  Administrative
     Agent  may  require,   including,   without   limitation,   the  status  of

                                      -53-
<PAGE>
     construction of the Units, a detailed breakdown of the costs of the various
     phases of  construction of the Units and  Improvements  showing the amounts
     expended to date for such  construction,  and an  itemized  estimate of the
     amount necessary to complete  construction of the Units and Improvements in
     their  entirety.  Administrative  Agent shall  complete  its review of each
     Collateral  Inventory  Report  and  establish  the  Borrowing  Base  Report
     (subject to later  adjustment  if  necessary) on or before the tenth (10th)
     and  twenty-  fifth  (25th)  day of each  Calendar  Month  (or on the  next
     succeeding Business Day if such date is not a Business Day).

          (b) COLLATERAL  CERTIFICATE.  Each Collateral Inventory Report will be
     accompanied  by a Collateral  Certificate,  in the form attached  hereto as
     EXHIBIT "E",  signed by an executive  officer of Borrower.  Entitled  Land,
     Lots  Under  Development,  Units  and  Finished  Lots  may be  added to the
     Borrowing  Base only upon receipt of the  Collateral  Inventory  Report and
     Collateral  Certificate  which  include  such  Entitled  Land,  Lots  Under
     Development,  Units and Finished  Lots and upon  satisfaction  of all other
     provisions of this Agreement.  Each Collateral Certificate shall be in form
     and substance  satisfactory  to  Administrative  Agent,  shall contain such
     certifications as Administrative  Agent may reasonably  require,  and shall
     set forth the following:

               (i) The total Collateral Value for the Borrowing Base;

               (ii) The calculated  amount of Collateral Value and usage for all
          types of  Collateral in the  Borrowing  Base and a calculation  of all
          applicable limitations; and

                                      -54-
<PAGE>
               (iii) A statement  that Borrower is in compliance  with the terms
          and conditions of the Loan Documents.

          (c) FORM OF REPORT AND  CERTIFICATE.  The Collateral  Inventory Report
     and the Collateral Certificate will be in written form and on computer disk
     formatted to Administrative Agent specifications.

          (d)  BORROWING  BASE  REPORT.  Administrative  Agent will  prepare the
     Borrowing  Base Report and determine the Borrowing  Base and the Collateral
     Value of the  Borrowing  Base (and all  other  amounts  and items  relating
     thereto)  based upon (i) the  Collateral  Inventory  Report and  Collateral
     Certificate  most  recently  submitted  by  Borrower;  (ii)  Administrative
     Agent's  inspections  made pursuant to this Agreement (as such  inspections
     may result in any adjustments to reflect any variance between the Borrowing
     Base Report and/or the Collateral  Inventory Report and the results of such
     inspections by Administrative  Agent);  and (iii) such other information as
     Administrative  Agent  may  reasonably  require  in  order  to  verify  the
     Borrowing  Base, the Collateral  Value of the Borrowing Base, and all other
     amounts and items  relating  thereto.  The Borrowing  Base Report will also
     take  into  account  the  sale of  Units  and  all  other  adjustments  and
     limitations permitted or required by this Agreement.  Each determination by
     Administrative Agent, in its reasonable judgment, of the Borrowing Base and
     the  Collateral  Value of the Borrowing  Base,  and each  determination  by
     Administrative  Agent, in its reasonable judgment,  as to the amount of any
     Advance to which  Borrower is  entitled,  based on the  information  in the
     Borrowing  Base Report (and all other amounts and items  entering into such
     determinations),  will be final,  conclusive  and  binding  upon  Borrower.
     Provided,  that  Borrower  submits  the  Collateral  Inventory  Reports  as
     required  pursuant  to Section  5.9(a)  above,  Administrative  Agent shall

                                      -55-
<PAGE>
     establish the Borrowing Base Report and determine the  Collateral  Value of
     the Borrowing Base (subject to later  adjustment if necessary) on or before
     the tenth (10th) and twenty-fifth  (25th) day of each Calendar Month (or on
     the next succeeding Business Day if such date is not a Business Day).

SECTION 6. LETTERS OF CREDIT

     6.1 ISSUANCE OF LETTERS OF CREDIT.

          (a) Subject to the terms and  conditions  of this  Agreement,  (i) the
     Issuing Bank agrees from time to time before the  Conversion  Date to issue
     Letters of Credit for the account of Borrower; and (ii) the Banks severally
     agree to  participate  in  Letters  of Credit  issued  for the  account  of
     Borrower,  subject to the prior  approval by each Bank of the provisions of
     each Letter of Credit.  Each  reference in this Agreement to the "issue" or
     "issuance"  or other  forms of such words in  relation to Letters of Credit
     shall be deemed to include any extension or renewal of a Letter of Credit.

          (b) Each Letter of Credit shall (i) by its terms be issued in a Stated
     Amount;  (ii) have a Stated Expiry Date no later than the Termination Date;
     (iii) expire or be  terminated by the  beneficiary  thereunder on or before
     its Stated Expiry Date; (iv) not exceed the Available Commitment; (v) shall
     not cause the Loan Balance to exceed the Available Commitment;  and (v) not
     cause the  Outstanding  LC Balance  after the  issuance  of said  Letter of
     Credit to exceed $20,000,000.00.

          (c) In addition to the conditions otherwise specified in this Section,
     the  obligation  of the Issuing  Bank to issue a Letter of Credit  shall be
     subject to the further  condition  precedent that the following  statements
     shall be correct,  and each  application  for such Letter of Credit and the
     issuance of such Letter of Credit  shall  constitute a  representation  and
     warranty  by  Borrower  that on the date of the  issuance of such Letter of
     Credit such statements are correct:

                                      -56-
<PAGE>
               (i) The  representations and warranties in Section 17 are correct
          on and as of the date of the issuance of such Letter of Credit, before
          and after giving effect to such issuance,  as though made on and as of
          such date;

               (ii) No Event of Default has occurred and is continuing; and

               (iii) The  conditions in Section 3.1 are satisfied as of the date
          of issuance of the Letter of Credit, before and after giving effect to
          such issuance.

     6.2 ISSUANCE  PROCEDURE  FOR LETTERS OF CREDIT.  By delivery to the Issuing
Bank of an Issuance Request on or before 9:00 a.m. (Phoenix,  Arizona time) five
(5) Business Days prior to the  requested  Issuance  Date,  and the execution of
such  applications  and agreements as the Issuing Bank may  reasonably  request,
Borrower may request the issuance of a Letter of Credit in such form as Borrower
may  reasonably  request.  Each  Issuance  Request shall include the form of the
Letter of Credit,  the amount and other terms thereof.  Subject to the terms and
conditions of this Agreement,  the Issuing Bank will issue such Letter of Credit
on the Issuance Date specified in the Issuance  Request  submitted in connection
therewith. The Issuing Bank and Borrower agree that all Letters of Credit issued
pursuant  to the  terms  of this  Section  shall be  subject  to the  terms  and
conditions  and  entitled to the benefits of this  Agreement  and the other Loan
Documents.

     6.3 LETTER OF CREDIT FEES AND COSTS.

          (a) Borrower agrees to pay to  Administrative  Agent, for distribution
     to the Banks pursuant to the Co-Lender Agreement, a non-refundable fee (the
     "Letter of Credit  Fee") equal to one percent  (1%) per annum on the Stated
     Amount of each  Letter  of  Credit,  computed  on a daily  basis,  from and

                                      -57-
<PAGE>
     including  the Issuance  Date of such Letter of Credit to the Stated Expiry
     Date (the "Outstanding  Period"). The Letter of Credit Fee shall be payable
     in  advance  upon the  issuance  of a Letter  of  Credit.  Upon an Event of
     Default,  the  Letter of Credit Fee shall be equal to three  hundred  basis
     points (3.0%) above the Letter of Credit Fee.

          (b) Borrower further agrees to pay to the Issuing Bank for its account
     a charge for all reasonable  administrative expenses of the Issuing Bank in
     connection  with  the  issuance,  amendment  or  modification  (if any) and
     administration of the Letter of Credit upon demand from time to time.

     6.4 DISBURSEMENTS. The Issuing Bank will notify Borrower of the presentment
for  payment of a Letter of Credit by any  beneficiary  thereto,  together  with
notice of the date (the "Disbursement Date") such payment shall be made. Subject
to the terms and provisions of the Letter of Credit, the Issuing Bank shall make
such payment (a "Disbursement") to the beneficiary of the Letter of Credit. Each
such Disbursement shall be deemed to be an Advance hereunder.

     6.5  REIMBURSEMENT  OBLIGATIONS  OF  BORROWER.   Borrower's  obligation  to
reimburse  the Banks  with  respect  to each  Disbursement  (including  interest
thereon) in respect of any Letter of Credit shall be absolute and  unconditional
under any and all circumstances and irrespective of any setoff, counterclaim, or
defense to payment  which  Borrower may have or have had against the Banks,  the
Issuing Bank,  Administrative  Agent or the beneficiary  thereof,  including any
defense based upon the occurrence of any Event of Default,  any draft, demand or
certificate or other document presented under the Letter of Credit proving to be
forged, fraudulent,  invalid or insufficient, the failure of any Disbursement to
conform to the terms of the Letter of Credit (if,  in Issuing  Bank's good faith
opinion,   such   Disbursement   is  determined  to  be   appropriate)   or  any
non-application  or  misapplication  by the  beneficiary of the proceeds of such
Disbursement,  or the legality,  validity, form, regularity or enforceability of
the Letter of Credit;  PROVIDED,  HOWEVER,  that nothing herein shall  adversely

                                      -58-
<PAGE>
affect the right of Borrower to commence any proceeding against Issuing Bank for
any wrongful  Disbursement  made by Issuing Bank under the Letter of Credit as a
result of acts or omissions  constituting  gross negligence or wilful misconduct
on the part of Issuing Bank.

     6.6 NATURE OF REIMBURSEMENT OBLIGATIONS. Borrower shall assume all risks of
the  acts,  omissions  or misuse  of any  Letter  of  Credit by the  beneficiary
thereof. Neither the Banks nor the Issuing Bank (except to the extent of its own
gross negligence or wilful misconduct) shall be responsible for:

          (a) The form, validity,  sufficiency,  accuracy,  genuineness or legal
     effect of any Letter of Credit or any  document  submitted  by any party in
     connection with the issuance of any Letter of Credit, even if such document
     should in fact prove to be in any or all  respects  invalid,  insufficient,
     inaccurate, fraudulent or forged;

          (b) The form, validity,  sufficiency,  accuracy,  genuineness or legal
     effect  of any  instrument  transferring  or  assigning  or  purporting  to
     transfer or assign any Letter of Credit;

          (c) Failure of any beneficiary of any Letter of Credit to comply fully
     with  conditions  required  in order to  demand  payment  under a Letter of
     Credit;

          (d)  Errors,  omissions,  interruption  or delays in  transmission  or
     delivery of any messages, by mail, cable, telegraph, telex or otherwise; or

          (e) Any loss or delay in the transmission or otherwise of any document
     or draft  required by or from a beneficiary  of a Letter of Credit in order
     to make a Disbursement under a Letter of Credit or of the proceeds thereof.

None of the foregoing shall affect,  impair or prevent the vesting of any of the
rights or powers granted the Banks or the Issuing Bank hereunder. In furtherance
and extension,  and not in limitation or derogation of any of the foregoing, any

                                      -59-
<PAGE>
action  taken or  omitted to be taken by the Banks or the  Issuing  Bank in good
faith shall be binding upon  Borrower and shall not put the Banks or the Issuing
Bank under any resulting liability to Borrower.

     6.7 BANKS  OBLIGATION.  Nothing  herein shall be deemed to relieve any Bank
from its  obligations to fulfill its Pro Rata Share of the Available  Commitment
hereunder or to prejudice any right which  Administrative  Agent or Borrower may
have against any Bank as a result of any default by such Bank hereunder.

     6.8 CERTAIN REQUIREMENTS AS TO LETTERS OF CREDIT. The Issuing Bank is under
no obligation to Issue any Letter of Credit if:

          (a) Any order,  judgment or decree of any  Governmental  Authority  or
     arbitrator  shall by its terms  purport to enjoin or  restrain  the Issuing
     Bank  from  Issuing  such  Letter  of  Credit,  or any  requirement  of law
     applicable  to the Issuing Bank or any request or directive  (with which it
     is customary for banks in the relevant  jurisdiction  to comply  whether or
     not  having  the  force  of  law)  from  any  Governmental  Authority  with
     jurisdiction  over the Issuing  Bank shall  prohibit,  or request  that the
     Issuing Bank refrain from,  the Issuance of letters of credit  generally or
     such Letter of Credit in  particular  or shall impose upon the Issuing Bank
     with respect to such Letter of Credit any restriction,  reserve, or capital
     requirement  (for  which  the  Issuing  Bank is not  otherwise  compensated
     hereunder)  not in effect on the closing date hereof,  or shall impose upon
     the Issuing Bank any  unreimbursed  loss,  cost,  or expense  which was not
     applicable  on the closing  date and which the  Issuing  Bank in good faith
     deems material to it;

          (b) The  Issuing  Bank has  received  written  notice  from any  Bank,
     Administrative Agent or Borrower,  on or prior to the Business Day prior to

                                      -60-
<PAGE>
     the requested  date of Issuance of such Letter of Credit,  that one or more
     of the applicable conditions contained herein is not then satisfied;

          (c) The Stated Expiry Date of any requested Letter of Credit is not in
     accord with the  requirements  of Section  6.1(b),  unless all of the Banks
     have approved such Stated Expiry Date;

          (d) Any requested Letter of Credit does not provide for drafts,  or is
     not otherwise in form and substance  acceptable to the Issuing Bank, or the
     Issuance of a Letter of Credit shall violate any applicable policies of the
     Issuing Bank; or

          (e) Such  Letter of Credit is to be used for a purpose  other  than as
     provided herein or denominated in a currency other than Dollars.

     6.9 RISK PARTICIPATIONS, DRAWINGS, AND REIMBURSEMENTS.

          (a) Immediately upon the Issuance of each Letter of Credit,  each Bank
     shall be deemed to, and hereby irrevocably and  unconditionally  agrees to,
     purchase from the Issuing Bank a participation in such Letter of Credit and
     each  drawing  thereunder  in an amount equal to the product of (i) the Pro
     Rata Share of such Bank,  times (ii) the  maximum  amount  available  to be
     drawn  under  such  Letter  of  Credit  and  the  amount  of  any  drawing,
     respectively.  For purposes of the Commitment, each Issuance of a Letter of
     Credit  shall be  deemed  to  utilize  each  Bank's  Pro Rata  Share of the
     Commitment by an amount equal to the amount of such participation.

          (b) In the event of any request for a drawing under a Letter of Credit
     by the  beneficiary or transferee  thereof,  the Issuing Bank will promptly
     notify  Borrower.  The Issuing  Bank shall honor any  Disbursement  request
     under any Letter of Credit  only if (i) such  request is  delivered  to the
     Issuing  Bank by the  beneficiary  of such Letter of Credit,  and (ii) such
     request is accompanied by the original  documents,  if any, required by the

                                      -61-
<PAGE>
     Letter of Credit for any Disbursement. Except as otherwise provided herein,
     Borrower  shall  reimburse  the Issuing Bank prior to 11:00 a.m.  (Phoenix,
     Arizona local time) on the day after any amount is paid by the Issuing Bank
     under any Letter of Credit (each such date, an "Honor Date"),  in an amount
     equal to the amount so paid by the Issuing Bank.  In the event  Borrower is
     required but fails to reimburse the Issuing Bank for the full amount of any
     drawing  under any Letter of Credit by 11:00 a.m.  (Phoenix,  Arizona local
     time) on the day after the  Honor  Date,  the  Issuing  Bank will  promptly
     notify  Administrative  Agent and Administrative Agent will promptly notify
     each Bank thereof.  Any notice given by the Issuing Bank or  Administrative
     Agent  pursuant to this  Section may be oral if  immediately  confirmed  in
     writing  (including  by  facsimile);  provided  that  the  lack  of such an
     immediate  confirmation  shall not  affect  the  conclusiveness  or binding
     effect of such notice.

          (c) Each Bank shall  upon any notice  pursuant  to this  Section  make
     available  to  Administrative  Agent for the account of the Issuing Bank an
     amount in Dollars and in immediately  available funds equal to its Pro Rata
     Share of the amount of the drawing,  whereupon the Banks shall  (subject to
     paragraph  (d))  each be deemed to have made a  Variable  Rate  Advance  to
     Borrower in that amount.

          (d) With respect to any unreimbursed drawing, Borrower shall be deemed
     to have  incurred  from the  Issuing  Bank a Variable  Rate  Advance in the
     amount of such drawing.

     6.10 ROLE OF THE ISSUING BANK. Each Bank and Borrower agree that, in paying
any  drawing  under a Letter of  Credit,  the  Issuing  Bank  shall not have any
responsibility   to  obtain  any  document  (other  than  any  sight  draft  and

                                      -62-
<PAGE>
certificates  expressly  required  by the Letter of Credit) or to  ascertain  or
inquire as to the validity or accuracy of any such  document or the authority of
the Person executing or delivering any such document.

     6.11 CASH COLLATERAL UPON EVENT OF DEFAULT.  Without limitation upon any of
the Banks'  other  rights or  remedies  under this  Agreement  or the other Loan
Documents,  upon demand by  Administrative  Agent following the occurrence of an
Event of Default,  Borrower  shall  immediately  deposit an amount  equal to any
amounts  then  available  to be drawn  under the  Letters of Credit in a special
interest bearing account with Administrative  Agent to be held by Administrative
Agent, for the benefit of the Banks, as collateral  security for the obligations
described in this  Agreement.  To the extent that Borrower fails to deliver such
amount, Borrower agrees that such amount shall be includable for all purposes in
the amounts owing under this Agreement.  Without  limitation upon the generality
of the  foregoing,  Borrower  agrees that such amounts may be included in credit
bids upon  foreclosure  of the liens of any or all of the Loan  Documents.  Such
account  shall be pledged,  pursuant to a pledge  agreement  in form and content
satisfactory to Administrative  Agent, to Administrative  Agent, for the benefit
of the  Banks,  as  long as the  Letter(s)  of  Credit  are  outstanding  or any
obligation of Borrower under the Loan Documents remains  outstanding,  and shall
permit  withdrawals only with the signature of  Administrative  Agent.  Borrower
hereby  agrees to execute  all  documents  required by  Administrative  Agent in
connection with any such deposit in order to create, confirm, perfect, or permit
Administrative  Agent to realize upon its security interests therein, and hereby
irrevocably grants to Administrative Agent a power of attorney,  coupled with an
interest, to execute all such documents.

SECTION 7. RELEASES

     7.1  RELEASE  OF  COLLATERAL  REQUEST OF  BORROWER.  Borrower  may  request
releases of Entitled Land, Lots Under Development,  Finished Lots and Units from
the lien and  encumbrance  of the Deed of  Trust  from  time to time;  PROVIDED,
HOWEVER,  Administrative  Agent  shall be under no  obligation  to  release  any
Entitled Land, Lots Under  Development,  Finished Lot or Unit unless each of the
following conditions precedent is satisfied:

                                      -63-
<PAGE>
          (a)  With  respect  to  each  parcel  of  Entitled  Land,  Lots  Under
     Development and Finished Lot (i) Borrower shall have paid to Administrative
     Agent an amount equal to the applicable  Collateral Value, (ii) no Event of
     Default or Unmatured Event of Default has occurred and is continuing (other
     than an Event of Default under Paragraphs  8.1(b)(c) or (d) of The Deeds of
     Trust),  and (iii) both before and after giving  effect to such release and
     any payments to be made  pursuant to this  sentence,  the Loan Balance does
     not exceed the Available Commitment and Borrower has made any payments then
     required pursuant to Section 3.17 hereof;

          (b)  With  respect  to each  Unit  (i)  Borrower  shall  have  paid to
     Administrative  Agent an amount equal to the greater of (A) the  applicable
     Collateral  Value, or (B) the Net Sales Proceeds,  (ii) unless such release
     is in  connection  with a sale to an unrelated  third party  purchaser,  no
     Event  of  Default  or  Unmatured  Event of  Default  has  occurred  and is
     continuing  (other than an Event of Default under  Paragraphs  8.1(b)(c) or
     (d) of The Deeds of Trust),  and (iii) both before and after giving  effect
     to such release and any payments to be made pursuant to this sentence,  the
     Loan Balance does not exceed the Available Commitment and Borrower has made
     any payments then required pursuant to Section 3.17 hereof;

          (c) If  requested  by  Administrative  Agent  in  connection  with the
     release  of less than all of parcel of  property  that is not  subject to a
     plat,  Administrative  Agent shall have received such  endorsements  to the
     Title Policy as  Administrative  Agent may require  insuring the continuing
     lien of the Deed of Trust as to the remaining  real property  encumbered by
     the Deed of Trust and any easements required by Administrative Agent;

                                      -64-
<PAGE>
          (d) All costs and  expenses of  Administrative  Agent  relating to all
     releases  shall  be  paid  by  Borrower,   including  but  not  limited  to
     reconveyance fees, title fees, recording fees and legal expenses; and

          (e) No release shall impair or adversely affect Administrative Agent's
     security in any real property remaining subject to the Deed of Trust or any
     term or provision of the Deed of Trust as it pertains to any real  property
     remaining subject to the Deed of Trust.

Any amounts  payable to  Administrative  Agent under  subparagraphs  (a) and (b)
above  shall be applied to the  outstanding  principal  balance of all  Advances
(first to Variable  Rate  Advances  unless  otherwise  requested  by  Borrower).
Borrower  shall take all action  necessary to ensure that all Net Sales Proceeds
from the sale of a Unit are paid by the Title Company directly to Administrative
Agent,  rather than to Borrower.  All such proceeds  shall be deposited  into an
account in the name of Borrower,  maintained with Administrative Agent and under
the sole  dominion  and  control of  Administrative  Agent  (the  "Bank  Control
Account").  Administrative  Agent  shall use its best  efforts to apply  amounts
payable to  Administrative  Agent under  subparagraphs  (a) and (b) above to the
outstanding  principal balance of all Advances on the same Business Day received
(but in any event on the next Business  Day).  All funds at any time in the Bank
Control  Account  are hereby  assigned  to  Administrative  Agent as  additional
security for the Loan and all other indebtedness of Borrower arising hereunder.

     7.2 OTHER RELEASES. Subject to the satisfaction of the conditions contained
in Sections 7.1(c),  (d) and (e) above,  Administrative  Agent shall release the
lien and  encumbrance of the Deed of Trust from any property that is conveyed to
a  homeowners'  association  or any property  that is dedicated to  governmental
entities if such conveyance is made without any compensation.

                                      -65-
<PAGE>
SECTION 8. FEES

     As additional  consideration for the Commitment,  Borrower agrees to pay to
Administrative  Agent for distribution to Administrative  Agent and the Banks in
accordance with the Co-Lender  Agreement the following fees, from Borrower's own
funds (unless otherwise indicated),  which shall be earned on the date due under
the Loan Documents and shall be non-refundable to Borrower:

     8.1 FACILITY FEE. A fee for the Commitment (the "Facility Fee") at the rate
of one- quarter of one percent (.25%) per annum of the maximum Commitment Amount
(i.e.,  $70,000,000.00)  shall be due and payable  quarterly  in advance on each
January 1, April 1, July 1 and October 1, provided that the initial Facility Fee
shall be payable on the date of this  Agreement  and shall be  prorated  for the
period  commencing on the date of this Agreement and ending on December 31, 1999
at the per annum rate set forth above.

     8.2 AGENCY FEE. The Agency Fee in accordance  with terms and conditions set
forth in a side letter between Borrower and Administrative Agent.

     8.3 LETTER OF CREDIT FEE. See Section 6.3 hereof.

     8.4 ATTORNEYS' COSTS,  EXPENSES,  AND FEES. Attorneys' costs, expenses, and
fees for  Administrative  Agent's  counsel and the Banks' counsel as provided in
the Loan Documents,  payable on or before the date hereof and during the term of
the Commitment,  from time to time upon the presentation by Administrative Agent
of statements therefor.

     8.5 APPRAISAL FEES, TITLE INSURANCE PREMIUM, AND OTHER COSTS, EXPENSES, AND
FEES. Appraisal fees, appraisal review fees, title insurance premiums, and other
costs, expenses, and fees that Borrower is obligated to pay pursuant to the Loan
Documents,  in the amounts  specified  by  Administrative  Agent,  payable on or
before  the  date  hereof,  and  monthly  thereafter  during  the  term  of  the
Commitment.

                                      -66-
<PAGE>
SECTION 9. SECURITY

     9.1  SECURITY.  Borrower  shall cause the Loan and  Borrower's  obligations
under  this  Agreement  to be  secured  in form and  substance  satisfactory  to
Administrative Agent by the following:

          (a) One or more Deeds of Trust constituting:

               (i) A first and prior lien on the  Project,  subject only to such
          matters as specifically approved by Administrative Agent therein;

               (ii) A  valid  and  effectual  assignment  of  rents  and  leases
          covering the Project;

               (iii)  A  valid  and  effectual   security   agreement   granting
          Administrative Agent a first and prior security interest in all of the
          property  described  below in, to, or under which  Borrower now has or
          hereafter  acquires  any right,  title or interest,  whether  present,
          future, or contingent:  all equipment,  inventory,  accounts,  general
          intangibles, instruments, documents, and chattel paper, as those terms
          are defined in the Uniform  Commercial  Code,  and all other  personal
          property of any kind (including without limitation money and rights to
          the payment of money), whether now existing or hereafter created, that
          are now or at any time  hereafter (i) in the  possession or control of
          Administrative Agent in any capacity;  (ii) erected upon, attached to,
          or appurtenant  to, the Project;  (iii) located or used on the Project
          or identified for use on the Project (whether stored on the Project or
          elsewhere);  or (iv) used  exclusively  in  connection  with,  arising

                                      -67-
<PAGE>
          exclusively from,  related  exclusively to, or associated  exclusively
          with the Project or any of the personal property described herein, the
          construction  of any  improvements  on  the  Project,  the  ownership,
          development,  maintenance,  leasing,  management,  or operation of the
          Project,  the use or enjoyment of the Project, or the operation of any
          business  conducted  on the  Project;  together  with all products and
          proceeds of all of the foregoing, in any form;

together with any UCC financing  statements for filing and/or  recording and any
other items  required  by  Administrative  Agent to fully  perfect the liens and
security interests of Administrative Agent.

SECTION 10. CONDITIONS PRECEDENT FOR EFFECTIVENESS OF AGREEMENT

     The obligation of the Banks to make the Loan and each and every Advance and
the obligation of the Issuing Bank to issue Letters of Credit are subject to the
following express conditions precedent,  all of which, unless otherwise provided
below,  shall have been satisfied,  in each case as determined by Administrative
Agent in its sole and absolute  discretion,  prior to the  effectiveness of this
Agreement:

     10.1 DOCUMENTS.  Borrower shall have executed (or obtained the execution or
issuing of) and delivered to Administrative Agent the following  documents,  all
in form satisfactory to Administrative Agent:

          (a) The Note;

          (b) The Guarantee;

          (c) An Environmental Indemnity Agreement covering all Subdivisions now
     or hereafter constituting Collateral hereunder.

                                      -68-
<PAGE>
          (d) If Borrower or any partner or member in Borrower or any  Guarantor
     is other than a natural person: (i) a copy of the organizational  documents
     for that entity;  (ii)  evidence of proper  formation  and good standing of
     that  entity  in the  state  of its  organization;  (iii)  evidence  of the
     qualification  or  registration  of that entity in the states in which such
     entity  is  doing  business,  if  such  states  are not  the  state  of its
     organization; and (iv) proper resolutions, authorizations, certificates and
     such other documents as Administrative  Agent may require,  relating to the
     existence  and good standing of that entity and the authority of any person
     executing  documents on behalf of that  entity.  No change shall be made to
     any organizational  documents  previously submitted to Administrative Agent
     without Administrative Agent's prior written approval, which approval shall
     not be unreasonably withheld.

     10.2  CO-LENDER  AGREEMENT.   The  Banks,   Administrative  Agent  and  the
Documentation  and  Syndication  Agent  shall have  entered  into the  Co-Lender
Agreement.

     10.3 INSURANCE POLICIES. Lender shall have received certificates evidencing
the policies of insurance required under the Loan Documents.

     10.4 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the  effectiveness  of
this Agreement,  the effectiveness of the Commitment,  the making of any Advance
or the Issuance of any Letter of Credit have been paid in full.

     10.5  LEGAL  OPINION.   Borrower,  at  its  expense,  shall  have  provided
Administrative  Agent with a written  opinion  by counsel in form and  substance
reasonably acceptable to Administrative Agent.

     10.6  REPRESENTATIONS  TRUE. All representations and warranties by Borrower
shall  remain  true and  correct  and all  agreements  that  Borrower is to have
performed  or complied  with by the date  hereof  shall have been  performed  or
complied with.

                                      -69-
<PAGE>
     10.7 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.

SECTION 11. CONDITIONS PRECEDENT TO APPROVAL OF SUBDIVISIONS

     Borrower may, from time to time,  request  Administrative  Agent to approve
Subdivisions.  Approvals of each Subdivision  shall be granted by Administrative
Agent in its reasonable discretion, provided, that such Subdivision satisfies at
all times the  conditions  precedent set forth in this Section 11. In any event,
only  Subdivisions  located  in  the  metropolitan  areas  of  Phoenix,  Tucson,
Sacramento and San Francisco,  and other Northern California  metropolitan areas
shall be approved pursuant to this Agreement. When requesting consideration of a
new   Subdivision,   Borrower  shall  deliver  to   Administrative   Agent  such
documentation  as  Administrative  Agent may require,  and each of the following
conditions precedent shall have been satisfied,  as determined by Administrative
Agent in its reasonable discretion:

     11.1 PLAT OR SURVEY.  Borrower shall have delivered to Administrative Agent
and  Administrative  Agent shall have  approved  either (a) one or more recorded
plats,  one of which  covers the entire  Subdivision;  each plat must  contain a
legal  description  of the land covered by the plat,  must describe and show all
boundaries of and lot lines within such land, all streets and other dedications,
and all  easements  affecting  such  land,  and  must  satisfy  such  additional
requirements as Administrative  Agent may, reasonably  prescribe;  or (b) one or
more  current  surveys  and a  tentative  plat map  approved  by the  applicable
Governmental  Authority.  Each survey must be certified by, and stamped with the
professional   seal  of,  a  surveyor   or  civil   engineer   satisfactory   to
Administrative  Agent and  licensed  in the State in which  the  Subdivision  is
located.  Each survey must satisfy the then current  requirements for an ALTA or
similar survey and such  additional  requirements  as  Administrative  Agent may

                                      -70-
<PAGE>
prescribe  in its sole  discretion.  Each  tentative  plat map must  satisfy the
requirements of a plat as set forth in Section 11(a).

     11.2   PRELIMINARY   TITLE   REPORT.   Borrower   shall  have  provided  to
Administrative  Agent, and Administrative Agent shall have approved, in its sole
and absolute  discretion,  one or more  preliminary  title reports  covering the
Subdivision, together with a copy of each Schedule B item.

     11.3 DEED OF  TRUST/MODIFICATION  TO DEED OF  TRUST.  Borrower  shall  have
executed,  delivered,   acknowledged,  and  recorded  a  Deed  of  Trust  (or  a
modification  to  existing  Deed of Trust)  covering,  if  possible,  the entire
Subdivision  (together with any financing  statements required by Administrative
Agent).  To the extent  possible,  Borrower shall ensure that all Entitled Land,
Lots Under Development,  Finished Lots and Units located in a single Subdivision
are covered by a single Deed of Trust.

     11.4 ENVIRONMENTAL  QUESTIONNAIRE.  The form of environmental questionnaire
requested  by  Administrative  Agent,  fully  completed  and  duly  executed  by
Borrower. The answers to the questions in the questionnaire must be satisfactory
to Administrative Agent in its sole and absolute discretion.

     11.5 ENVIRONMENTAL  ASSESSMENT.  A report of an environmental assessment of
the  Entitled  Land,  Lots Under  Development,  Finished  Lots or Units dated or
updated (unless in connection with a project encumbered by the Existing Deeds of
Trust) within the previous twelve (12) month period, addressed to Administrative
Agent by an environmental engineer acceptable to Administrative Agent containing
such  information,  results,  and  certifications  as  Administrative  Agent may
require, in its sole and absolute discretion.  Depending upon the results of the
environmental  assessment,  Borrower  shall also provide such follow up testing,
reports,  and other  actions as may be required by  Administrative  Agent in its
sole and  absolute  discretion.  The  contents of the  environmental  assessment
report and any follow up must be  satisfactory  to  Administrative  Agent in its
sole  and  absolute  discretion.  All  environmental  reports  shall be the sole
property of Administrative Agent.

                                      -71-
<PAGE>
     11.6 TITLE INSURANCE.  Borrower shall have provided to Administrative Agent
and Administrative  Agent shall have approved an American Land Title Association
or similar loan policy or policies of title  insurance or an  endorsement  to an
existing title policy or policies or an irrevocable and unconditional commitment
to issue such policy or policies or  endorsement  issued by the Title Company at
Administrative  Agent's request insuring the Deed of Trust encumbering each such
Subdivision.  Each such policy shall have a liability limit of not less than the
Commitment Amount (or such lesser amount approved by Administrative Agent in its
sole and absolute  discretion)  and shall  provide  coverage and otherwise be in
form and substance  satisfactory  to  Administrative  Agent  (including  without
limitation  mechanic's  lien  coverage,  comprehensive  coverage,  and revolving
credit coverage) insuring  Administrative  Agent's interest under the applicable
Deed  of  Trust  as a valid  first  lien on the  fee  interest  in the  property
encumbered  by the Deed of  Trust.  Such  policy  shall be  accompanied  by such
reinsurance and co-insurance agreements and endorsements as Administrative Agent
may require in its sole and absolute  discretion.  Such policy must contain only
such  exceptions as are  satisfactory  to  Administrative  Agent in its sole and
absolute  discretion and must have attached such  endorsements as Administrative
Agent may require in its sole and absolute discretion.

     11.7 FLOOD ZONE.  Evidence as to whether (i) the  Subdivision is located in
an area  designated  by the  United  States  Department  of  Housing  and  Urban
Development as having special flood or mudslide hazards,  and (ii) the community
in which the  Subdivision  is located is  participating  in the  National  Flood
Insurance Program.

     11.8 SOILS TESTS.  A soils test report  addressed to  Administrative  Agent
prepared by a licensed soils engineer acceptable to Administrative Agent showing
the  locations  of, and  containing  boring logs for, all bores,  together  with
recommendations for the design of the foundations of the Units.

                                      -72-
<PAGE>
     11.9 INSURANCE  POLICIES.  Borrower  shall have provided to  Administrative
Agent the certificates of insurance required under the Loan Documents.

     11.10  ASSESSMENTS,  CHARGES,  AND TAXES.  For taxes and assessments on the
Project  that  Administrative  Agent has  approved  in  writing  in its sole and
absolute  discretion for payment in installments  pursuant to the Deed of Trust,
evidence that such installments are current. For all other taxes and assessments
and all utility and services charges, evidence that they have been paid in full.

     11.11 CONTRACTS.  If required by Administrative  Agent, Borrower shall have
delivered to Administrative  Agent all executed contracts relating to design and
construction of the Improvements and Units between Borrower and any other Person
(including,   without   limitation,   each  architect  and  each  contractor  or
subcontractor  for labor,  material,  or services).  The contract  price in each
contract shall be within the budgeted amount in the applicable Budget.

     11.12 PROJECTIONS.  Borrower shall have delivered to Administrative Agent a
project proforma with respect to such Subdivision,  including projected budgets,
sales and pricing in  substantially  the form of the sample  attached  hereto as
EXHIBIT "J".

     11.13 PAYMENT OF COSTS,  EXPENSES,  AND FEES. All costs, expenses, and fees
to be paid by Borrower under the Loan  Documents on or before the  effectiveness
of this  Agreement,  the  effectiveness  of the  Commitment,  or the request for
Subdivision approval, including, without limitation recording, documentary stamp
tax and intangible taxes, shall have been paid in full.

     11.14 OTHER ACTIONS BY BORROWER.  Borrower  shall have performed such other
actions as Administrative Agent may reasonably require.

     11.15  REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall  remain  true and  correct  and all  agreements  that  Borrower is to have
performed  or complied  with by the date  hereof  shall have been  performed  or
complied with.

                                      -73-
<PAGE>
     11.16 NO  DEFAULTS.  No Event of  Default  or  Unmatured  Event of  Default
exists.

SECTION 12. CONDITIONS PRECEDENT TO APPROVAL OF ENTITLED LAND

     Borrower may, from time to time,  request  Administrative  Agent to approve
Entitled Land for inclusion in the  Borrowing  Base.  Approvals of Entitled Land
for inclusion in the Borrowing Base shall be granted by Administrative  Agent in
its  reasonable  discretion,  provided,  that as such  Collateral  satisfies the
applicable requirements of this Agreement. Entitled Land shall be considered for
inclusion  in the  Borrowing  Base no more  frequently  than twice per  Calendar
Month. In addition to the conditions precedent for Advances herein, Borrower may
include and maintain  Entitled Land in the Borrowing  Base only if the following
conditions  precedent  are  satisfied  at all times that such  Entitled  Land is
included in the Borrowing  Base,  in each case as  determined by  Administrative
Agent in its reasonable discretion:

     12.1  APPROVED  SUBDIVISION.  The  Entitled  Land  shall be  located  in an
Approved  Subdivision  and  Borrower  shall  have  satisfied  at all  times  the
conditions set forth in Section 11 with respect to such Entitled Land.

     12.2 FEE TITLE.  Fee title to the Entitled Land shall have been acquired by
Borrower  and  Administrative   Agent  shall  have  received  evidence  of  such
acquisition  satisfactory  to  Administrative  Agent in its  sole  and  absolute
discretion.

     12.3 DOCUMENTS. Administrative Agent has received the following agreements,
documents,  and  instruments,  each duly executed by the parties  thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:

          (a)  APPRAISAL.  An Appraisal of the Entitled  Land,  with the date of
     valuation (unless in connection with a Project previously encumbered by the

                                      -74-
<PAGE>
     Existing  Deeds of Trust)  within  120 days of the date of the  request  to
     include the Entitled Land in the Borrowing  Base. The Appraisal  shall have
     been approved by Administrative Agent in its sole and absolute discretion.

          (b) OTHER ITEMS. Such other agreements,  documents, and instruments as
     Administrative Agent may reasonably require (including, without limitation,
     if required by Administrative  Agent, a copy of the zoning for the Entitled
     Land, all related  stipulations,  and the zoning ordinances;  a copy of all
     conditions,  covenants,  and  restrictions  related to the Entitled Land; a
     copy of any public reports or disclosures  required under  applicable state
     or federal law once  prepared by Borrower  and  approved by the  applicable
     Governmental Authority;  evidence satisfactory to Administrative Agent that
     such  Entitled  Land  satisfy the  definition  of  Entitled  Land set forth
     herein).

     12.4 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the  effectiveness  of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Entitled Land, including, without limitation recording, documentary stamp
tax and intangible taxes, shall have been paid in full.

     12.5 OTHER ACTIONS BY BORROWER.  Borrower  shall have  performed such other
actions  and  delivered  such  other  documents  as  Administrative   Agent  may
reasonably require.

     12.6  REPRESENTATIONS  TRUE. All representations and warranties by Borrower
shall  remain  true and  correct  and all  agreements  that  Borrower is to have
performed  or complied  with by the date  hereof  shall have been  performed  or
complied with.

     12.7 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.

                                      -75-
<PAGE>
     12.8 LIMITATIONS. After giving effect to the addition of such Entitled Land
in the Borrowing Base, the limitations and restrictions on the Borrowing Base in
Section 5 are not violated.

SECTION 13. CONDITIONS PRECEDENT TO APPROVAL OF LOTS UNDER
                    DEVELOPMENT

     Borrower may, from time to time,  request  Administrative  Agent to approve
Lots Under  Development for inclusion in the Borrowing  Base.  Approvals of Lots
Under  Development  for  inclusion  in the  Borrowing  Base  shall be granted by
Administrative  Agent  in  its  reasonable  discretion,   provided,   that  such
Collateral satisfies the applicable  requirements of this Agreement.  Lots Under
Development  shall be considered  for  inclusion in the  Borrowing  Base no more
frequently  than  twice  per  Calendar  Month.  In  addition  to the  conditions
precedent  for Advances  herein,  Borrower  may include and maintain  Lots Under
Development in the Borrowing Base only if the following conditions precedent are
satisfied  at all times that such Lots Under  Development  are  included  in the
Borrowing  Base,  in each  case as  determined  by  Administrative  Agent in its
reasonable discretion:

     13.1 APPROVED  SUBDIVISION.  The Lots Under Development shall be located in
an Approved  Subdivision  and  Borrower  shall have  satisfied  at all times the
conditions  set forth in  Sections  11 and 12 with  respect  to such Lots  Under
Development.

     13.2 FEE  TITLE.  Fee title to the Lots Under  Development  shall have been
acquired by Borrower and  Administrative  Agent shall have received  evidence of
such acquisition  satisfactory to Administrative  Agent in its sole and absolute
discretion.

     13.3 DOCUMENTS. Administrative Agent has received the following agreements,
documents,  and  instruments,  each duly executed by the parties  thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:

                                      -76-
<PAGE>
a) APPRAISAL.  An Appraisal of the Lots Under  Development,  with the
     date  of  valuation  (unless  in  connection  with  a  Project   previously
     encumbered  by the Existing  Deeds of Trust) within 120 days of the date of
     the request to include the Lots Under  Development  in the Borrowing  Base.
     The Appraisal shall have been approved by Administrative  Agent in its sole
     and absolute discretion.

          (b) BUDGET.  A Budget for the respective  Improvements,  together with
     the  cost  of the  applicable  Lots  Under  Development  as  determined  in
     accordance with GAAP.

          (c)  PLANS  AND  SPECIFICATIONS.  Plans  and  Specifications  for  the
     respective Improvements.

          (d)  CONSTRUCTION.  At the request of Administrative  Agent,  evidence
     that construction of the Improvements will commence within thirty (30) days
     or has commenced or been completed on the Lots Under Development.

          (e) OTHER ITEMS. Such other agreements,  documents, and instruments as
     Administrative Agent may reasonably require (including, without limitation,
     if  required  by  Administrative  Agent,  a copy of the zoning for the Lots
     Under Development,  all related stipulations,  and the zoning ordinances; a
     copy of all conditions,  covenants,  and  restrictions  related to the Lots
     Under  Development;  a copy of any public reports or  disclosures  required
     under  applicable  state  or  federal  law;  a copy  of  the  architectural
     committee  approval and any other approvals  required under the conditions,
     covenants, and restrictions).

     13.4 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the  effectiveness  of
this Agreement, the effectiveness of the Commitment, or the request for approval
of  the  Lots  Under  Development,   including,  without  limitation  recording,
documentary stamp tax and intangible taxes, shall have been paid in full.

                                      -77-
<PAGE>
     13.5 OTHER ACTIONS BY BORROWER.  Borrower  shall have  performed such other
actions  and  delivered  such  other  documents  as  Administrative   Agent  may
reasonably require.

     13.6  REPRESENTATIONS  TRUE. All representations and warranties by Borrower
shall  remain  true and  correct  and all  agreements  that  Borrower is to have
performed  or complied  with by the date  hereof  shall have been  performed  or
complied with.

     13.7 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.

     13.8  LIMITATIONS.  After giving  effect to the addition of such Lots Under
Development  in the Borrowing  Base, the  limitations  and  restrictions  on the
Borrowing Base in Section 5 are not violated.

SECTION 14. ADDITIONAL CONDITIONS PRECEDENT TO THE INCLUSION OF
     EACH FINISHED LOT IN THE BORROWING BASE

     Borrower may, from time to time,  request  Administrative  Agent to approve
Finished Lots for inclusion in the  Borrowing  Base.  Approvals of each Finished
Lot for inclusion in the Borrowing Base shall be granted by Administrative Agent
in its  reasonable  discretion,  provided,  that such Finished Lot satisfies the
applicable requirements of this Agreement. Finished Lots shall be considered for
inclusion no more  frequently  than twice per Calendar Month. In addition to the
conditions precedent for Advances herein, Borrower may include and maintain each
Finished Lot in the Borrowing  Base only if the following  conditions  precedent
are  satisfied at all times that such  Finished Lot is included in the Borrowing
Base,  in each case as  determined  by  Administrative  Agent in its  reasonable
discretion:

     14.1 APPROVED SUBDIVISION. The Finished Lot shall be located in an Approved
Subdivision  and Borrower  shall have  satisfied at all times the conditions set
forth in Sections 11, 12 and 13 with respect to such Lot.

                                      -78-
<PAGE>
     14.2 FEE TITLE.  Fee title to the  applicable  Finished Lot shall have been
acquired by Borrower and  Administrative  Agent shall have received  evidence of
such acquisition  satisfactory to Administrative  Agent in its sole and absolute
discretion.

     14.3  PLAT.  Borrower  shall have  delivered  to  Administrative  Agent and
Administrative  Agent  shall  have  approved  a final  plat and  final map (with
respect to California properties),  and if required by Administrative Agent with
respect to  California  properties  Administrative  Agent shall have  received a
Subdivision  Map Act  Endorsement to the applicable  title policy,  covering the
applicable Finished Lots.

     14.4 DOCUMENTS. Administrative Agent has received the following agreements,
documents,  and  instruments,  each duly executed by the parties  thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:

          (a)  APPRAISAL.  An  Appraisal  for  all of the  Finished  Lots in the
     respective  Subdivision  with the date of valuation  (unless in  connection
     with Finished Lots  previously  encumbered by the Existing  Deeds of Trust)
     within 120 days of the date of the request to include the  Finished  Lot in
     the   Borrowing   Base.   The   Appraisal   shall  have  been  approved  by
     Administrative Agent in its sole and absolute discretion.

          (b) IMPROVEMENTS.  Representation  by Borrower that  substantially all
     Improvements  related  to the  Finished  Lot have been  installed  and that
     construction  of the  Improvements  complies with plans and  specifications
     previously approved by Administrative Agent.

                                      -79-
<PAGE>
          (c) OTHER ITEMS. Such other agreements,  documents, and instruments as
     Administrative Agent may reasonably require.

     14.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the  effectiveness  of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Finished Lot, including, without limitation recording,  documentary stamp
tax and intangible taxes, shall have been paid in full.

     14.6 OTHER ACTIONS BY BORROWER.  Borrower  shall have  performed such other
actions  and  delivered  such  other  documents  as  Administrative   Agent  may
reasonably require.

     14.7  REPRESENTATIONS  TRUE. All representations and warranties by Borrower
shall  remain  true and  correct  and all  agreements  that  Borrower is to have
performed  or complied  with by the date  hereof  shall have been  performed  or
complied with.

     14.8 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.

     14.9 LIMITATIONS.  After giving effect to the addition of such Finished Lot
in the Borrowing Base, the limitations and restrictions on the Borrowing Base in
Section 5 are not violated.

SECTION 15. ADDITIONAL CONDITIONS PRECEDENT TO THE INCLUSION OF EACH UNIT IN THE
     BORROWING BASE

     Borrower may, from time to time,  request  Administrative  Agent to approve
Units for inclusion in the Borrowing  Base or to  reclassify  existing  Finished
Lots or Units.  Approvals of each Unit for inclusion in the  Borrowing  Base and
reclassification  of  existing  Finished  Lots and  Units  shall be  granted  by
Administrative Agent in its reasonable discretion, provided, that each such Unit
satisfies  the  applicable  requirements  of  this  Agreement.  Units  shall  be
considered  for  inclusion or  reclassification  in the  Borrowing  Base no more

                                      -80-
<PAGE>
frequently  than  twice  per  Calendar  Month.  In  addition  to the  conditions
precedent  for Advances  herein,  Borrower may include and maintain each Unit in
the Borrowing Base only if the following  conditions  precedent are satisfied at
all times that such Unit is  included  in the  Borrowing  Base,  in each case as
determined by Administrative Agent in its reasonable discretion:

     15.1  APPROVED  SUBDIVISION.  The Unit  shall  be  located  in an  Approved
Subdivision  and Borrower  shall have  satisfied at all times the conditions set
forth in Sections 11, 12, 13 and 14 with respect to the Unit and related Lot.

     15.2 FEE TITLE. Fee title to the applicable Lot shall have been acquired by
Borrower  and  Administrative   Agent  shall  have  received  evidence  of  such
acquisition  satisfactory  to  Administrative  Agent in its  sole  and  absolute
discretion.

     15.3  PLAT.  Borrower  shall have  delivered  to  Administrative  Agent and
Administrative  Agent  shall  have  approved  a final  plat and  final map (with
respect to California properties),  and if required by Administrative Agent with
respect to  California  properties  Administrative  Agent shall have  received a
Subdivision  Map Act  Endorsement to the applicable  title policy,  covering the
applicable Lot.

     15.4 DOCUMENTS. Administrative Agent has received the following agreements,
documents,  and  instruments,  each duly executed by the parties  thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:

          (a) APPRAISAL.  An Appraisal for the respective type of Unit, valid as
     determined  by  Administrative  Agent in its sole and absolute  discretion,
     and, if requested by  Administrative  Agent,  an updated  Appraisal for the
     respective  type of  Unit.  The  Appraisal  shall  have  been  approved  by
     Administrative Agent in its sole and absolute discretion.

          (b) BUDGET. A Budget for the respective type of Unit together with the
     Acquisition Cost of the applicable Lot.

                                      -81-
<PAGE>
          (c)  PLANS  AND  SPECIFICATIONS.  Plans  and  Specifications  for  the
     respective type of Unit.

          (d) PURCHASE CONTRACT. At the request of Administrative Agent, if such
     Unit is a Presold Unit, a copy of a Purchase Contract for such Unit.

          (e) PUBLIC REPORTS. If required by Administrative Agent, a copy of the
     public report issued to Borrower for the sale of the Units once prepared by
     Borrower and approved by the applicable Governmental Authority.

          (f) OTHER ITEMS. Such other agreements,  documents, and instruments as
     Administrative Agent may reasonably require.

     15.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the  effectiveness  of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Unit, including, without limitation recording,  documentary stamp tax and
intangible taxes, shall have been paid in full.

     15.6 OTHER ACTIONS BY BORROWER.  Borrower  shall have  performed such other
actions  and  delivered  such  other  documents  as  Administrative   Agent  may
reasonably require.

     15.7  REPRESENTATIONS  TRUE. All representations and warranties by Borrower
shall  remain  true and  correct  and all  agreements  that  Borrower is to have
performed  or complied  with by the date  hereof  shall have been  performed  or
complied with.

     15.8 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.

     15.9  LIMITATIONS.  After giving effect to the addition of such Unit in the
Borrowing  Base,  the  limitations  and  restrictions  on the Borrowing  Base in
Section 5 are not violated.

                                      -82-
<PAGE>
SECTION 16. ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES

     The Banks shall be obligated to make an Advance only upon  satisfaction  by
Borrower of the  following  additional  conditions  precedent,  as determined by
Administrative Agent in its sole and absolute discretion:

     16.1  REPRESENTATIONS  AND WARRANTIES  ACCURATE.  The  representations  and
warranties  by Borrower in the Loan  Documents are correct on and as of the date
of the Advance,  as though made on and as of such date,  and after giving effect
to such Advance.

     16.2 DEFAULTS. No Event of Default or Unmatured Event of Default shall have
occurred and be continuing  both before and after giving effect to such issuance
or Advance.

     16.3 DRAW REQUEST.  Borrower  shall have  delivered or sent by facsimile to
Administrative Agent a Draw Request for such Advance.

     16.4 APPROVALS AND INSPECTIONS BY GOVERNMENTAL AUTHORITIES.  As required by
Administrative  Agent,  all  inspections,  Approvals and Permits by Governmental
Authorities  or  other  Persons  required  for the  stage of  completion  of the
Improvements  or the Unit have been obtained and, if required by  Administrative
Agent,  Administrative  Agent has  received  evidence  thereof  satisfactory  to
Administrative Agent.

     16.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower  under the Loan Documents on or before the Advance have been
paid in full.

Borrower  hereby  authorizes  Administrative  Agent,  and  Administrative  Agent
reserves the right in its sole and absolute discretion,  to verify any documents
and  information  submitted  to  Administrative  Agent in  connection  with this
Agreement.  Administrative Agent may elect, in its sole and absolute discretion,
to waive any of the  foregoing  conditions  precedent.  Any such waiver shall be
effective only if (i) it is in writing executed by Administrative Agent, (ii) it

                                      -83-
<PAGE>
specifically identifies the condition precedent, and (iii) it states whether the
condition  precedent is waived as a  requirement  of the  effectiveness  of this
Agreement,  as a requirement of the  effectiveness  of the  Commitment,  or as a
requirement  for a particular  Advance,  or otherwise.  Any such waiver shall be
limited to the  condition(s)  precedent  therein and the  requirements  therein.
Delay or  failure  by  Administrative  Agent to  insist on  satisfaction  of any
condition  precedent  shall not be a waiver of such  condition  precedent or any
other  condition  precedent.  If  Borrower  is unable to satisfy  any  condition
precedent  of  an  Advance,  the  making  of  the  Advance  shall  not  preclude
Administrative  Agent from  thereafter  declaring the condition or event causing
such inability to be an Event of Default.

SECTION 17. REPRESENTATIONS AND WARRANTIES

     Borrower represents and warrants to Administrative Agent, Documentation and
Syndication Agent and the Banks as follows:

     17.1  RECITALS AND  STATEMENTS.  The recitals and  statements  of intent of
Borrower appearing in this Agreement are true and correct.

     17.2 ORGANIZATION; POWERS; ETC. (a) The Borrower is duly organized, validly
existing  and in  good  standing  under  the  laws  of the  jurisdiction  of its
formation;  (b) the Borrower has the power and authority to own its property and
assets and to carry on its  business as now  conducted  and is  qualified  to do
business in every jurisdiction where such qualification is required except where
the failure to so qualify would not result in a material  adverse  effect on the
business,  assets,  operations  or condition  (financial  or  otherwise)  of the
Borrower;  and (c) the  Borrower  has the power to execute,  deliver and perform
this Agreement and the other Loan Documents and to borrow hereunder.

     17.3  AUTHORIZATION;  ETC. The execution,  delivery and  performance by the
Borrower of this Agreement, the Advances hereunder, and the issuance,  execution
and  delivery  of the  Notes:  (a) have been duly  authorized  by all  requisite

                                      -84-
<PAGE>
action;  (b) will not violate (i) any  provision of law, any order of any court,
or any rule,  regulation  or order of any other agency of  government,  (ii) the
organizational  documents  of Borrower,  or (iii) any  provision of any material
indenture, agreement or other instrument to which the Borrower is a party, or by
which the Borrower or any of its  properties or assets are or may be bound;  (c)
will not be in conflict with, result in a breach of or constitute  (alone,  with
notice,  with lapse of time, or with any combination of these factors) a default
under any  indenture,  agreement  or other  instrument  referred  to in (b)(iii)
above;  and (d) will not result in the creation or  imposition  of any Lien upon
any property or assets of the Borrower  (except pursuant to the Loan Documents).
Except for  filings  which may be required  under the 1934 Act, no  registration
with or consent or approval of, or other action by, any  Governmental  Authority
is required in connection  with the execution,  delivery and performance of this
Agreement, the execution and delivery of the Notes or the Advances hereunder.

     17.4  ENFORCEABILITY.  This  Agreement  constitutes,  and each  other  Loan
Document when duly executed and  delivered by the Borrower and  Guarantors  will
constitute,  the  legal,  valid  and  binding  obligation  of the  Borrower  and
Guarantors, respectively,  enforceable in accordance with its terms, subject, as
to the  enforcement  of  remedies,  to  applicable  bankruptcy,  reorganization,
insolvency,  moratorium and other laws of general  applicability  relating to or
affecting  creditors'  rights  from  time  to  time  in  effect  and to  general
principles of equity  (regardless of whether such enforcement is considered in a
proceeding at law or in equity).

     17.5  LITIGATION.  There are no actions,  suits or proceedings at law or in
equity or by or before  any  governmental  instrumentality  or other  agency now
pending or, to the  knowledge of the Borrower,  threatened  against or affecting
the  Borrower  or  Guarantors  or any  property  or  rights of the  Borrower  or
Guarantors  which would be reasonably  likely in the aggregate to (i) materially
impair the ability of the Borrower or Guarantors  to perform  their  obligations

                                      -85-
<PAGE>
under this Agreement, the Notes or the other Loan Documents or materially impair
the ability of the Borrower or Guarantors to carry on business  substantially as
now  being  conducted  or (ii)  result  in any  material  adverse  change in the
business,  assets,  operations,  or condition  (financial  or  otherwise) of the
Borrower or Guarantors.

     17.6 FEDERAL RESERVE REGULATIONS.

          (a)  The  Borrower  is  not  engaged  principally,  or as  one  of its
     important  activities,  in the business of extending credit for the purpose
     of purchasing or carrying Margin Stock.

          (b) No part of the proceeds of any Loan will be used, whether directly
     or indirectly, and whether immediately,  incidentally or ultimately, (i) to
     purchase  or carry  Margin  Stock or to extend  credit  to  others  for the
     purpose of  purchasing or carrying  Margin Stock or to refund  indebtedness
     originally incurred for such purpose, or (ii) for any purpose which entails
     a  violation  of, or which is  inconsistent  with,  the  provisions  of the
     Regulations of the Board, including Regulation G, U or X.

     17.7 INVESTMENT COMPANY ACT. The Borrower is not an "investment company" or
a company  "controlled"  by an  "investment  company"  within the meaning of the
Investment Company Act of 1940, as amended.

     17.8 PUBLIC  UTILITY  HOLDING  COMPANY  ACT. The Borrower is not a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary  company" of a "holding company," within
the meaning of the Public Utility Holding Company Act of 1935, as amended.

     17.9 NO BREACH.  The  execution,  delivery and  performance by Borrower and
Guarantors  of this  Agreement,  the  Notes,  the Loan  Documents  and all other
documents and instruments  relating to the Loan will not result in any breach of
the terms,  conditions or  provisions  of, or  constitute a default  under,  any
agreement or  instrument  under which  Borrower or  Guarantors  is a party or is

                                      -86-
<PAGE>
obligated.  Neither  Borrower nor any Guarantor is in default in the performance
or observance of any  covenants,  conditions or provisions of any such agreement
or instrument.

     17.10 FINANCIAL STATEMENTS TRUE. All financial statements,  profit and loss
statements,   statements  as  to  ownership  and  other  statements  or  reports
previously or hereafter given to the Administrative  Agent or the Banks by or on
behalf of Borrower and Guarantors are and shall be true, complete and correct as
of the date thereof.  There has been no material adverse change in the financial
condition of Borrower or any  Guarantor  since the latest  financial  statements
given to the Administrative Agent or the Banks.

     17.11 SIGNIFICANT DEBT AGREEMENTS. Neither Borrower nor any Guarantor is in
default in any material respect under any Significant Debt Agreement.

     17.12 ERISA.  (a) No Reportable  Event has occurred and is continuing  with
respect to any Plan;  (b) PBGC has not  instituted  proceedings to terminate any
Plan;  (c) neither the Borrower,  any member of the  Controlled  Group,  nor any
duly-appointed  administrator  of a Plan (i) has incurred any  liability to PBGC
with  respect to any Plan other than for premiums not yet due or payable or (ii)
has  instituted or intends to institute  proceedings to terminate any Plan under
Section  4041 or  4041A  of  ERISA;  and (d)  each  Plan of  Borrower  has  been
maintained and funded in all material  respects in accordance with its terms and
in all material  respects in accordance with all provisions of ERISA  applicable
thereto.  The  Borrower  does not  participate  in, or is not  required  to make
contributions  to, any  Multi-employer  Plan (as that term is defined in Section
3(37) of ERISA).

     17.13  SOLVENT.  Borrower in the  aggregate  (both  before and after giving
effect to the Loan  contemplated  hereby) is solvent,  has assets  having a fair
value in excess of the amount  required to pay its probable  liabilities  on its
existing  debts as they become  absolute  and  matured,  and has, and will have,
access to adequate  capital for the conduct of its  business  and the ability to
pay its debts from time to time incurred in  connection  therewith as such debts
mature.

                                      -87-
<PAGE>
     17.14 LIENS. The liens,  security interests and assignments  created by the
Loan Documents will, when granted, be valid,  effective,  properly perfected and
enforceable liens, security interests and assignments.

     17.15  LICENSES.  Borrower has obtained,  or will obtain when  necessary or
appropriate,  and there remain in full force and effect all  licenses,  permits,
consents,   approvals  and  authorizations  necessary  or  appropriate  for  the
construction of the Improvements and Units.

     17.16 FILING OF TAXES. Borrower has filed all federal,  state and local tax
returns and has paid all of its current obligations before delinquent, including
all  federal,  state and  local  taxes and all  other  payments  required  under
federal, state or local law.

     17.17 BUDGETS AND PLANS AND SPECIFICATIONS. Each applicable Budget contains
Borrower's  best  estimate  of all costs,  expenses,  and fees to be incurred by
Borrower  in  connection  with the  Improvements  and the Units.  Each Plans and
Specifications  and  related  working  drawings  are an  accurate  and  complete
description of the Improvements or Units related thereto.

     17.18 AFFIRMATION. Each request by Borrower for an Advance shall constitute
an affirmation on the part of Borrower that the  representations  and warranties
contained herein are true and correct in all material respects as of the time of
such request and that the conditions precedent set forth in Sections 10, 11, 12,
13, 14, 15 and 16 hereof  have been  satisfied  in all  material  respects.  All
representations  and warranties  made herein shall survive the execution of this
Agreement,  all Advances and the execution  and delivery of all other  documents
and  instruments  in  connection  with the Loan,  so long as the Banks  have any
commitment to lend to Borrower hereunder and until the Loan and all indebtedness
hereunder  have been paid in full and all of  Borrower's  obligations  hereunder
have been fully discharged.

                                      -88-
<PAGE>
SECTION 18. AFFIRMATIVE COVENANTS

     So long as the Banks have any commitment to lend to Borrower  hereunder and
until the Loan and all other  indebtedness  hereunder have been paid in full and
all of Borrower's obligations hereunder have been fully discharged:

     18.1 CORPORATE,  LIMITED LIABILITY COMPANY,  OR PARTNERSHIP  EXISTENCE.  If
Borrower  is a  corporation,  a limited  liability  company,  or a  partnership,
Borrower shall continue to be validly existing, and in the case of a corporation
or a  limited  liability  company  in  good  standing,  under  the  law  of  the
jurisdiction of its organization or formation.

     18.2 BOOKS AND  RECORDS;  ACCESS BY  ADMINISTRATIVE  AGENT.  Borrower  will
maintain a single, standard, modern system of accounting, on an accrual basis in
accordance with GAAP,  including without  limitation,  a single,  complete,  and
accurate set of books and records of its assets, business,  financial condition,
operations,  property,  prospects,  and results of operations in accordance with
good accounting practices.  Borrower will give representatives of Administrative
Agent access to all assets, property,  books, records, and documents of Borrower
and will permit such  representatives to inspect such assets and property and to
audit, copy, examine, and make excerpts from such books, records, and documents.

     18.3  INFORMATION  AND  STATEMENTS.  Borrower  shall furnish or cause to be
furnished to Administrative Agent the following information and statements:

          (a)  CONSOLIDATING  AND  CONSOLIDATED   QUARTERLY  STATEMENTS  OF  THE
     MERITAGE  GROUP.  As soon as available,  and in any event within sixty (60)
     days after the end of each fiscal quarter of the Meritage Group,  copies of
     the consolidating  and consolidated  balance sheet of the Meritage Group as
     of the end of such  fiscal  quarter,  and  consolidating  and  consolidated
     statements  of income and cash flows of the Meritage  Group for that fiscal
     quarter  and for the  portion of the fiscal  year  ending  with such fiscal
     quarter, in each case setting forth in comparative form the figures for the

                                      -89-
<PAGE>
     corresponding period of the preceding fiscal year, all in reasonable detail
     and fairly  stated and prepared by the Meritage  Group in  accordance  with
     GAAP. As soon as available and in any event within 60 days after the end of
     each  quarter of the Meritage  Group's  fiscal year, a copy of the Meritage
     Group's quarterly report on Form 10-Q filed with the SEC.

          (b) CONSOLIDATING  AND CONSOLIDATED  ANNUAL STATEMENTS OF THE MERITAGE
     GROUP.  As soon as  available  and in any event  within one hundred  twenty
     (120)  days  after the close of each  fiscal  year of the  Meritage  Group,
     audited consolidated  financial statements of the Meritage Group, including
     its  consolidated  balance  sheet as of the close of such  fiscal  year and
     consolidated  statements of income and cash flows of the Meritage Group for
     such  fiscal  year,  in each case  setting  forth in  comparative  form the
     figures  for the  preceding  fiscal  year,  all in  reasonable  detail  and
     accompanied  by  an  unqualified  opinion  thereon  of  independent  public
     accountants of recognized  national standing selected by the Meritage Group
     and acceptable to  Administrative  Agent, to the effect that such financial
     statements  have been prepared in accordance  with GAAP (except for changes
     in which such accountants concur) and that the examination of such accounts
     in connection  with such  financial  statements has been made in accordance
     with generally accepted auditing standards and, accordingly,  includes such
     tests of the accounting records and such other auditing  procedures as were
     considered necessary in the circumstances.  As soon as available and in any
     event  within one hundred  twenty (120) days after the close of each fiscal
     year  of the  Meritage  Group,  company  prepared  consolidating  financial
     statements of the Meritage Group, including its consolidating balance sheet
     as of the close of such fiscal year and consolidating  statements of income
     and cash flows of the  Meritage  Group for such fiscal  year,  in each case

                                      -90-
<PAGE>
     setting  forth in  comparative  form the figures for the  preceding  fiscal
     year, all in reasonable detail and prepared in accordance with GAAP. Within
     60 days prior to each fiscal year of the Meritage  Group, a projection,  in
     reasonable detail and in form and substance  satisfactory to Administrative
     Agent,  on a  quarterly  basis of the cash flow and of the  earnings of the
     Meritage  Group for the next one (1) fiscal year,  together  with gross and
     net margin analysis of each project by quarter. As soon as available and in
     any event  within 120 days  after the end of the  Meritage  Group's  fiscal
     year, a copy of the Meritage  Group's annual report on Form 10-K filed with
     the SEC.

          (c)  CLOSING  REPORT.  As soon as  available  and in any event  within
     fifteen (15) Business Days after the end of each Calendar  Month, a monthly
     report of all Unit and other sales closed on the previous rolling month, in
     form and substance  satisfactory to Administrative  Agent,  together with a
     reconciliation  of the most recently  submitted  Borrowing  Base Report and
     recalculation  of the Borrowing  Base after giving effect to such closings.
     For purposes of this  paragraph,  a sale will be deemed to have closed when
     Title Company has received all funds necessary to close the sale and to pay
     Administrative  Agent all sums owed to  Administrative  Agent  pursuant  to
     Section 3.17 hereof.

          (d)  SALES  REPORTS  AND  INVENTORY  REPORTS.  As soon as the same are
     available, and in any event within fifteen (15) Business Days after the end
     of each  Calendar  Month,  a monthly  sales,  closings  and backlog  report
     showing sales of Units during the preceding  month.  Within sixty (60) days
     after the end of each calendar quarter,  a report showing (A) the status of
     Units under  construction and Lots as of the end of the preceding  calendar
     quarter,  and  (B)  an  inventory  report  of  Entitled  Land,  Lots  Under
     Development  and  Finished  Lots  as of the end of the  preceding  calendar
     quarter.  Such reports  shall be in  substantially  the form of the samples
     attached hereto as EXHIBIT "I" and shall contain such detailed  information
     as Administrative Agent may reasonably require.

                                      -91-
<PAGE>
          (e)  COLLATERAL  INVENTORY  REPORT AND COLLATERAL  CERTIFICATE.  On or
     before the dates that are four (4) Business  Days prior to the tenth (10th)
     and the  twenty-fifth  (25th) day of each Calendar  Month,  the  Collateral
     Inventory Report, accompanied by the Collateral Certificate.

          (f)  CERTIFICATE  OF  COMPLIANCE.  A certificate in form and substance
     satisfactory  to  Administrative  Agent  that  the  Meritage  Group  is  in
     compliance with all covenants,  terms,  and conditions  applicable  thereto
     under or pursuant to all agreements with Administrative Agent and the Banks
     and under the Loan Documents,  including, without limitation, the Financial
     Covenants.  Such  certificate  shall be  provided  by  Borrower  within one
     hundred twenty (120) days after the end of each fiscal year of Borrower and
     within sixty (60) days after the end of each interim  quarterly  accounting
     period of Borrower.

          (g) OTHER ITEMS AND  INFORMATION.  Such other  information  concerning
     Borrower,  the  Project,  and the assets,  business,  financial  condition,
     operations,  property,  prospects, and results of operations of Borrower as
     Administrative Agent reasonably requests from time to time. In this regard,
     upon  request  of   Administrative   Agent,   Borrower   shall  deliver  to
     Administrative   Agent  counterparts  and/or  conditional   assignments  as
     security of any and all construction contracts,  receipted invoices,  bills
     of sale,  statements,  conveyances,  and other agreements,  documents,  and
     instruments  of any nature  relating to the Project or under which Borrower
     claims  title  to any  materials  or  supplies  used  or to be  used in the
     Project.  Also,  in this  regard,  upon  request of  Administrative  Agent,
     Borrower  shall  deliver to  Administrative  Agent a  complete  list of all
     contractors,  subcontractors,  material suppliers, other vendors, artisans,
     and laborers performing work or services or providing materials or supplies
     for the Project.

                                      -92-
<PAGE>
     18.4 LAW; JUDGMENTS;  MATERIAL AGREEMENTS;  APPROVALS AND PERMITS. Borrower
shall comply with all laws, ordinances,  regulations, and rules (federal, state,
and local) and all  judgments,  orders,  and  decrees of any  arbitrator,  other
private  adjudicator,  or  Governmental  Authority  relating  to  Borrower,  the
Project, or the assets, business,  operations, or property of Borrower. Borrower
shall comply in all material respects with all material  agreements,  documents,
and instruments to which Borrower is a party or by which Borrower,  the Project,
or any of the  other  assets  or  property  of  Borrower  is bound or  affected.
Borrower shall comply with all Requirements (including,  without limitation,  as
applicable,  requirements of the Federal Housing Administration and the Veterans
Administration)  and  all  conditions  and  requirements  of all  Approvals  and
Permits.  Borrower  shall  obtain and  maintain  in effect from time to time all
Approvals and Permits  required for the business  activities and operations then
being conducted by Borrower in the Project.

     18.5 TAXES AND OTHER  INDEBTEDNESS.  Except for taxes and assessments being
contested  in  accordance  with the Deed of  Trust  and  except  for  taxes  and
assessments  that  Administrative  Agent  has  agreed  in its sole and  absolute
discretion  may be  paid in  installments  as  provided  in the  Deed of  Trust,
Borrower shall pay and discharge (i) 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, or upon the Note,  any Deed of Trust,  or
the indebtedness  evidenced or secured thereby,  (ii) 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 (iii) all its other  material  trade credit.  Upon the request of
Administrative Agent, Borrower shall deliver to Administrative Agent receipts or
other evidence satisfactory to Administrative Agent showing payment of all taxes
and  assessments  on the  Collateral.  Borrower  shall pay when due all dues and
charges for water and water delivery,  electricity,  gas, sewers, waste removal,
bills for  repairs,  and any and all other  claims,  encumbrances  and  expenses
incident to the ownership of the Collateral.

                                      -93-
<PAGE>
     18.6 ASSETS AND PROPERTY. Borrower will maintain, keep, and preserve all of
its  assets  and  property   (tangible  and  intangible)   (including,   without
limitation,  the  Project)  necessary  or useful in the  proper  conduct  of its
business and operations in good working order and  condition,  ordinary wear and
tear excepted.

     18.7  INSURANCE.  The following  insurance shall be obtained and maintained
and all related premiums shall be paid as they become due:

          (a) PROPERTY. Insurance of the Project against damage or loss by fire,
     lightning,  and other perils, on an all-risks basis, such coverage to be in
     an amount  not less than the full  replacement  cost.  During the period of
     construction of the Project,  such policy shall be written in the so-called
     "BUILDER'S RISK COMPLETED VALUE NON-REPORTING FORM," on an all-risks basis,
     with no coinsurance requirement except as approved by Administrative Agent,
     and shall contain a provision  granting the insured  permission to complete
     and/or occupy the Project.

          (b)  LIABILITY.  Commercial  general  liability  insurance  protecting
     Borrower and  Administrative  Agent  against loss or losses from  liability
     imposed by law or assumed in any  agreement,  document,  or instrument  and
     arising  from bodily  injury,  death,  or  property  damage with a limit of
     liability of not less than  $2,000,000.00  per occurrence and $2,000,000.00
     general aggregate. Also, "UMBRELLA" excess liability insurance in an amount
     not less than $5,000,000.00. Such policies must be written on an occurrence
     basis so as to provide blanket contractual  liability,  broad form property
     damage  coverage,  and coverage for products and completed  operations.  In
     addition,  there shall be obtained and  maintained  business  motor vehicle
     liability insurance  protecting  Borrower and Administrative  Agent against
     loss or losses from liability relating to motor vehicles owned,  non-owned,

                                      -94-
<PAGE>
     or hired used by Borrower, any contractor, any subcontractor,  or any other
     Person in any manner  related to the Project  with a limit of  liability of
     not less than  $2,000,000.00  (combined  single limit for  personal  injury
     including bodily injury and death and property damage).

          (c) FLOOD.  A policy or  policies  of flood  insurance  in the maximum
     amount of flood  insurance  available with respect to the Project under the
     Flood Disaster Protection Act of 1973, as amended. This requirement will be
     waived upon  presentation of evidence  satisfactory  to the  Administrative
     Agent that no portion of the Project is located  within an area  identified
     by the U.S.  Department of Housing and Urban  Development as having special
     flood hazards.

          (d)  WORKMAN'S   COMPENSATION.   Workman's   compensation   insurance,
     disability  benefits  insurance,  and  such  other  forms of  insurance  as
     required by law covering loss resulting from injury, sickness,  disability,
     or death of employees of Borrower,  any contractor,  and any  subcontractor
     located on or assigned to the Project. Borrower shall cause each contractor
     and each  subcontractor  having  employees  located on or  assigned  to the
     Project  to  obtain  and  maintain  this  same  coverage  for all  eligible
     employees.

          (e)  ADDITIONAL  INSURANCE.  Borrower  shall obtain and maintain  such
     other policies of insurance as Administrative  Agent may reasonably request
     in writing.

          (f) OTHER. All required  insurance shall be procured and maintained in
     financially sound and generally recognized  responsible insurance companies
     selected by  Borrower.  Such  companies  must be  authorized  to write such
     insurance in the States of Arizona and  California.  Each company  shall be
     rated "A" or better by A.M.  Best Co.,  in Best's Key Guide,  or such other
     rating  acceptable to Administrative  Agent in Administrative  Agent's sole

                                      -95-
<PAGE>
     and  absolute   discretion.   All  property  policies  evidencing  required
     insurance  shall  name  Administrative  Agent as first  mortgagee  and loss
     payee.  All liability  policies  evidencing  required  insurance shall name
     Administrative  Agent as  additional  insured.  The  policies  shall not be
     cancelable as to the interests of the Administrative  Agent due to the acts
     of Borrower. The policies shall provide for at least thirty (30) days prior
     written   notice  of  the   cancellation   or   modification   thereof   to
     Administrative Agent.

          (g) EVIDENCE. Certificates of insurance evidencing that such insurance
     is in full force and effect,  shall be delivered to  Administrative  Agent,
     together  with  proof of the  payment  of the  premiums  thereof.  At least
     fifteen (15) days prior to the expiration of such policies,  Borrower shall
     furnish  Administrative Agent evidence that such policy has been renewed or
     replaced in the form of a certificate  reciting that there is in full force
     and  effect,  with a term  covering at least the next  succeeding  calendar
     year,  insurance  of the types and in the amounts  required in this Section
     18.7.  If required  by  Administrative  Agent,  Borrower  shall  provide to
     Administrative  Agent the  original or  certified  copies of the  insurance
     policies required herein.

     18.8  ERISA.  Borrower  will fund each  Defined  Benefit  Plan and  Defined
Contribution Plan (as such terms are defined in ERISA) established or maintained
by Borrower so that there is never an Accumulated Funding Deficiency (as defined
in SECTION 412 of the Internal Revenue Code of 1986, as amended).

     18.9  APPRAISALS.  Administrative  Agent  shall  have  the  right  to order
Appraisals  from time to time.  Each Appraisal is subject to review and approval
by Administrative  Agent. Borrower agrees upon demand by Administrative Agent to
pay to  Administrative  Agent the cost and expense for such Appraisals and a fee
determined  by  Administrative  Agent  for  review  of each  such  Appraisal  by

                                      -96-
<PAGE>
Administrative Agent.  However,  Borrower's obligation to pay costs and expenses
associated  with a reappraisal of existing  Collateral  shall be limited to once
per year for each such reappraisal, unless such reappraisal is ordered after the
occurrence  of  an  Event  of  Default  or as a  result  of  federal  regulatory
requirements.  All FNMA  appraisals  or other  appraisals  of Units  accepted by
Administrative  Agent  that do not  have a  specific  expiration  date  shall be
updated at  Administrative  Agent's  request.  Based on the updated,  respective
Appraised Value approved or determined by  Administrative  Agent in its sole and
absolute  discretion,  Administrative  Agent  shall have the right to revise the
Collateral  Values  and/or  the  Maximum  Allowed  Advances  applicable  to  any
Collateral at any time. If the outstanding  principal amount of Advances exceeds
the Available  Commitment as a result of such  revision,  then Borrower shall be
required to make a mandatory  prepayment  to  Administrative  Agent  pursuant to
Section 3.17 hereof.

     18.10  COMMENCEMENT AND COMPLETION.  As requested by Administrative  Agent,
Borrower  shall  cause  construction  of the  Improvements  and the  Units to be
prosecuted and completed in good faith,  with due diligence,  and without delay.
Upon completion of each Unit,  Borrower shall obtain the issuance of a permanent
certificate of occupancy or other  equivalent  permit required by the applicable
Governmental  Authority and, if requested by  Administrative  Agent, make a copy
thereof available to Administrative  Agent for inspection.  Borrower shall cause
the  Improvements  and the Units to be constructed (i) in a good and workmanlike
manner, (ii) in compliance with all applicable  Requirements,  and (iii), unless
otherwise consented to by Administrative Agent in advance in writing in the sole
and absolute  discretion of  Administrative  Agent, in accordance with the Plans
and Specifications.  Upon demand by Administrative Agent, Borrower shall correct
any defect in the Units or any departure from any applicable Requirements or, to
the extent not  theretofore  approved in writing by  Administrative  Agent,  the
respective  Plans and  Specifications.  Borrower  understands  and  agrees  that
inspection of the Improvements  and the Units by or on behalf of  Administrative
Agent, the review by Administrative Agent of Draw Requests and related documents
and  information,   the  making  of  Advances  by  the  Banks,  any  actions  by
Administrative  Agent  under  Section  18.12  hereof,  and any other  actions by
Administrative  Agent shall not be a waiver of  Administrative  Agent's right to
require compliance with this Section 18.10.

                                      -97-
<PAGE>
     18.11 TITLE  INSURANCE.  If Title  Company  pays any claims under any Title
Policy,  Borrower  will take any and all  actions  necessary  to cause the total
liability  under  the  Title  Policy  to  remain  at or to be  increased  to the
Commitment Amount notwithstanding the payment of such claim or claims, including
without limitation, providing any supplemental Title Policies or endorsements or
reinsurance  agreements if requested by Administrative  Agent, the cost of which
shall be paid by Borrower. Upon payment of any such claims, Borrower will obtain
and  provide  to  Administrative  Agent  any  and all  documentation  reasonably
requested by  Administrative  Agent to ensure that the maximum coverage provided
for hereunder  shall not have been diminished as a result of the payment of such
claims.

     18.12 RIGHTS OF INSPECTION;  CORRECTION OF DEFECTS; AGENCY.  Administrative
Agent and its agents, employees, and representatives shall have the right at any
time and from time to time to enter upon the  Project  in order to  inspect  the
Project. If Administrative Agent, in its judgment, determines that any materials
or work do not conform with the respective Plans and  Specifications or with any
applicable  Requirements  or are otherwise not in conformity with sound building
practice,  and such defect is not corrected within twenty (20) days after notice
thereof to Borrower,  Administrative Agent shall have the right to stop the work
and to order  replacement or correction of any such materials or work regardless
of whether or not such materials or work have theretofore  been  incorporated in
the Units,  regardless of whether  Administrative  Agent's  representatives have
previously  inspected  such  work  or  materials,   and  regardless  of  whether
Administrative  Agent  has  previously  made  Advances  to pay for such  work or
materials.   Borrower  shall  promptly  make  such  replacement  or  correction.
Inspection by Administrative  Agent or by Administrative  Agent's  inspectors of
the Project is for the sole purpose of protecting the security of Administrative
Agent and is not to be construed as a  representation  by  Administrative  Agent
that  there  has  been  compliance  with the  Plans  and  Specifications  or the
applicable  Requirements  or that the Units are free of defects in  materials or

                                      -98-
<PAGE>
workmanship.  Borrower  may  make or  cause to be made  such  other  independent
inspections  as  Borrower  may desire for its own  protection.  Borrower  hereby
appoints  and  authorizes   Administrative   Agent,  as  Borrower's   agent  and
attorney-in-fact,  to record any notices of completion,  cessation of labor, and
other notices that Administrative  Agent determines to be necessary to record to
protect any  interest of  Administrative  Agent under the Loan  Documents.  This
agency and power of attorney is coupled  with an  interest  and is  irrevocable.
Based on any such inspections,  Administrative Agent shall have the right in its
sole and absolute discretion to approve or disapprove Total Costs and Unit Costs
submitted by Borrower, make revisions to the applicable Completion Percentage of
Lots Under Development and Units,  determine whether the conditions set forth in
Sections 11, 12, 13, 14, 15 and 16 have been  satisfied,  and make  revisions to
the Collateral  Values and Maximum Allowed  Advances  applicable to any Entitled
Land,  Lots  Under  Development,  Finished  Lot  or  Unit  at any  time.  If the
outstanding  principal amount of advances exceeds the Available  Commitment as a
result of such  revision,  then  Borrower  shall be required to make a mandatory
prepayment to Administrative Agent pursuant to Section 3.17 hereof.

     18.13   MISCELLANEOUS.   Any   inspections   or   determinations   made  by
Administrative Agent or lien waivers, receipts, or other agreements,  documents,
and instruments obtained by Administrative Agent are made or obtained solely for
Administrative  Agent's  own  benefit  and not in any way  for  the  benefit  or
protection  of  Borrower.  Administrative  Agent  may  accept  and  rely  on any
information  from Architect,  any other Person providing  labor,  materials,  or
services for Improvements or Units, Borrower, or any other Person as to labor or
materials  furnished or incorporated  in the  Improvements or Units and the cost
and payment  therefor and as to all other matters  relating to  construction  of
Improvements  or the Units and the Project  without the  necessity  of verifying
such information.  Administrative  Agent has no obligation to Borrower to ensure
compliance by Architect or any other Person in carrying out  construction of the
Improvements or Units.

     18.14 VERIFICATION OF COSTS.  Administrative  Agent shall have the right at
any time and from time to time to review and verify  all  costs,  expenses,  and

                                      -99-
<PAGE>
Pees in each Budget.  Based on its review and  verification of costs,  expenses,
and fees in each Budget, Administrative Agent shall have the right to adjust any
and all such budgeted amounts.

     18.15  CROSS-COLLATERALIZATION.  At  Administrative  Agent's request at any
time  and from  time to time,  Borrower  agrees  to  execute  and  deliver  such
additional  agreements,  documents,  and  instruments  as  Administrative  Agent
determines  to be necessary or  appropriate  so that all  Collateral  shall also
secure any or all (as determined by  Administrative  Agent) other obligations of
Borrower to the Banks and/or so that any or all property, interests in property,
and  rights  to  property  selected  by  Administrative   Agent  securing  other
obligations  of  Borrower  to the Banks also  secure the  Obligations.  Borrower
agrees to pay all costs,  expenses, and fees incurred by Administrative Agent in
connection   with  any  and  all  such   cross-collateralization   requests   by
Administrative Agent (including, without limitation, taxes, costs, expenses, and
fees of Administrative Agent's attorneys).

     18.16  ADMINISTRATIVE  AGENT'S  INSPECTOR(S).  Borrower  agrees that during
construction  of  Improvements  and Units,  Administrative  Agent shall have the
right to employ an outside inspector or inspectors who shall review as agent for
Administrative  Agent  all  construction  activities  undertaken  in  regard  to
Improvements   and  Units  and  who  shall  prepare  reports  of  such  reviews.
Alternatively,   Administrative   Agent   may   elect  to  have   employees   of
Administrative Agent perform such reviews and prepare such reports. In addition,
the employees of Administrative  Agent will review the inspection reports of any
outside inspector(s),  will review Draw Requests,  will perform other activities
related to Draw Requests, and will perform other activities in administering and
monitoring  the Advances.  Prior to the  occurrence of an Event of Default or an
Unmatured Event of Default, Administrative Agent shall limit such inspections to
no more frequently than once per calendar quarter.

     18.17 FURTHER ASSURANCES. Borrower shall promptly execute, acknowledge, and
deliver such additional agreements,  documents,  and instruments and do or cause

                                      -100-
<PAGE>
to be done such other acts as Administrative  Agent may reasonably  request from
time to time to better assure,  preserve,  protect,  and perfect the interest of
Administrative   Agent  in  the  Collateral  and  the  rights  and  remedies  of
Administrative  Agent,  Documentation  and Syndication Agent and the Banks under
the Loan Documents.

     18.18  COSTS AND  EXPENSES  OF  BORROWER'S  PERFORMANCE  OF  COVENANTS  AND
SATISFACTION  OF CONDITIONS.  Borrower will perform all of its  obligations  and
satisfy all conditions under the Loan Documents at its sole cost and expense.

     18.19 PAYMENT OF RELEASE PRICE.  Borrower shall, upon the closing of a sale
of any  Entitled  Land,  Lots  Under  Development,  Finished  Lot or Unit pay to
Administrative  Agent for application to the outstanding unpaid aggregate amount
of Advances hereunder,  an amount equal to the amount required under Section 7.1
for the release of such Collateral.

     18.20  CONSTRUCTION  AND  SALES  RECORDS.  Borrower  shall,  at all  times,
maintain  complete and accurate  records of  Borrower's  construction  and sales
activities and shall, upon prior notice thereof by Administrative  Agent, permit
Administrative Agent to review such records upon request by Administrative Agent
at any time and from time to time during regular  business  hours.  Such records
shall  include,  without  limitation,  (i) any and all  documents,  instruments,
contracts and agreements  relating to the  construction or sale of Units or Lots
entered  into by  Borrower  with or for the  benefit of  purchasers,  contracts,
subcontractors,  or other Persons, as applicable, (ii) lien waivers and releases
with respect to all  construction in place,  (iii) requests for disbursement and
voucher submitted by contracts,  subcontractors,  or other Persons, and (iv) all
permits, licenses and approvals necessary for the continuation and completion of
construction.

     18.21  GUARANTEES.  Borrower  shall  cause  each  wholly  owned  (direct or
indirect)  Subsidiary of Meritage now existing or hereinafter created to execute
the Guarantee and satisfy the  conditions set forth in Section  10.1(c),  unless
Administrative Agent agrees in writing that such Subsidiary need not execute the
Guarantee.

                                     -101-
<PAGE>
     18.22 SERVICES.  To the extent requested by Administrative  Agent, Borrower
shall provide to Administrative Agent satisfactory evidence, which may be in the
form of  letters  from  local  utility  and  other  service  companies  or local
Governmental  Authorities,  that (i) telephone service,  electric power, garbage
removal, storm sewer, sanitary sewer, water, and any other services or utilities
required by Administrative  Agent exist at the boundary of and parcel containing
the Lots Under  Development  and are available  thereto,  (ii) such services and
utilities are adequate to serve such property,  and (iii) no conditions exist to
affect Borrower's or any subsequent  owner's right to connect to, to obtain, and
to have unlimited use of such services and utilities,  except for the payment of
a normal connection charge and except for payment of subsequent charges for such
services  and  utilities  to the  service or  utility  supplier.  By  requesting
inclusion  of such Lots Under  Development  into the  Borrowing  Base,  Borrower
represents  to  Administrative  Agent that the  foregoing  conditions  have been
satisfied.

     18.23 CC&RS. When available, Borrower shall deliver to Administrative Agent
the CC&Rs for each Subdivision for review and approval by  Administrative  Agent
in its reasonable discretion.

SECTION 19. NEGATIVE COVENANTS

     Until the Commitment  terminates in full and the  Obligations  are paid and
performed in full, Borrower agrees that:

     19.1 CHANGE IN CONTROL OR  MANAGEMENT.  Should there be a Change in Control
as to the Meritage  Group,  the Loan shall be  immediately  due and payable.  In
addition,  should there be a material  change in  management  as to the Meritage
Group,  the Loan shall be immediately due and payable unless the  Administrative
Agent should consent to the substitute  management team. The termination of both
Landon and Hilton as co-chief  executive  officers of Meritage shall be deemed a
material change in management.

     19.2  AMENDMENTS  TO  ORGANIZATIONAL  DOCUMENTS.  No member of the Meritage
Group hall amend its organizational documents if the result thereof could result
in the occurrence directly or indirectly of a Material Adverse Change.

                                     -102-
<PAGE>
     19.3 FINANCIAL COVENANTS. Borrower shall not permit:

          (a) MINIMUM  LIQUIDITY.  The Meritage Group's Liquidity at any time to
     be less than $7,000,000.00.

          (b)  MAXIMUM   LEVERAGE.   The  ratio  of  (a)  the  Meritage  Group's
     consolidated Liabilities,  minus Subordinated Debt to (b) Adjusted Tangible
     Net Worth,  to be greater  than 2.5 to 1.0 as of the end of the first three
     fiscal quarters of each fiscal year of the Meritage Group and to be greater
     than 2.25 to 1.0 as of the end of the fourth fiscal  quarter of each fiscal
     year of the Meritage Group, determined as of the end of each fiscal quarter
     of the Meritage  Group's fiscal year.  For the purposes of calculating  the
     foregoing ratio,  Subordinated  Debt may not exceed twenty percent (20%) of
     Adjusted Tangible Net Worth.

          (c) MINIMUM FIXED CHARGE  COVERAGE.  The ratio of the Meritage Group's
     consolidated EBITDA to total interest incurred, to be less than 2.0 to 1.0,
     determined  as of the end of each fiscal  quarter of the  Meritage  Group's
     fiscal year for the immediately preceding four fiscal quarters.

          (d) MINIMUM ADJUSTED  TANGIBLE NET WORTH.  The  consolidated  Adjusted
     Tangible Net Worth of the Meritage  Group  determined as of the end of each
     quarter of the Meritage  Group's fiscal year to be less than the sum of (a)
     $50,000,000,  (b) fifty percent (50%) of  Consolidated  Net Income for each
     fiscal  quarter of the Meritage Group in which  Consolidated  Net Income is
     positive  (without  offset  for any fiscal  quarter  in which the  Meritage
     Group's Consolidated Net Income is negative),  and (c) seventy-five percent
     (75%) of any new stated capital or paid in capital acquired by the Meritage
     Group commencing January 1, 2000.

                                     -103-
<PAGE>
          (e)  GUARANTIES.  The  Meritage  Group to make or  suffer to exist any
     Contingent  Obligation  (including,   without  limitation,  any  Contingent
     Obligation with respect to the obligations of a Subsidiary or joint venture
     that is not a Loan  Party) or  otherwise  assume,  guarantee  or in any way
     become  contingently  liable or  responsible  for  obligations of any other
     Person,  whether by agreement to purchase  those  obligations  of any other
     Person, or by agreement for the furnishing of funds through the purchase of
     goods,  supplies or services  (whether  by way of stock  purchase,  capital
     contribution, advance or loan) for the purpose of paying or discharging the
     obligations  of any other Person that,  in the  aggregate,  exceeds  twenty
     percent  (20%) of the  consolidated  Adjustable  Tangible  Net Worth of the
     Meritage Group.

     Any  failure  to  comply  with  the  foregoing  financial  covenants  shall
constitute an Event of Default.

     19.4 MERGERS, CONSOLIDATIONS, SALES OF ASSETS. The Meritage Group shall not
merge into or consolidate  with any other Person,  or permit any other Person to
merge into or consolidate with it, or sell, transfer, lease or otherwise dispose
of (in one transaction or in a series of transactions)  all or substantially all
of its assets, whether now owned or hereafter acquired.

     19.5  BUSINESS OF BORROWER.  Borrower  shall not  substantially  change the
nature of the business conducted by the Borrower.

     19.6 ERISA LIABILITIES.  Borrower shall not create or suffer to exist ERISA
Liabilities  in an aggregate  amount in excess of $50,000.00  for all Plans,  if
any, maintained by Borrower.

     19.7 DISSOLUTION OR LIQUIDATION.  Borrower shall not dissolve or liquidate,
or  merge  or  consolidate  with or into  any  other  entity,  or turn  over the
management or operation of its property, assets or business to any other person,
firm or corporation.

                                     -104-
<PAGE>
     19.8  JOINT   VENTURES.   The  Meritage  Group  shall  not  invest  in  any
non-consolidated joint ventures that would result in the aggregate of such joint
venture  investments,  whether in the form of debt or equity,  exceeding  twenty
percent (20%) of the Meritage Group's Tangible Net Worth.

SECTION 20. INSPECTION BY ADMINISTRATIVE AGENT

     20.1 ENTER PROPERTY. Administrative Agent shall have the right, but not the
obligation,  to enter at any  reasonable  times upon the Project to determine if
the construction of the Improvements or the Unit is in conformity with the Plans
and  Specifications  and all other  requirements  hereof and to examine and make
copies and extracts of any books, records,  accounting data and other documents,
including without  limitation all permits,  licenses,  consents and approvals of
Governmental Authorities having jurisdiction over Borrower, the Improvements and
the  contractor  and all  subcontractors  supplying  labor  and/or  materials in
connection with the Improvements.

     20.2  NO  DUTY  TO  INSPECT.  Administrative  Agent  shall  have no duty to
supervise or inspect any  construction or to inspect any books and records;  any
inspection by  Administrative  Agent shall be for the sole purpose of protecting
Administrative  Agent's  security and  preserving  the rights of  Administrative
Agent,  Documentation and Syndication Agent and the Banks hereunder.  Failure by
Administrative Agent to inspect any work shall not constitute a waiver of any of
Administrative Agent's rights hereunder. Inspection not followed by notice of an
Event of Default  shall not  constitute  a waiver of any Event of  Default  then
existing.  Any inspection by Administrative  Agent shall not be a representation
by Administrative Agent that there has been or will be compliance with the Plans
and Specifications or that the construction is free from defective  materials or
workmanship,  nor  shall  any  inspection  by  Administrative  Agent  constitute
approval  of any  certification  given to  Administrative  Agent or relieve  any
person making such certification of responsibility therefor.

                                     -105-
<PAGE>
SECTION 21. WAIVER

     21.1 WAIVER.  Borrower waives presentment,  demand,  protest and notices of
protest,  nonpayment,  partial  payment and all other  notices  and  formalities
except as  expressly  called for in this  Agreement.  Borrower  consents  to and
waives  notice of: (i) the  granting of  indulgences  or  extensions  of time of
payment,  (ii) the taking or releasing  of  security,  and (iii) the addition or
release of persons who may be or become primarily or secondarily  liable for the
Loan or any other indebtedness  arising in connection with the Loan, or any part
thereof,  and all in  such  manner  and at  such  time  as the  Banks  may  deem
advisable.

     21.2 DELAY.  No delay or omission by  Administrative  Agent or the Banks in
exercising  any right,  power or remedy  hereunder,  and no indulgence  given to
Borrower,  with respect to any term,  condition or provision  set forth  herein,
shall  impair any right,  power or remedy of  Administrative  Agent or the Banks
under this Agreement, or be construed as a waiver by Administrative Agent or the
Banks of, or  acquiescence  in, any Event of Default.  Likewise,  no such delay,
omission or indulgence by  Administrative  Agent or the Banks shall be construed
as a variation or waiver of any of the terms,  conditions  or provisions of this
Agreement. Any actual waiver by the Banks of any Event of Default shall not be a
waiver of any other prior or subsequent Event of Default or of the same Event of
Default after notice to Borrower demanding strict performance.

SECTION 22. DEFAULT

     22.1 EVENT OF DEFAULT.  The  occurrence of any of the  following  events or
conditions shall constitute an Event of Default under this Agreement:

          (a) Any failure to pay any principal or interest  under the Notes when
     the same shall  become due and payable and such failure  continues  for ten
     (10) days after notice thereof to Borrower, or the failure to pay any other
     sum due under the Notes, this Agreement or any other Loan Document when the
     same shall become due and payable and such failure  continues  for ten (10)
     days  after  notice  thereof to  Borrower.  No  notice,  however,  shall be
     required after maturity of any portion of the Notes.

                                     -106-
<PAGE>
          (b) Any failure or neglect to perform or observe any of the covenants,
     conditions  or provisions  of this  Agreement,  the Notes or any other Loan
     Document  (other than a failure or neglect  described in one or more of the
     other provisions of this Paragraph 22.1) and such failure or neglect either
     cannot be remedied or, if it can be remedied, it continues unremedied for a
     period of thirty (30) days after notice thereof to Borrower.

          (c)  Any  warranty,  representation  or  statement  contained  in this
     Agreement, in the Notes or in any other Loan Document, or made or furnished
     to  Administrative  Agent or the Banks by or on behalf  of  Borrower,  that
     shall be or shall prove to have been false when made or furnished.

          (d)  The  filing  by  Borrower,  any  endorser  of the  Notes,  or any
     guarantor of the Loan (or against Borrower or such endorser or guarantor to
     which  Borrower or such  endorser or  guarantor  acquiesces  or that is not
     dismissed  within  sixty  (60)  days  after  the  filing  thereof)  of  any
     proceeding under the federal  bankruptcy laws now or hereafter  existing or
     any other similar statute now or hereafter in effect; the entry of an order
     for relief  under such laws with  respect to Borrower  or such  endorser or
     guarantor;  or  the  appointment  of  a  receiver,  trustee,  custodian  or
     conservator  of all or any part of the assets of Borrower or such  endorser
     or guarantor.

          (e) The  insolvency  of  Borrower,  any  endorser  of the Notes or any
     guarantor of the Loan;  or the  execution  by Borrower or such  endorser or
     guarantor of an assignment  for the benefit of creditors;  or the convening
     by Borrower or such endorser or guarantor of a meeting of its creditors, or
     any class thereof, for purposes of effecting a moratorium upon or extension
     or composition of its debts; or the failure of Borrower or such endorser or

                                     -107-
<PAGE>
     guarantor to pay its debts as they mature;  or if Borrower or such endorser
     or guarantor is generally not paying its debts as they mature.

          (f) The admission in writing by Borrower, any endorser of the Notes or
     any guarantor of the Loan that it is unable to pay its debts as they mature
     or that it is generally not paying its debts as they mature.

          (g) The  liquidation,  termination  or  dissolution of Borrower or any
     guarantor of the Loan.

          (h) Any levy or execution upon, or judicial seizure of, any portion of
     any collateral or security for the Loan.

          (i) Any  attachment or  garnishment  of, or the existence or filing of
     any lien or  encumbrance,  other than any lien or encumbrance  permitted by
     the Deed of Trust,  against any portion of any  collateral  or security for
     the Loan, that is not removed or released within thirty (30) days after its
     creation.

          (j) The  institution of any legal action or proceedings to enforce any
     lien or encumbrance  upon any portion of any collateral or security for the
     Loan, that is not dismissed within thirty (30) days after its institution.

          (k) The  occurrence of any event of default and the  expiration of any
     applicable  notice  and  cure  period  under  the  Notes,  any of the  Loan
     Documents  or any other  document or  instrument  executed or  delivered in
     connection with the Loan.

          (l) The  occurrence of any event of default and the  expiration of any
     applicable notice and cure period under any document or instrument given by
     Borrower, by any entity owned by Borrower or, if Borrower is a corporation,

                                     -108-
<PAGE>
     partnership  or trust,  by any entity owned by the same persons or entities
     that own Borrower, in connection with any other indebtedness of Borrower or
     such entity to the Banks.

          (m) The occurrence of any adverse change in the financial condition of
     Borrower or  Guarantor  that Agent,  in its  reasonable  discretion,  deems
     material,  or if Agent in good faith  shall  believe  that the  prospect of
     payment or performance of the Loan is impaired.

          (n) Either of (A) the occurrence of any one or more Reportable  Events
     or (B) a failure  to make a  "required  payment"  under the  provisions  of
     Section  412(n)(1) of the Code shall have occurred with respect to any Plan
     or Plans and the  occurrence of either (A) or (B) above shall have resulted
     in any of (1) liability of the Borrower to the PBGC or to one or more Plans
     in an aggregate  amount  exceeding  $50,000.00,  (2) the termination of the
     respective  Plan  or  Plans  by  the  PBGC,  (3)  the  appointment  by  the
     appropriate  United States  District Court of a trustee to administer  such
     Plan or Plans or (4) for the  imposition of a Lien in favor of such Plan or
     Plans.

          (o) The  occurrence  of any  default  or  event  of  default,  and the
     expiration of any applicable notice and cure period,  under any Significant
     Debt Agreement.

          (p) Any failure to comply with the Financial Covenants.

     22.2 REMEDIES.  Upon the occurrence of any Event of Default and at any time
while such Event of Default is continuing, Administrative Agent and/or the Banks
may do one or more of the following:

          (a)  Cease  making  Advances  and  declare  the  Loan  and  all  other
     indebtedness of Borrower  hereunder  immediately  due and payable,  without
     notice or demand;

                                     -109-
<PAGE>
          (b) Proceed to protect and enforce its rights and remedies  under this
     Agreement, the Note, and all Loan Documents;

          (c) Take over and complete  construction  of the  Improvements  or the
     Units  by  or  through  any  agent,  contractor  or  subcontractor  of  its
     selection,  and make  Advances  in payment of the  costs,  expenses,  fees,
     attorneys'  fees and other charges  incurred in connection with such taking
     over and completion,  together with reasonable  allowances for supervision;
     and

          (d) Avail itself of any other relief to which  Administrative Agent or
     the Banks may be legally or equitably entitled.

     22.3  ENFORCEMENT  COSTS.  Borrower  shall  pay  all  costs  and  expenses,
including   without   limitation  costs  of  title  searches  and  title  policy
commitments,  Uniform  Commercial  Code  searches,  court  costs and  reasonable
outside  attorneys'  fees,  incurred  by  Administrative  Agent and the Banks in
enforcing  payment and  performance of the Loan and the other  indebtedness  and
obligations  of Borrower  hereunder or in exercising  the rights and remedies of
Administrative Agent and the Banks hereunder.  All such costs and expenses shall
be secured by all Loan Documents.  In the event of any court proceedings,  court
costs and attorneys' fees shall be set by the court and not by jury and shall be
included in any judgment obtained by Administrative Agent and the Banks.

SECTION 23. ACTION UPON AGREEMENT

     23.1 NO THIRD  PARTY  BENEFICIARIES.  This  Agreement  is made for the sole
protection and benefit of the parties hereto and no other person or organization
shall have any right of action hereon.

     23.2  INTEGRATION.  This Agreement and the other Loan Documents  embody the
entire Agreement of the parties with regard to the subject matter hereof.  There
are no  representations,  promises,  warranties,  understandings  or  agreements
expressed  or implied,  oral or  otherwise,  in relation  thereto,  except those

                                     -110-
<PAGE>
expressly  referred  to or set  forth  herein.  Borrower  acknowledges  that the
execution and delivery of this Agreement is its free and voluntary act and deed,
and that said  execution  and  delivery  have not been  induced  by, nor done in
reliance upon, any  representations,  promises,  warranties,  understandings  or
agreements made by  Administrative  Agent,  the Banks,  their agents,  officers,
employees or representatives.

     23.3 MODIFICATIONS. No promise, representation,  warranty or agreement made
subsequent  to the  execution  and  delivery of this  Agreement  by either party
hereto,  and no  revocation,  partial  or  otherwise,  or change,  amendment  or
addition to, or alteration or  modification  of, this  Agreement  shall be valid
unless the same shall be in writing signed by all parties hereto.

     23.4 NO JOINT VENTURE.  Administrative  Agent,  the Banks and Borrower each
have  separate and  independent  rights and  obligations  under this  Agreement.
Nothing contained herein shall be construed as creating, forming or constituting
any  partnership,  joint  venture,  merger  or  consolidation  of  Borrower  and
Administrative Agent or the Banks for any purpose or in any respect.

SECTION 24. GENERAL

     24.1 WAIVER OF GUARANTY  AND  SURETYSHIP  DEFENSES.  Each  Borrower  hereby
waives to the fullest  extent  permissible by law the right to plead any statute
of limitations as a defense to any demand  secured  hereby.  Except as set forth
herein,  each  Borrower  waives any  requirements  of  presentment,  demands for
payment,  notices of nonpayment or late  payment,  protest,  notices of protest,
notices  of  dishonor,  and all other  formalities.  No offset or claim that any
Borrower now or may in the future have against Administrative Agent or the Banks
shall relieve any Borrower  from paying  installments  or  performing  any other
obligation  herein  or  secured  hereby.  Each  Borrower  waives  all  rights or
privileges it might otherwise have to require  Administrative Agent or the Banks

                                     -111-
<PAGE>
to proceed against or exhaust any collateral  securing any promissory note or to
proceed  against  any  guarantor  of such  indebtedness,  or to pursue any other
remedy available to  Administrative  Agent or the Banks in any particular manner
or order under the legal or equitable  doctrine or principle of  marshalling  or
suretyship,  and each Borrower further agrees that  Administrative  Agent or the
Banks may proceed  against any or all of the collateral in such order and manner
as Administrative Agent or the Banks in their sole discretion may determine.  To
the extent that any court of competent jurisdiction determines that any Borrower
is a guarantor, surety or accommodation party with respect to any portion of the
Obligations  (the  "Guaranteed  Obligations"),  or has subjected its property to
secure the  indebtedness of another,  such Borrower hereby  expressly waives the
benefits of the  provisions of A.R.S.  ss.12-1641,  ET SEQ., 16 Arizona Rules of
Civil Procedure, Rule 17(f), A.R.S. ss.ss.12-1644, 33-722 and 33-814, and waives
any  defense  arising  by  reason of any  disability  or other  defense  of such
Borrower  or by  reason  of the  cessation  from  any  cause  whatsoever  of the
liability of such Borrower,  and, although it is the intention of all parties to
this Agreement that this Agreement and the other Loan Documents will be governed
by, and construed in accordance with, the laws of the State of Arizona,  without
giving  effect to its  conflicts of laws rules,  to the extent that any court of
competent jurisdiction applies the laws of the State of California to all or any
part of the  Agreement or the Loan  Documents  or with respect to any  Borrower,
each  Borrower  hereby  unconditionally  and  irrevocably  waives any rights and
defenses such Borrower may have because any Guaranteed Obligations is secured by
real property. These rights and defenses include, without limitation, any rights
or defenses  based upon Sections  2899,  3433,  580a,  580b,  580d or 726 of the
California Code of Civil Procedure, and any comparable provisions of the laws of
any other  jurisdiction and all other suretyship  defenses it otherwise might or
would have under  California law or other  applicable law.  Without limiting the
provisions of this Section 24.1, the "Joint Borrower Provisions" attached hereto
as SCHEDULE  24.1 are  incorporated  herein by this  reference and each Borrower
agrees to be bound thereby.

     24.2  SURVIVAL.  This  Agreement  shall  survive the making of the Loan and
shall  continue  so long as any part of the Loan,  or any  extension  or renewal
thereof, remains outstanding.

                                     -112-
<PAGE>
     24.3  DISCRETIONARY   RIGHTS.  All  rights,  powers  and  remedies  granted
Administrative   Agent  and  the  Banks  herein,   or  otherwise   available  to
Administrative  Agent and the Banks,  are for the sole benefit and protection of
Administrative  Agent and the Banks,  and except as  otherwise  provided  herein
Administrative  Agent and the Banks may exercise any such right, power or remedy
at their option and in their sole and absolute discretion without any obligation
to do so. In addition, if, under the terms hereof,  Administrative Agent and the
Banks are given two or more alternative courses of action,  Administrative Agent
and the Banks may elect any alternative or combination of  alternatives,  at its
option and in its sole and absolute discretion. All monies advanced by the Banks
under the terms hereof and all amounts  paid,  suffered or incurred by the Banks
in exercising any authority  granted  herein,  including  reasonable  attorneys'
fees, shall be secured by the Loan Documents, shall bear interest at the highest
rate payable on the Loan until paid, and shall be due and payable by Borrower to
the Banks immediately without demand.

     24.4 INDEMNITY.  Borrower shall defend,  indemnify, and hold Administrative
Agent,  Documentation  and  Syndication  Agent and each Bank and their officers,
directors,  employees,  and agents harmless from and against all claims,  costs,
expenses,  actions, suits, proceedings,  losses, damages, and liabilities of any
kind whatsoever,  including,  but not limited to,  attorneys' fees and expenses,
arising out of any matter  relating,  directly or  indirectly,  (i) to the Loan,
(ii) to the ownership,  development,  construction or sale of the Collateral, or
(iii) to any financial statements,  reports,  projections, and other information
provided by Borrower or any other Loan Party with  respect to the  business  and
operations of the Meritage Group,  in each case whether  resulting from internal
disputes of Borrower,  disputes between  Borrower and any guarantor,  or whether
involving other third parties or entities (including,  without limitation, other
Banks) or out of any  matter  whatsoever  related  to this  Agreement,  the loan
documents,  or any  property  encumbered  thereby,  but  excluding  any claim or
liability which results as the direct result of the gross  negligence or willful
misconduct of Administrative Agent,  Documentation and Syndication Agent and the
Banks or the  breach by  Administration  Agent and the Banks of this  Agreement.

                                     -113-
<PAGE>
This  indemnity  provision  shall  continue  in full  force and effect and shall
survive not only the making of the Loan but shall also survive the  repayment of
the Loan and the performance of all of Borrower's other obligations hereunder.

     24.5 JOINT AND  SEVERAL.  If  Borrower  consists of more than one person or
entity their liability shall be joint and several.  The provisions  hereof shall
apply to the parties  according to the context thereof and without regard to the
number or gender of words or expressions used.

     24.6  TIME OF  ESSENCE.  Time is  expressly  made  of the  essence  of this
Agreement.

     24.7 NOTICES. Notices and other communications provided for herein shall be
in writing and shall be delivered by hand or overnight courier service or mailed
as follows:

          (a) if to the Borrower:

              MONTEREY HOMES CONSTRUCTION, INC.
              MONTEREY HOMES ARIZONA, INC.
              CHANDLER 110, LLC
              MERITAGE HOMES OF NORTHERN CALIFORNIA, INC.
              6613 North Scottsdale Road, Suite 200
              Scottsdale, Arizona 85259
              Attention: Larry W. Seay, Chief Financial Officer

          (b) if to the Administrative Agent:

              NORWEST BANK ARIZONA, NATIONAL ASSOCIATION
              100 West Washington, 11th Floor
              Phoenix, Arizona 85003
              Attention: Regional Real Estate Group, MAC S4101-110

          (c) if to a Bank, to it at its address (or telecopy  number) set forth
     in Schedule 2.1 or in any assignment and acceptance  pursuant to which such
     Bank shall have become a party hereto.

                                     -114-
<PAGE>
All notices and other  communications  given to any party  hereto in  accordance
with the provisions of this Agreement  shall be deemed to have been given on the
date of receipt if  delivered by hand or overnight  courier  service,  or on the
date two (2) Business  Days after  dispatch by certified or  registered  mail if
mailed,  in each case  delivered,  sent or mailed  (properly  addressed) to such
party as provided in this  Section or in  accordance  with the latest  unrevoked
direction from such party given in accordance with this Section.

     24.8 PAYMENT OF COSTS.  Borrower  shall pay all costs and expenses  arising
from the preparation of this  Agreement,  the closing of the Loan, the making of
Advances,   the  issuing  of  Letters  of  Credit,   and  the   monitoring   and
administration  of the  Loan,  including  but not  limited  to  title  insurance
premiums,  other title  company  charges,  recording  and filing fees,  costs of
Uniform  Commercial  Code  searches,   Administrative   Agent  and  the  Banks's
reasonable  in-house  and  outside  attorneys'  fees,   Administrative   Agent's
reasonable  processing  and  closing  fees,  Administrative  Agent's  reasonable
inspection  fees,  appraisal  and  appraisal  review  fees,  any  intangible  or
recording  taxes and any other  charges  that may be imposed  on  Administrative
Agent or the Banks as a result of this transaction.

     24.9 CHOICE OF LAW.  This  Agreement  shall be  governed  by and  construed
according to the laws of the State of Arizona.

     24.10 SUCCESSORS. Except as otherwise provided herein, this Agreement shall
be binding upon, and shall inure to the benefit of, the parties hereto and their
successors and assigns.

     24.11 HEADINGS.  The headings or captions of sections in this Agreement are
for reference only, do not define or limit the provisions of such sections,  and
shall not affect the interpretation of this Agreement.

     24.12  PARTICIPATIONS  AND ASSIGNMENTS.  Each Bank, at any time, shall have
the right  (subject to the terms of the Co-Lender  Agreement)  to sell,  assign,
transfer,  negotiate  or grant  participation  interests  in the Loan and in any

                                     -115-
<PAGE>
documents and instruments  executed in connection  herewith.  In connection with
any  assignment  by a Bank of all or a portion of its  interest  in the Loan (i)
except in the case of an assignment to a Bank or an affiliate of any Bank, or if
an  Unmatured  Event of  Default  or an Event of  Default  shall be  continuing,
Borrower must give its prior written consent to such  assignment  (which consent
shall  not  be  unreasonably  withheld  or  delayed),  (ii)  the  amount  of the
Commitment of the assigning  Bank subject to each such  assignment  shall not be
less than  $10,000,000.00  or such  lesser  amount if such  amount is the entire
Commitment of the assigning  Bank, and (iii) any assignee shall have a net worth
of at least  $350,000,000 and total assets of a least $2.5 billion.  Within five
Business Days after receipt of notice of any assignment of a Bank's interest the
Loan,  the  Borrower  shall  execute and  deliver to  Administrative  Agent,  in
exchange for the surrendered  Note or Notes (A) a new Note or Notes to the order
of such assigning Bank in a principal amount equal to the applicable  Commitment
retained  by it,  if any,  and (B) a new  Note or  Notes,  to the  order  of the
assignee Bank in a principal amount equal to the applicable  Commitment assigned
to it. Such new Note or Notes shall be in an aggregate principal amount equal to
the aggregate principal amount of such surrendered Note or Notes; such new Notes
shall be dated the date of the  surrendered  Notes which they  replace and shall
otherwise be in substantially  the form of EXHIBIT "A".  Canceled Notes shall be
returned to the Borrower.  Each Bank is authorized to furnish to any participant
or prospective  participant  any information or document that such Bank may have
or obtain regarding the Loan, Borrower or any guarantor of the Loan.

     24.13 SEVERABILITY.  The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement  required  hereunder  shall not in
any way  affect  or impair  the  legality  or  enforceability  of the  remaining
provisions of this Agreement or any instrument or agreement required hereunder.

                                     -116-
<PAGE>
     24.14 ARBITRATION PROVISIONS.

          (a) ARBITRATION.

               (i)  Except  for  "Core  Proceedings"  under  the  United  States
          Bankruptcy Code, the Administrative Agent, Banks and Borrower agree to
          submit to binding  arbitration all claims,  disputes and controversies
          between or among them,  whether in tort,  contract or  otherwise  (and
          their respective employees, officers, directors,  attorneys, and other
          agents)  arising out of or relating to in any way the Loan and related
          Loan  Documents  which  are  the  subject  of this  Agreement  and its
          negotiation, execution, collateralization,  administration, repayment,
          modification,    extension,   substitution,   formation,   inducement,
          enforcement,  default or termination.  Any arbitration proceeding will
          (1)  proceed in  Phoenix,  Arizona;  (2) be  governed  by the  Federal
          Arbitration  Act  (Title  9 of the  United  States  Code);  and (3) be
          conducted in accordance with the Commercial  Arbitration  rules of the
          American Arbitration Association("AAA").

               (ii) The arbitration  requirement does not limit the right of any
          party to (A) foreclose against real or personal  property  collateral;
          (B) exercise  self-help remedies relating to collateral or proceeds of
          collateral such as repossession;  or (C) obtain provisional  ancillary
          remedies  such  as  replevin,  injunctive  relief,  attachment  or the
          appointment of a receiver, before, during or after the pendency or any
          arbitration proceeding. This exclusion does not constitute a waiver of
          the  right  or  obligation  of any  party to  submit  any  dispute  to

                                     -117-
<PAGE>
          arbitration,  including those arising from the exercise of the actions
          detailed in sections (A), (B) and (C) of this paragraph.

               (iii)  Any  arbitration   proceeding  will  be  before  a  single
          arbitrator  selected according to the Commercial  Arbitration Rules of
          the AAA. The arbitrator  will be a neutral  attorney who has practiced
          in the  area  of  commercial  law  for a  minimum  of ten  years.  The
          arbitrator will determine  whether or not an issue is arbitratable and
          will give effect to the  statutes of  limitation  in  determining  any
          claim.  Judgment  upon the award  rendered  by the  arbitrator  may be
          entered in any court having jurisdiction.

          (b) MOTION PRACTICE. In any arbitration proceeding the arbitrator will
     decide (by documents only or with a hearing at the arbitrator's discretion)
     any pre-  hearing  motions  which are  similar to  motions  to dismiss  for
     failure to state a claim or motions for summary adjudication.

          (c)  DISCOVERY.  In  any  arbitration  proceeding  discovery  will  be
     permitted and will be governed by the Arizona Rules of Civil Procedure. All
     discovery  must be  completed no later than 20 days before the hearing date
     and within 180 days of the  commencement  of arbitration  proceedings.  Any
     requests  for an  extension  of the  discovery  periods,  or any  discovery
     disputes,  will be subject to final  determination by the arbitrator upon a
     showing  that the  request  for  discovery  is  essential  for the  party's
     presentation  and that no  alternative  means for obtaining  information is
     available.

                                     -118-
<PAGE>
          (d) PAYMENT OF ARBITRATION  COSTS AND FEES. The arbitrator shall award
     costs and expenses of the  arbitration  proceeding in  accordance  with the
     provision of this Agreement, the Note and/or other Loan Documents.

     24.15 JURY WAIVER.  BORROWER,  ADMINISTRATIVE AGENT, CO-AGENT AND THE BANKS
HEREBY VOLUNTARILY,  KNOWINGLY,  IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT
TO  HAVE A JURY  PARTICIPATE  IN  RESOLVING  ANY  DISPUTE  (WHETHER  BASED  UPON
CONTRACT,  TORT OR OTHERWISE) BETWEEN OR AMONG BORROWER,  ADMINISTRATIVE  AGENT,
CO-AGENT  AND THE BANKS  ARISING OUT OF OR IN ANY WAY RELATED TO THE NOTE,  THIS
DOCUMENT   OR  ANY  OTHER   RELATED   DOCUMENT  OR  ANY   RELATIONSHIP   BETWEEN
ADMINISTRATIVE  AGENT,  THE BANKS AND  BORROWER.  THIS  PROVISION  IS A MATERIAL
INDUCEMENT  TO THE BANKS TO PROVIDE  THE  FINANCING  DESCRIBED  HEREIN OR IN THE
OTHER RELATED DOCUMENTS.

     IN WITNESS  WHEREOF,  these  presents are executed as of the date indicated
above.

                                        MONTEREY HOMES CONSTRUCTION, INC.,
                                        an Arizona Corporation

                                        By: /s/ Larry W. Seay
                                           -------------------------------------
                                        Name: Larry W. Seay
                                             -----------------------------------
                                        Title: Vice President - Finance & CFO
                                              ----------------------------------

                                     -119-
<PAGE>
                                        MONTEREY HOMES ARIZONA, INC.,
                                        an Arizona corporation

                                        By: /s/ Larry W. Seay
                                           -------------------------------------
                                        Name: Larry W. Seay
                                             -----------------------------------
                                        Title: Vice President - Finance & CFO
                                              ----------------------------------

                                        CHANDLER 110, LLC,
                                        an Arizona limited liability company

                                        BY: MONTEREY HOMES CONSTRUCTION, INC.,
                                        an Arizona corporation, Member

                                        By: /s/ Larry W. Seay
                                           -------------------------------------
                                        Name: Larry W. Seay
                                             -----------------------------------
                                        Title: Vice President - Finance & CFO
                                              ----------------------------------

                                        MERITAGE HOMES OF NORTHERN CALIFORNIA,
                                        INC., a California corporation

                                        By: /s/ Larry W. Seay
                                           -------------------------------------
                                        Name: Larry W. Seay
                                             -----------------------------------
                                        Title: Vice President - Finance & CFO
                                              ----------------------------------
                                                                        BORROWER

                                     -120-
<PAGE>

                                        NORWEST BANK ARIZONA, NATIONAL
                                        ASSOCIATION, a national banking
                                        association

                                        By: /s/ Kevin Kosan
                                           -------------------------------------
                                        Name: Kevin Kosan
                                             -----------------------------------
                                        Title: Vice President
                                              ----------------------------------
                                              ADMINISTRATIVE AGENT AND BANK

                                        CALIFORNIA BANK & TRUST, a California
                                        banking corporation

                                        By: /s/ Eileen E. Porter
                                           -------------------------------------
                                        Name: Eileen E. Porter
                                             -----------------------------------
                                        Title: Vice President
                                              ----------------------------------
                                              DOCUMENTATION AND SYNDICATION
                                              AGENT AND BANK

                                     -121-
<PAGE>
                                  SCHEDULE 3.1

                            COMMITMENTS OF THE BANKS
                                 as to the Loan
                            as of _____________, 1999

INITIALLY, THE COMMITMENTS OF THE BANKS SHALL BE AS FOLLOWS:

            BANK                                       %           COMMITMENT
            ----                                    -------        -----------
1. Norwest Bank Arizona, National Association       54.6875%       $35,000,000
2. California Bank & Trust                          45.3125%       $29,000,000
   Maximum Commitment                              100%            $64,000,000

On February 17, 2000, the commitment of the Banks shall be as set forth below if
both of the  following is  satisfied:  (i) the CB&T Facility has been fully paid
and all further  commitments to provide credit  thereunder  have  terminated and
(ii) no  Unmatured  Event of  Default or Event of Default  has  occurred  and is
continuing.  If such events have not occurred, the commitment of California Bank
& Trust  shall  be  increased  only  in the  sole  and  absolute  discretion  of
California Bank & Trust.

            BANK                                       %           COMMITMENT
            ----                                    -------        -----------
1. Norwest Bank Arizona, National Association        50.0%         $35,000,000
2. California Bank & Trust                           50.0%         $35,000,000
   Maximum Commitment                               100%           $70,000,000

<PAGE>
ADDRESSES

1. NORWEST BANK ARIZONA, NATIONAL ASSOCIATION
   100 West Washington, 11th Floor
   Phoenix, Arizona  85003
   Attention:  Regional Real Estate Group, MAC S4101-110

2. CALIFORNIA BANK & TRUST
   11622 El Camino Real, Suite 200
   San Diego, California  92130
   Attention: Peggy Standefer, Esq.

   with a copy to:

   CB&T REAL ESTATE FINANCE
   3101 North Central Avenue, Suite 520
   Phoenix, Arizona  85012
   Attention: Mark Young

                                     -123-
<PAGE>
                                  SCHEDULE 24.1

                            JOINT BORROWER PROVISIONS

     1.  Administrative  Agent and the Banks are entitled to rely,  and shall be
exonerated  from any liability for relying upon,  any Draw Request,  request for
Letter of Credit or similar  request made by any  Borrower  without the need for
any  consent  or  other  authorization  of  any  other  Borrower  and  upon  any
information  or  certificate  provided on behalf of any  Borrower by an officer,
partner, manager or other representative of such Borrower.

     2. As further  described in the  Agreement,  the parties hereto intend that
all of the Obligations shall constitute one indebtedness, and that each Borrower
shall  constitute  a  borrower  (and not a  guarantor,  surety or  accommodation
party),  with respect to all of the Obligations.  In the event that (and only to
the extent that),  notwithstanding the contrary intent of the parties, any court
of competent jurisdiction determines that any Borrower is a guarantor, surety or
accommodation  party with  respect to any  portion  of the  Obligations,  or has
granted a lien or  security  interest  on its  property  to  secure  the debt of
another,  the waivers and other  provisions  of 24.1 of the  Agreement  and this
Schedule  24.1 shall apply to such Borrower in  connection  with the  Guaranteed
Obligations.

          2.1 Each Borrower consents and agrees that  Administrative  Agent, for
the benefit of Banks, may, at any time and from time to time, agree with any one
Borrower, without notice or demand to the other Borrowers, and without affecting
the enforceability of or security for the Guaranteed  Obligations under any Loan
Document, to:

          (a) supplement,  modify, amend, extend, renew, or otherwise change the
     time for  payment or the terms of the  Guaranteed  Obligations  or any part
     thereof,  including  any  increase  or  decrease of the rate(s) of interest
     thereon;

          (b)  supplement,  modify,  amend or waive,  or enter  into or give any
     agreement,  approval or consent with respect to, the Guaranteed Obligations

<PAGE>
     or any part thereof or any of the Loan Documents or any additional security
     or  guaranties,  or  any  condition,   covenant,  default,  remedy,  right,
     representation or term thereof or thereunder;

          (c) accept new or  additional  instruments,  documents  or  agreements
     relative to any of the Loan Documents or the Guaranteed  Obligations or any
     part thereof;

          (d) accept partial payments on the Guaranteed Obligations;

          (e)  receive  and  hold  additional  security  or  guaranties  for the
     Guaranteed Obligations or any part thereof;

          (f)  release,  reconvey,   terminate,  waive,  abandon,   subordinate,
     exchange,  substitute,  transfer and enforce any security or guaranties for
     the Guaranteed Obligations,  and apply any security and direct the order or
     manner of sale thereof as Administrative  Agent, on behalf of Banks, in its
     sole and absolute discretion may determine;

          (g) release any Person or any  guarantor  from any personal  liability
     with respect to the Guaranteed Obligations or any part thereof,

          (h) settle,  release on terms satisfactory to Administrative Agent and
     Banks or by operation of applicable laws or otherwise  liquidate or enforce
     any  Guaranteed  Obligations  and any security or guaranty  therefor in any
     manner, consent to the transfer of any security and bid and purchase at any
     sale; and

          (i)  consent  to the  merger,  change  or any other  restructuring  or
     termination of the corporate existence of any Borrower or any other Person,
     and correspondingly  restructure the Guaranteed  Obligations,  and any such
     merger, change, restructuring or termination shall not affect the liability

                                      -2-
<PAGE>
     of the other Borrowers or the continuing existence of any Lien securing the
     Guaranteed  Obligations under any Loan Document to which such Borrowers are
     a party or the enforceability  hereof or thereof with respect to all or any
     part of the Guaranteed Obligations.

          2.2 Upon the occurrence of and during the  continuance of any Event of
Default,   Administrative  Agent  and  Banks  may  enforce  each  Loan  Document
independently  as to each  Borrower  and  independently  of any other  remedy or
security  Administrative  Agent  and  Banks  at any  time  may  have  or hold in
connection  with the Guaranteed  Obligations,  and it shall not be necessary for
Administrative  Agent  and  Banks  to  marshal  assets  in  favor  of any of the
Borrowers or any other Person or to proceed upon or against  and/or  exhaust any
other security or remedy before  proceeding to enforce such Loan Document.  Each
of the Borrowers expressly waives any right to require  Administrative  Agent or
any Bank to marshal  assets in favor of any  Borrower or any other  Person or to
proceed against any other Person or any Collateral provided by any other Person,
and agrees that  Administrative  Agent and Banks may proceed against any Persons
and/or  Collateral  in such  order as they  shall  determine  in their  sole and
absolute  discretion.  The  Administrative  Agent and Banks may file a  separate
action or actions against any Borrower,  whether action is brought or prosecuted
with respect to any other  security or against any other Person,  or whether any
other Person is joined in any such action or actions.  Each  Borrower  expressly
waives the benefit of any  statute(s)  of  limitations  affecting  its liability
under the Loan Documents or the  enforcement  of the  Guaranteed  Obligations or
created or granted by any Loan Document.  The rights of Administrative Agent and
Banks hereunder and under the Agreement shall be reinstated and revived, and the
enforceability  of the Agreement shall  continue,  with respect to any amount at
any time paid on account of the Obligations  which  thereafter shall be required
to be restored or returned by Administrative  Agent or Bank upon the bankruptcy,
insolvency or  reorganization of any Borrower or any other Person, or otherwise,
all as though  such  amount had not been paid.  The  enforceability  of the Loan
Documents  at all times shall  remain  effective  as to each  Borrower as to the

                                      -3-
<PAGE>
Guaranteed Obligations of such Borrower even though such Guaranteed Obligations,
including any part thereof may be or hereafter  may become  invalid or otherwise
unenforceable  as against any other  Borrower or any other Person and whether or
not any other  Borrower or any other Person  shall have any  personal  liability
with respect thereto.

          2.3 Each  Borrower  expressly  waives  in  respect  of the  Guaranteed
Obligations any and all defenses now or hereafter  arising or asserted by reason
of (a) any disability or other defense of any other Borrower or any other Person
with  respect  t o the  Guaranteed  Obligations,  (b)  the  unenforceability  or
invalidity  of any security or guaranty for the  Guaranteed  Obligations  or the
lack of  perfection  or  continuing  perfection  or failure of  priority  of any
security  for the  Guaranteed  Obligations,  (c)  the  cessation  for any  cause
whatsoever of the ability of any other  Borrower or any other Person (other than
by reason of the full  payment  and  performance  of all  Obligations),  (d) any
failure of Administrative Agent or any Bank to marshal assets in favor of any of
the other Borrowers or any other Person, (e) except as otherwise required by law
or as provided in any Loan Document,  any failure of Administrative Agent or any
Bank to give  notice of sale or other  disposition  of  Collateral  to any other
Borrower  or any other  Person or any defect in any notice  that may be given in
connection  with any sale or disposition of Collateral,  (f) except as otherwise
required  by  law  or  as  provided  in  any  Loan  Document,   any  failure  of
Administrative  Agent or any Bank to comply with  applicable  laws in connection
with the sale or other  disposition  of any Collateral or other security for any
Obligation,  including,  without limitation, any failure of Administrative Agent
or any Bank to conduct a commercially  reasonable  sale or other  disposition of
any Collateral or other security for any Guaranteed  Obligation,  (g) any act or
omission  of  Administrative  Agent  or any  Bank or  others  that  directly  or
indirectly  results in or aids the discharge or release of any other Borrower or
any  other  Person  or  any  other  security  or  guaranty  for  the  Guaranteed
Obligations  by operation of law or otherwise,  (h) any law which  provides that
the  obligation of a surety or guarantor must neither be larger in amount nor in
other  respects  more  burdensome  than that of the principal or which reduces a
surety's or  guarantor's  obligation in proportion to the principal  obligation,

                                      -4-
<PAGE>
(i) any failure of  Administrative  Agent or any Bank to file or enforce a claim
in any  bankruptcy  or other  proceeding  with  respect to any  Person,  (j) the
election by  Administrative  Agent or any Bank, in any bankruptcy  proceeding of
any Person, of the application or  non-application  of Section 1111(b)(2) of the
United States  Bankruptcy  Code, (k) any extension of credit or the grant of any
Lien under Section 364 of the United States Bankruptcy Code, (l) any use of cash
collateral  under  Section 363 of the United  States  Bankruptcy  Code,  (m) any
agreement or stipulation with respect to the provision of adequate protection in
any bankruptcy  proceeding of any Person, (n) the avoidance of any Lien in favor
of Administrative Agent or Banks for any reason, (o) any bankruptcy, insolvency,
reorganization,  arrangement,  readjustment of debt,  liquidation or dissolution
proceeding  commenced by or against any Person,  including  any discharge of, or
bar or stay against collecting, all or any of the Guaranteed Obligations (or any
interest thereon) in or as a result of any such proceeding, or (p) to the extent
permitted, the benefits of any form of one-action rule.

          2.4 Each  Borrower  waives all rights and defenses  that such Borrower
may have because any  Guaranteed  Obligation is secured by real  property.  This
means, among other things:

          (1)  Administrative  Agent and Banks may  collect  from such  Borrower
     and/or  foreclose on any Collateral  pledged by such Borrower  without fast
     foreclosing  on any real or  personal  property  collateral  pledged by any
     other Borrower (or by any other Person) with respect to any such Guaranteed
     Obligation.

          (2) If  Administrative  Agent  and/or  Banks  foreclose  on  any  real
     property  collateral  pledged by such Borrower or any other Borrower (or by
     any other Person) with respect to any such Guaranteed Obligation:

               (A) The amount of such Guaranteed  Obligation may be reduced only
          by the price  for which  that  Collateral  is sold at the  foreclosure
          sale, even if the Collateral is worth more than the sale price.

                                      -5-
<PAGE>
               (B) Administrative Agent and Banks may collect from such Borrower
          and/or  foreclose on any  Collateral  pledged by such Borrower even if
          Administrative  Agent  and/or  any Bank,  by  foreclosing  on the real
          property Collateral, has destroyed any right such Borrower may have to
          collect from any other  Borrower (or from any other Person who pledged
          such Collateral).

This is an unconditional and irrevocable  waiver of any rights and defenses such
Borrower may have because any Guaranteed Obligation is secured by real property.
These  rights  and  defenses  include,  but are not  limited  to,  any rights or
defenses based upon Section 580a,  580b,  580d or 726 of the California  Code of
Civil  Procedure,  and  any  comparable  provisions  of the  laws  of any  other
jurisdiction and all other suretyship  defenses it otherwise might or would have
under California law or other applicable law.

          2.5 Each  Borrower  waives all rights and  defenses  arising out of an
election of remedies by  Administrative  Agent  and/or  Banks,  even though that
election  of  remedies,  such as a  non-judicial  foreclosure  with  respect  to
security for a Guaranteed  Obligation,  has destroyed such Borrower's  rights of
subrogation and reimbursement  against the principal by the operation of Section
580d of the California Code of Civil Procedure or otherwise.

          2.6 Without  limiting the  generality of the  foregoing,  in the event
that all or any part of the  Guaranteed  Obligations  at any time are secured by
one or more Deeds of Trust, each Borrower  authorizes  Administrative  Agent and
Banks,  upon the  occurrence  of and  during  the  continuance  of any  Event of
Default,  at their sole option,  without notice or demand and without  affecting
any Obligations,  the  enforceability  of the Guaranteed  Obligations  under the
Agreement,  or the  validity or  enforceability  of any Liens of  Administrative
Agent  and Banks on any  Collateral  securing  the  Guaranteed  Obligations,  to
foreclose any or all of such Deeds of Trust by judicial or non-judicial sale.

          2.7  Notwithstanding  anything  to the  contrary  elsewhere  contained
herein or in any other Loan  Document  to which any  Borrower  is a party,  each

                                      -6-
<PAGE>
Borrower  hereby waives with respect to each other  Borrower and its  respective
successors  and assigns  (including  any surety) and any other party any and all
rights at law or in equity, to subrogation, to reimbursement, to exoneration, to
contribution,  to setoff or to any other  rights  that could  accrue to a surety
against  a  principal,  to a  guarantor  against  a  maker  or  obligor,  to  an
accommodation party against the party accommodated, or to a holder or transferee
against a maker and which each  Borrower may have or hereafter  acquire  against
any other  Borrower or any other party in connection  with or as a result of any
Borrower's execution,  delivery and/or performance of the Agreement or any other
Loan Document to which any such Borrower is a party until payment in full of all
Guaranteed  Obligations.  Each Borrower  agrees that it shall not have or assert
any such rights against any other Borrower or any such Borrower's successors and
assigns or any other Person  (including  any surety),  either  directly or as an
attempted  setoff to any action  commenced  against such  Borrower by such other
Borrower  (as  borrower  or in any other  capacity)  or any other  Person.  Each
Borrower hereby  acknowledges and agrees that this waiver is intended to benefit
Administrative  Agent and Banks and shall not limit or  otherwise  affect any of
the Borrowers'  liability  hereunder  under any other Loan Document to which any
Borrower is a party, or the enforceability hereof or thereof.

          2.8 Without limiting the generality of the foregoing and to the extent
otherwise  applicable,  each  Borrower  hereby  waives  discharge by waiving all
defenses based on suretyship or impairment of collateral securing the Guaranteed
Obligations.

     3. Each Borrower  warrants and agrees that each of the waivers and consents
set  forth  herein  is  made  with  full  knowledge  of  its   significance  and
consequences,  with the  understanding  that  events  giving rise to any defense
waived may  diminish,  destroy or otherwise  adversely  affect rights which each
Borrower otherwise may have against the other Borrowers,  Administrative  Agent,
Banks, or others, or against any Collateral securing the Guaranteed Obligations.
If any of the waivers or consents  herein are  determined  to be contrary to any
applicable law or public policy, such waivers and consents shall be effective to
the maximum extent permitted by law.

                                      -7-
<PAGE>
     4. Each Borrower represents and warrants to Administrative  Agent and Banks
that such Borrower has  established  adequate means of obtaining from each other
Borrower, on a continuing basis,  financial and other information  pertaining to
the businesses, operations and condition (financial and otherwise) of each other
Borrower and their respective properties, and each Borrower now is and hereafter
will be  completely  familiar  with the  businesses,  operations  and  condition
(financial and otherwise) of each other Borrower and its respective  properties.
Each Borrower hereby  expressly  waives and relinquishes any duty on the part of
Administrative  Agent and Banks to disclose to such Borrower any matter, fact or
thing  related  to  the  businesses,   operations  or  condition  (financial  or
otherwise) of any other Borrower or such other  Borrower's  properties,  whether
now known or hereafter known by  Administrative  Agent and Banks during the term
of the Agreement.

                                      -8-
<PAGE>
                                   EXHIBIT "A"

                                 PROMISSORY NOTE
<PAGE>
                                  EXHIBIT "B-1"

                      DEED OF TRUST, ASSIGNMENT OF RENTS,
                 SECURITY AGREEMENT AND FIXTURE FILING (ARIZONA)
<PAGE>
                                  EXHIBIT "B-2"

                       DEED OF TRUST, ASSIGNMENT OF RENTS,
               SECURITY AGREEMENT AND FIXTURE FILING (CALIFORNIA)
<PAGE>
                                  EXHIBIT "C-1"

                     MODIFICATION OF DEED OF TRUST (ARIZONA)
<PAGE>
                                  EXHIBIT "C-2"

                   MODIFICATION OF DEED OF TRUST (CALIFORNIA)
<PAGE>
                                   EXHIBIT "D"

                                    GUARANTEE
<PAGE>
                                   EXHIBIT "E"

                             COLLATERAL CERTIFICATE
<PAGE>
                                   EXHIBIT "F"

                     PROPOSED INITIAL APPROVED SUBDIVISIONS
<PAGE>
                                   EXHIBIT "G"

                              CONSTRUCTION SCHEDULE
<PAGE>
                                   EXHIBIT "H"

                       SAMPLE COLLATERAL INVENTORY REPORT
<PAGE>
                                   EXHIBIT "I"

                       SAMPLE SALES AND INVENTORY REPORTS
<PAGE>
                                   EXHIBIT "J"

                             SAMPLE PROJECT PROFORMA
<PAGE>As of July 31, 1999

Guaranty Federal Bank, F.S.B.
8333 Douglas Avenue
Dallas, Texas 75225

     Re:  Modification of an existing $70,000,000.00 guidance line from Guaranty
          Federal  Bank,  F.S.B.  ("Lender") to  Legacy/Monterey  Homes L.P., an
          Arizona  corporation  ("Borrower");  such loan and other  indebtedness
          being  guaranteed  by Meritage  Corporation,  a Maryland  corporation,
          MTH-Texas GP, Inc., an Arizona  corporation and MTH-Texas LP, Inc., an
          Arizona corporation (collectively referred to as "Guarantor")

Gentlemen:

     Reference is made to that certain Master Loan Agreement dated as of January
31, 1993 (and all amendments  thereto,  if any) (the "Loan  Agreement")  between
Lender and Borrower governing a $70,000,000.00  loan (as increased) (the "Loan")
for the acquisition  and/or  refinancing of residential  lots located in certain
counties in the State of Texas as described  therein,  and the  construction  of
single-family  residences  thereon.  Unless otherwise  expressly defined herein,
each term used herein with its initial letter capitalized shall have the meaning
given to such term in the Loan Agreement. As used in this letter agreement,  the
term "Loan  Instruments"  shall mean and include (i) the "Loan  instruments"  as
defined in the Loan Agreement,  (ii) the Fourth Modification  Agreement dated as
of even date  herewith,  executed by and between the parties  hereto,  and (iii)
this letter agreement and all other documents  executed in conjunction  herewith
(and all amendments thereto, if any).

     Borrower  and  Lender  desire to  increase  the Loan  Amount to the  stated
principal  amount of  $80,000,000.00  and to amend and modify  certain terms and
provisions of the Loan and the Loan Instruments as follows:

     1.  The  Loan   Amount  is  hereby   increased   from   $70,000,000.00   to
$80,000,000.00.  All  references  in  the  Loan  Instruments  to the  amount  of
$70,000,000.00 are hereby increased to $80,000,000.00.

     2. The stated maturity date of the Note is hereby extended to and including
July 31, 2000, when the entire unpaid  principal  balance of the Note,  together
with  all  accrued  and  unpaid  interest  shall be due and  payable;  provided,
however,  such  date may be  extended  as set forth in  Paragraph  9 of the Loan
Agreement (as amended hereby).
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 2

     3.  Exhibit A to the Loan  Agreement  is hereby  modified by deleting  such
exhibit in its entirety and replacing it with Exhibit A attached hereto.

     4. All  Loan  Instruments  hereby  are  amended  and  modified  in a manner
consistent with the  modifications,  terms and/or  provisions  contained herein.
Except as modified hereby, all the terms,  provisions and conditions of the Loan
Instruments shall remain in full force and effect.

     5. This letter agreement  constitutes the "Letter Agreement" referred to in
the Fourth Modification  Agreement of even date herewith executed by and between
the parties hereto.

     6. The terms and  provisions of this letter  agreement may not be modified,
amended,  altered or otherwise affected except by instrument in writing executed
by Lender and Borrower.

     7. Each  Guarantor  by its  execution  hereof agree to the  amendments  and
modifications  to the  Loan  Instruments  set  forth  herein  and  in the  prior
amendments and  modifications to the Loan Instruments and agree that all of such
modifications do not and will not waive,  release or in any manner modify either
Guarantor's obligations and liabilities under and pursuant to the Guaranty.

             (The balance of this page is intentionally left blank.)
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 3

     If this letter  agreement  correctly  sets forth our  understanding  of the
subject matter contained  herein,  please indicate this by executing this letter
agreement in the space furnished below and then return a fully-executed  copy to
the undersigned.

                                        Very truly yours,

                                        BORROWER:

                                        LEGACY/MONTEREY HOMES L.P.,
                                        an Arizona limited partnership

                                        BY:  MTH-TEXAS GP, INC.,
                                             an Arizona corporation,
                                             General Partner

                                             By: /s/ Rick Morgan
                                                 -------------------------------
                                                 Name: Rick Morgan
                                                 Title: Vice President
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 4

                                        GUARANTOR:

                                        MERITAGE CORPORATION,
                                        a Maryland corporation

                                        By: /s/ John London
                                            ------------------------------------
                                            Name: John London
                                            Title: Co-CEO

                                        MTH-TEXAS GP, INC.,
                                        an Arizona corporation,

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President

                                        MTH-TEXAS LP, INC.,
                                        an Arizona corporation

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 5

ACCEPTED AND AGREED TO:

LENDER:

GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank

By: /s/ Sam A. Meade
    ------------------------------------
    Name: Sam A. Meade
    Title: Senior Vice President
<PAGE>
                                    EXHIBIT A

                                TO LOAN AGREEMENT

1.   Introductory  Paragraph.  RESIDENCE AND INVENTORY LOT  LIMITATIONS.  At any
     given time,  Residences and Inventory Lots financed under the Loan shall be
     limited to the following numbers, unless modified by Lender in writing:

     Total Residences:             Seven Hundred Seventy-five (775).
     Specs:                        One Hundred Twelve (112).
     Models:                       Sixty-three (63).
     Inventory Lots:               Six Hundred Twenty-Five (625).

     Borrower may increase the number of Specs  allowed above by the same number
     by which Borrower is short of Models allowed above.  Borrower covenants and
     agrees not to allow,  and is prohibited  from  allowing,  any more than ten
     (10) Specs,  three (3) Models or one hundred fifty (150)  Inventory Lots to
     exist in any Approved Subdivision (as hereinafter defined).

     The outstanding  aggregate amount of the Loan Allocations for all Specs and
     Models at any time shall never exceed $16,800,000.00.

     The outstanding  aggregate amount of the Loan Allocations for all Inventory
     Lots at any time shall never exceed $10,000,000.00.

     The term  "SPECS"  means a Residence  which is not a Model and is not Under
     Contract.  The term "MODEL" means a Residence specifically utilized for the
     purposes of marketing other residential products. The term "UNDER CONTRACT"
     shall mean  Residences  under  written  contract to sell to bona fide third
     parties  unrelated  to  Borrower,   having  no  contingency  or  any  other
     conditions not reasonably  susceptible  to being  satisfied,  providing for
     earnest  money  deposits of at least  $2,000.00,  and for which  Lender has
     received  preliminary loan approval from a bona fide residential  permanent
     lender.

     The term "INVENTORY RESIDENCE" means any Residence which is not a Model.

2.   Introductory Paragraph.  APPROVED SUBDIVISIONS.  The following subdivisions
     and  any  additional  subdivisions  approved  in  writing  by  Lender  (the
     "APPROVED  SUBDIVISIONS")  are  approved by Lender for the  Residences  and
     Inventory Lots:

     Subdivision                        County
     -----------                        ------
     Stone Canyon (Fern Bluff)          Williamson
     Oakmont Forest                     Williamson
     Settlers Ridge/Creekside           Travis
     Round Rock Ranch                   Williamson
     The Meadows (Thunderbird Est.)     Collin
     Brighton Estates - Arlington       Tarrant
     Bristol Park (Fountain Creek)      Collin
     Chase-Oaks                         Collin
     Cottonwood Bend                    Collin
     Country Club Park                  Dallas
     Creekwood Estates                  Denton
     Crestwood                          Collin
     Cross Creek West                   Collin
     Eden Road Estates                  Tarrant
     El Dorado Heights                  Collin
     Heritage Park - Allen              Collin
     Highland Parkway                   Collin
     Hillcrest Estates                  Collin

EXHIBIT A, - Page 1
<PAGE>
     Hunters Glen                       Collin
     Independence Hill                  Collin
     Meadow Glen PH IIB                 Denton
     Oakwood Glen                       Collin
     Orchard Valley Estates             Denton
     Parkdale - Plano                   Collin
     Shadow Lakes                       Collin
     Shadow Lakes North                 Collin
     Lakes of Valley Ranch              Dallas
     Vista Ridge Estates                Denton
     Windhaven Farms (Carelle Custom)   Collin
     Ravenglass Estates                 Collin
     Frankford Meadows                  Dallas
     Hunter Trail                       Tarrant
     Fossil Beach                       Tarrant

3.   Introductory  Paragraph.  APPROVED PRICE RANGE.  The Residences shall be in
     the $70,000.00 to $350,000.00 price range.

4.   Paragraph  1(c).  GUARANTOR.  Guarantor  of the  Loan  shall  be:  Meritage
     Corporation,  a, Maryland  corporation  (formerly  known as "Monterey Homes
     Corporation");  MTH-Texas G.P., Inc., an Arizona corporation; and MTH-Texas
     L.P., Inc., an Arizona corporation.

5.   Paragraph 2(h). LOAN FINANCE CHARGE. None.

6.   Paragraph  2(k) and 6(g).  INSPECTION  FEE. An inspection fee of $30.00 per
     Residence  shall be paid to Lender on the day the  Mortgage  pertaining  to
     such Residence is recorded in the Real Property Records.

7.   Paragraph  4(c).  LOAN  RATIOS.  The Loan  Allocation  shall not exceed the
     lesser of (1) one hundred percent (100%) of the direct costs of a Property,
     as determined by Lender or, (2) seventy  percent (70%) of the lowest of the
     values  as  provided  in  Paragraph  4(c)(i),(ii)  and  (iii) of this  Loan
     Agreement.

8.   Paragraph 6(q). OTHER ENTITIES. The Mortgages shall additionally secure all
     other  indebtedness  now or  hereafter  owed by the  following  entities to
     Lender: None.

9.   Paragraph  6(s).  REQUIRED  RELEASES.  Borrower shall cause:  (a) Inventory
     Residences to be released from a Mortgage nine (9) months from the day such
     Mortgage  is  recorded  in the Real  Property  Records,  (b)  Models  to be
     released from a Mortgage twenty-four (24) months from the day such Mortgage
     is recorded in the Real  Property  Records,  and (c)  Inventory  Lots to be
     released  from a Mortgage  twelve (12) months from the day such Mortgage is
     recorded in the Real Property  Records;  provided,  however,  if no default
     then exists under any Loan Instruments,  Lender may, at its option,  extend
     the Required  Release  Date for periods of three (3) months (the  "EXTENDED
     RELEASE DATE");  provided,  such Extended Release Date shall in no event go
     beyond the Stated  Maturity Date (as  hereinafter  defined) or the Extended
     Maturity Date (as hereinafter defined), if applicable.

10.  Paragraph 7. REQUIRED PRINCIPAL  REDUCTIONS.  Prior to the date that Lender
     gives Borrower the notice  described in Paragraph 4(f) above, the following
     shall apply:  in the event a Property has been granted an Extended  Release
     Date (as provided in Paragraph 9 of this Exhibit A) and a Mortgage  remains
     covering  such  Property  beyond the  following  periods from the date such
     Mortgage is recorded,  then Borrower shall make a principal  payment of the
     Note in an amount equal to ten percent  (10%) of the Loan  Allocation  with
     respect to such Property (and the Loan  Allocation  for such Property shall
     be reduced by the same amount), as determined by Lender:

     Inventory Residences:         Fifteen (15) months.
     Models:                       Twenty-four (24) months.
     Inventory Lots:               Twelve (l2) months.

EXHIBIT A, - Page 2
<PAGE>
     From and after the date that Lender gives Borrower the notice  described in
     Paragraph 4(f) of the Loan  Agreement,  the following  shall apply:  in the
     event a Property has been granted an Extended  Release Date, as provided in
     Paragraph 9 of this Exhibit A, Borrower  shall make a principal  payment on
     the Note of ten  percent  (10%) of that  portion  of the Loan  advanced  by
     Lender for such  Property,  within the  following  periods  from the date a
     Mortgage covering such Property is recorded in the Real Property Records:

     Inventory Residences:         Fifteen (15) months.
     Models:                       Twenty-four (24) months.
     Inventory Lots:               Twelve (12) months.

11.  Paragraph 9. MATURITY AND EXTENSION. The maturity date of the Note shall be
     the later of the maturity date as provided in the Note (July 31, 2000) (the
     "STATED MATURITY DATE"), or nine (9) months after the recording in the Real
     Property  Records  of the last  Mortgage  (the  "EXTENDED  MATURITY  DATE")
     approved  by Lender  and  recorded  prior to the  expiration  of the Stated
     Maturity Date. After the Stated Maturity Date, no additional Mortgage shall
     be recorded.

12.  Paragraph  10.  ADDITIONAL  DEFAULTS.  In addition to the events of default
     stipulated in the Loan  Instruments,  it shall be a default under this Loan
     Agreement if Borrower fails to comply with any of the following: None.

13.  Paragraph 11.  ADDITIONAL LOAN COVENANTS.  Borrower shall fully perform and
     satisfy the following "ADDITIONAL LOAN COVENANTS":

     (a)  The aggregate  net worth of Borrower  (determined  in accordance  with
          generally accepted accounting principles,  consistently applied) shall
          not fall below $15,000,000.00.

     (b)  The ratio of total  liabilities  to equity (as  determined  by Lender)
          shall not exceed 4.0 to 1.0.

     (c)  John Landon shall at all times retain management control of Borrower.

     (d)  In no event shall Monterey Homes Corporation,  a Maryland corporation,
          be in default under any secured indebtedness.

     If Borrower or Guarantor (if  applicable to Guarantor)  breaches any of the
     Additional  Loan  Covenants  then,  at  Lender's  election,  no  additional
     Mortgages  shall  be  recorded  in the  Real  Property  Records;  provided,
     however,  that a breach  of any  Additional  Loan  Covenants  shall  not be
     considered a default under the Loan Instruments.

14.  Paragraph  16(d).  RELEASE PRICE. The partial release price shall be a cash
     amount  equal to the Loan  Allocation  for the Property  multiplied  by the
     Stage  (expressed  as a percentage)  of the Property,  all as determined by
     Lender;  provided,  however, if Lender shall have given Borrower the notice
     described in Paragraph 4(f) of the Loan Agreement, then the partial release
     price  shall be an  amount in cash  equal to one  hundred  and one  hundred
     percent  (100%) of the  outstanding  balance of the Loan advanced by Lender
     for the Property.

15.  Paragraph  16(e).  EXTENSION  FEE. If Lender  extends the Required  Release
     Date, as provided in Paragraph 9 of this Exhibit A,  Borrower  shall pay to
     Lender an  extension  fee of one percent  (1%) of that  portion of the Loan
     advanced by Lender for each such Property  times a fraction,  the numerator
     of which is the number of days the  Required  Release  Date is extended and
     the denominator of which is 365.

EXHIBIT A, - Page 3
<PAGE>
                          FOURTH MODIFICATION AGREEMENT

     This FOURTH  MODIFICATION  AGREEMENT (this "AGREEMENT") is made and entered
into as of July 31, 1999, by and between  LEGACY/MONTEREY HOMES L.P., an Arizona
limited partnership  ("BORROWER"),  and GUARANTY FEDERAL BANK, F.S.B., a federal
savings  bank  organized  and  existing  under  the  laws of the  United  States
("LENDER").

                                   WITNESSETH:

     WHEREAS, pursuant to a certain Master Loan Agreement (the "LOAN AGREEMENT")
dated as of January 31, 1993,  between  Lender and Borrower,  Lender made a loan
(the "LOAN") to Borrower,  evidenced by a certain Revolving Promissory Note (the
"NOTE") dated as of January 31, 1993,  payable to Lender in the stated principal
amount of FIFTY MILLION AND NO/100 DOLLARS ($50,000,000.00) (as increased), with
interest and principal payable as set forth therein; and

     WHEREAS,  to secure the Note and Loan,  Master Form  Deed(s) of Trust (With
Security Agreement and Assignment of Rents and Leases) (hereinafter collectively
referred to as the "MASTER DEEDS OF TRUST,"  whether one or more),  which Master
Deeds of Trust have been  recorded in certain  counties in the State of Texas as
more particularly described on Exhibit A attached hereto; and which Master Deeds
of Trust are  incorporated by reference  pursuant to the terms and provisions of
certain  Deeds of Trust  Incorporating  by Reference a Master Form Deed of Trust
(With  Security  Agreement  and  Assignment  of  Rents  and  Leases)  (hereafter
collectively  referred to as the  "SUPPLEMENTAL  DEEDS OF TRUST," whether one or
more) recorded in such counties and encumbering  certain real and other property
(the  "PROPERTY")  described  in such  Supplemental  Deeds of Trust (such Master
Deeds of Trust and Supplemental Deeds of Trust hereafter  collectively  referred
to as the "DEEDS OF TRUST," whether one or more); and

     WHEREAS,  the  Deeds of Trust  were  modified  pursuant  to a  Modification
Agreement (the "FIRST  MODIFICATION") dated ____________,  1997, and recorded in
various counties in Texas, which First  Modification  modified certain terms and
provisions of the Loan as set forth therein; and

     WHEREAS,  the Deeds of Trust were further pursuant to a Second Modification
Agreement (the "SECOND  MODIFICATION") dated as of May 19, 1998, and recorded in
various counties in Texas, which Second Modification  modified certain terms and
provisions of the Loan as set forth therein; and

     WHEREAS,  the Deeds of Trust were further pursuant to a Third  Modification
Agreement  (the  "THIRD  MODIFICATION")  dated as of  March  ______,  1999,  and
recorded in various counties in Texas, which Third Modification modified certain
terms and provisions of the Loan as set forth therein; and

     WHEREAS,  the Note and the Loan are  guaranteed  pursuant  to that  certain
Guaranty  Agreement  dated as of June 30,  1997 (the  "GUARANTY"),  executed  by
MTH-Texas  GP, Inc.,  an Arizona  corporation,  MTH-Texas  LP, Inc.,  an Arizona
corporation, and Meritage Corporation, a Maryland corporation (formerly known as
"MONTEREY HOMES CORPORATION") ("GUARANTOR," whether one or more); and

     WHEREAS, the Loan Agreement,  the Note, the First Modification,  the Second
Modification, the Third Modification Agreement, the Deeds of Trust and all other
documents  evidencing  and/or  securing  the Loan are  hereinafter  collectively
called the "LOAN INSTRUMENTS"; and

FOURTH MODIFICATION AGREEMENT - Page 1
<PAGE>
     WHEREAS,  Lender,  the owner and  holder of the Note and the Deeds of Trust
and all rights and titles evidenced thereby,  and Borrower,  the record owner of
the Property  and being  liable for the payment of the Note and Loan,  desire to
modify the Loan Instruments as herein provided.

     NOW,  THEREFORE,  in  consideration  of Ten and No/100 Dollars ($10.00) and
other good and valuable consideration,  the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:

     1. The stated maturity date of the Note is hereby extended to and including
July 31, 2000, when the entire unpaid  principal  balance of the Note,  together
with  all  accrued  and  unpaid  interest  shall be due and  payable;  provided,
however, such date may be extended as set forth in the Loan Agreement.

     2. The Loan is hereby increased from $70,000,000.00 to $80,000,000.00.  All
references in the Loan  Instruments to the amount of  $70,000,000.00  are hereby
increased to $80,000,000.00.

     3. Borrower shall execute and deliver to Lender a letter agreement (in form
and  substance  satisfactory  to Lender  in its sole  discretion)  (the  "LETTER
AGREEMENT")  dated  as of the date  hereof  amending  certain  other  terms  and
provisions of the Loan  Instruments.  (Hereafter,  this Agreement and the Letter
Agreement shall be included in the defined term "LOAN INSTRUMENTS.")

     4. Borrower  acknowledges and agrees, that as an accommodation to Borrower,
Exhibit A hereto  (which  exhibit  describes the  recording  information  of the
Master Deeds of Trust) shall be attached to this  Agreement  (and to any and all
other  documents  which may  require  the  attachment  of a  description  of the
recording  information of the Master Deeds of Trust) after Borrower's  execution
of same.  Accordingly,  Borrower hereby  authorizes and directs Lender to attach
such Exhibit A to this Agreement.

     5. Notwithstanding anything to the contrary contained in the Deeds of Trust
or other Loan Instruments,  with respect to any amendment to the Master Deeds of
Trust, the following terms and provisions shall apply:

     With respect to any amendment or  modification of the Master Deeds of Trust
     now or hereafter  executed by Borrower (or any future owner of the Property
     if different from Borrower) and duly recorded in the  appropriate  official
     public  records,  Borrower  acknowledges  and agrees that such amendment or
     modification of the Master Deeds of Trust shall  constitute an amendment or
     modification to the terms and provisions of any such Supplemental  Deeds of
     Trust (and shall be incorporated into any such Supplemental  Deeds of Trust
     and made a part  thereof  for all  purposes,  as though such  amendment  or
     modification  of the Master  Deeds of Trust  specifically  referred to such
     Supplemental  Deeds  of  Trust)  without  the  necessity  of  any  specific
     reference in such amendment or modification to any such Supplemental  Deeds
     of Trust;  and no such  amendment  or  modification  of the Master Deeds of
     Trust shall impair the obligations of Borrower under any such  Supplemental
     Deeds of Trust or any other of the Loan Instruments.

     6. Borrower hereby  expressly  promises to pay to the order of Lender,  the
principal  amount of the Note (as  modified and  increased)  and all accrued and
unpaid  interest now or hereafter to become due and payable under the Note,  and
Borrower hereby expressly promises to perform all of the obligations of Borrower
under the Loan Instruments (as modified and increased).

     7. The liens of the Deeds of Trust are hereby  acknowledged  by Borrower to
be good,  valid and  subsisting  liens,  and such liens are hereby  renewed  and
extended  so as to secure  the  payment  of the Note and Loan (as  modified  and
increased).

     8. Borrower  hereby  represents and warrants to Lender that (a) Borrower is
the sole legal and beneficial  owner of the Property;  (b) Borrower has the full
power and authority to make the agreements  contained in this Agreement  without
joinder or consent of any other party; (c) the

FOURTH MODIFICATION AGREEMENT - Page 2
<PAGE>
execution,  delivery and  performance  of this  Agreement will not contravene or
constitute  an event which itself or which with the passing of time or giving of
notice  or both  would  constitute  a  default  under  any deed of  trust,  loan
agreement,  indenture  or other  agreement  to which  Borrower or Guarantor is a
party or by which Borrower or any of its property is bound; and (d) there exists
no default under the Loan  Instruments (as modified).  BORROWER HEREBY AGREES TO
INDEMNIFY AND HOLD LENDER HARMLESS AGAINST ANY LOSS, CLAIM, DAMAGE, LIABILITY OR
EXPENSE (INCLUDING WITHOUT LIMITATION,  ATTORNEYS' FEES) INCURRED AS A RESULT OF
ANY  REPRESENTATION  OR WARRANTY MADE BY BORROWER HEREIN PROVING TO BE UNTRUE IN
ANY MATERIAL RESPECT.

     9. The terms and conditions hereof may not be modified, amended, altered or
otherwise  affected  except by  instrument  in  writing  executed  by Lender and
Borrower.

     10.  All Loan  Instruments  are hereby  amended  and  modified  in a manner
consistent with the  modifications,  terms and/or  provisions  contained herein.
Except as  expressly  modified  hereby,  the terms  and  conditions  of the Loan
Instruments are and shall remain in full force and effect.

     11. Borrower agrees to pay to Lender,  contemporaneously with the execution
and delivery  hereof,  all costs and expenses  incurred in connection  with this
transaction,  title insurance endorsement premiums,  reasonable fees of Lender's
counsel and recording fees.

     12.  Borrower  hereby  agrees to execute and deliver to Lender such further
documents and instruments  evidencing or pertaining to the Loan, as modified and
increased hereby, as may be reasonably  requested by Lender from time to time so
as to evidence the terms and conditions hereof.

             [The balance of this page is intentionally left blank.]

FOURTH MODIFICATION AGREEMENT -Page 3
<PAGE>
     EXECUTED  on the  date(s)  set forth in the  acknowledgment(s)  below to be
EFFECTIVE as of the date first above written.

                                        BORROWER:

                                        LEGACY/MONTEREY HOMES L.P.,
                                        an Arizona limited partnership

                                        BY: MTH-TEXAS GP, INC., an
                                            Arizona corporation,
                                            General Partner

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President

                                        LENDER:

                                        GUARANTY FEDERAL BANK, F.S.B.,
                                        a federal savings bank

                                        By: /s/ Sam A. Meade
                                            ------------------------------------
                                            Name: Sam A. Meade
                                            Title: Senior Vice President

STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLIN    ss.

     This  instrument  was  ACKNOWLEDGED  before  me on July 26,  1999,  by Rick
Morgan, Vice President of MTH-TEXAS GP, INC., an Arizona corporation, as General
Partner of LEGACY/MONTEREY HOMES L.P., an Arizona limited partnership, on behalf
of said limited partnership.

[SEAL]                                  /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public

My Commission Expires:

                                        ------------------------------------
                                        Printed Name of Notary Public

FOURTH MODIFICATION AGREEMENT - Page 4
<PAGE>
STATE OF TEXAS      ss.
                    ss.
COUNTY OF DALLAS    ss.

     This instrument w s acknowledged  before me on the 29th day of July,  1999,
by Sam A. Meade,  Senior Vice  President of GUARANTY  FEDERAL  BANK,  F.S.B.,  a
federal savings bank, on behalf of said federal savings bank.

                                        /s/ Leslie Ruth Reynolds
                                        ------------------------------------
                                        Notary Public in and for the
[SEAL]                                  Above country and state

My Commission Expires:

     02/04/2001                         Leslie Ruth Reynolds
----------------------                  ------------------------------------
                                        Printed Name of Notary

FOURTH MODIFICATION AGREEMENT -Page 5
<PAGE>
                              CONSENT OF GUARANTOR

     Each of the undersigned,  as a guarantor ("Guarantor," whether one or more)
of the loan (the  "Loan"),  evidenced  by the Note and  secured  by the Deeds of
Trust described in the foregoing Fourth Modification Agreement (the "Agreement")
to which this Consent is attached,  hereby  acknowledge and consent (jointly and
severally) to the terms of the Agreement and agree (jointly and severally)  that
the  execution  and  delivery of the  Agreement  will in no way change or modify
Guarantor's  respective  obligations under their respective Guaranty (as defined
in the  Agreement);  and each  Guarantor  acknowledges  and agrees  (jointly and
severally)  that the  Indebtedness  (as  defined in the  respective  instruments
comprising  the  Guaranty)  includes the Loan (as increased and set forth in the
Agreement),  together  with any and all  other  Indebtedness  now or at any time
hereafter  owing by  Guarantor  to  Lender;  and  each  Guarantor  (jointly  and
severally)  hereby  unconditionally  and  absolutely  guarantees  to Lender  the
payment when due of such  Indebtedness,  and hereby  acknowledge  and agree that
their  respective  Guaranty is in full force and  effect,  and that there are no
claims,  counterclaims,  offsets or defenses to their respective  Guaranty;  and
each Guarantor acknowledges and consents (jointly and severally) to the terms of
any and all prior  modifications  to the terms of the Loan  (including,  without
limitation,  any and all  extensions  of the term  thereof and  increases in the
principal thereof prior to the date hereof, if any).

     EXECUTED  on the  date(s)  set forth in the  acknowledgment(s)  below to be
EFFECTIVE as, of the 31st day of July, 1999.

                                        GUARANTOR:

                                        MERITAGE CORPORATION,
                                        a Maryland co oration

                                        By: /s/ John R. Landon
                                            ------------------------------------
                                            Name: John R. Landon
                                            Title: Co-CEO

                                        MTH-TEXAS GP, INC.,
                                        an Arizona corporation

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President

                                        MTH-TEXAS LP, INC.,
                                        an Arizona corporation

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President

FOURTH MODIFICATION AGREEMENT -Page 6
<PAGE>
STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLIN    ss.

     This  instrument  was  ACKNOWLEDGED  before me on July 27, 1999,  by John R
Landon,  Co-CEO of MERITAGE CORPORATION,  a Maryland  corporation,  on behalf of
said corporation.

[SEAL]                                  /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public

My Commission Expires:

----------------------                  ------------------------------------
                                        Printed Name of Notary Public

STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLIN    ss.

     This  instrument  was  ACKNOWLEDGED  before  me on July 26,  1999,  by Rick
Morgan, Vice President of MTH-TEXAS GP, 1NC., an Arizona corporation,  on behalf
of said corporation.

[SEAL]                                  /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public

My Commission Expires:

----------------------                  ------------------------------------
                                        Printed Name of Notary Public

STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLIN    ss.

     This  instrument  was  ACKNOWLEDGED  before  me on July 26,  1999,  by Rick
Morgan, Vice President of MTH-TEXAS LP, IN , an Arizona  corporation,  on behalf
of said corporation.

[SEAL]

                                        /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public

My Commission Expires:

----------------------                  ------------------------------------
                                        Printed Name of Notary Public

FOURTH MODIFICATION AGREEMENT - Page 7
<PAGE>
                                    EXHIBIT A

                       Description of the Deed(s) of Trust

LEGACY/MONTEREY, L.P.

COLLIN COUNTY  Recorded September 4, 1996, Clerk File 96-0075977

DALLAS         Recorded September 5, 1996, Volume 96175 Page 00192

DENTON         Recorded September 5, 1996, Clerk File 96-80061921

HARRIS         Recorded August 6, 1997, Clerk File No. S579911

ROCKWALL       Recorded August 19, 1997, Clerk File No. 176219

TARRANT        Recorded September 5, 1996, Clerk File D196175179

TRAVIS         Recorded September 6, 1996,Volume 12766, Page 1157

WILLIAMSON     Recorded September 9, 1996, Clerk File 9648096

Fort Bend sent to Legacy for sig. Today (1-26-99)

EXHIBIT A, Description of the Deeds of Trust - Page 1
<PAGE>
                           CERTIFICATE OF RESOLUTIONS
                                       OF
                              MERITAGE CORPORATION

     I, Rick Morgan,  Assistant  Secretary of MERITAGE  CORPORATION,  a Maryland
corporation (the "Company"), do hereby certify as follows:

     (i)   that I am the duly elected and qualified  Assistant  Secretary of the
           Company and the custodian of the Company's records;

     (ii)  that a meeting  of the Board of  Directors  of the  Company  was duly
           called and held on July 27, 1999, and at such meeting a quorum of the
           Directors was present and acting throughout;

     (iii) that set forth  below is a true and  correct  restatement  of certain
           resolutions  adopted by the  Directors of the Company at such meeting
           held on July 27, 1999;

     RESOLVED, that the President or any Vice President of the Company be and is
hereby  authorized  and  directed to do any and all things  deemed  necessary or
advisable and in the best interest of the Company,  at his sole  discretion,  in
connection with the obtainment by LEGACY/MONTEREY HOMES L.P., an Arizona limited
partnership (the  "Partnership") of a loan in the amount of $80,000,000.00  (the
"Loan"),  to be obtained from GUARANTY FEDERAL BANK,  F.S.B.  ("Lender") for the
purpose of the Partnership  acquiring,  developing and/or  constructing  various
residential   subdivisions   (herein  collectively  and  singularly  called  the
"Project"),  to be located in certain  counties in Texas; to execute and deliver
appropriate  loan  instruments in the name of and on behalf of the Company,  and
all documents, certificates and agreements in this connection required by Lender
including,  without  limitation,  guaranties  which guarantee the Loan, the Loan
being reasonably expected to benefit, directly or indirectly, the Company;

     FURTHER  RESOLVED,  that the seal of the Company and the attestation of the
signature  of the  President  or any  Vice  President  by  the  Secretary  or an
Assistant  Secretary  of the Company will not be  necessary,  but if the seal or
such  attestation  is required by any party in connection  with the  transaction
contemplated by these  resolutions,  the Secretary or an Assistant  Secretary of
the Company is hereby  authorized  to attest,  for and on behalf of the Company,
the  signature  of the  President  or any Vice  President  upon any  instrument,
document or other writing  executed on behalf of the Company by the President or
any Vice President thereof and to affix the seal of the Company thereto;

     FURTHER  RESOLVED,  that the  officers of the Company are hereby  severally
authorized  to (a) sign,  execute,  certify to,  verify,  acknowledge,  deliver,
accept, file and record any and all instruments and documents,  and (b) take, or
cause to be  taken,  any and all such  action  in the name and on  behalf of the
Company or otherwise,  as in any such officer's judgment is necessary, desirable

CERTIFICATE OF RESOLUTIONS, Page 1
<PAGE>
or  appropriate  in order to  consummate  the  transactions  contemplated  by or
otherwise to effect the purposes of the foregoing resolutions;

     FURTHER RESOLVED, that all actions heretofore taken by the incorporators or
the  directors  or the  officers  of the  Company,  and all things done by their
authority,  with respect to the  organization  of the Company and in  connection
with the  acquisition  of lands for and the  financing and  construction  of the
Project as aforesaid, be and the same are hereby ratified,  approved and adopted
as the acts of the Company;

     FURTHER  RESOLVED,  that said  officers  are  authorized  and  empowered to
perform  all acts and  execute  and.  deliver  all  instruments,  documents  and
agreements required by Lender to carry out the purposes of this resolution.

     (i)   that none of the  resolutions  set  forth  above  have been  amended,
           modified,  revoked or rescinded;  and each such resolution is in full
           force and effect on the date hereof; and

     (ii)  that  the  following  are the duly  elected,  qualified  and  serving
           officers  of the  Company,  that  their  addresses  are as  stated in
           connection  with each,  and that the  signature  set out opposite the
           name of each officer is the genuine signature of such person, to wit:

NAME AND ADDRESS              SIGNATURE
----------------              ---------

President:

/s/ John R. Landon
------------------------------------

Vice President:

/s/ Rick Morgan
------------------------------------

Secretary:

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

CERTIFICATE OF RESOLUTIONS, Page 2
<PAGE>
Assistant Secretary:

/s/ Rick Morgan
------------------------------------

     (iii) that (a) all  franchise  and other taxes  required  to  maintain  the
           Company's  corporate  existence  have  been paid when due and that no
           such taxes are  delinquent;  (b) no  proceedings  are pending for the
           forfeiture  of the  Company's  Certificate  of  Incorporation  or the
           Company's dissolution,  voluntary or involuntary;  (c) the Company is
           duly  qualified  to do  business  in the State of Texas and any other
           states in which it is doing business, and is in good standing in such
           states; (d) there is no provision of the Articles of Incorporation or
           Bylaws of the Company limiting the power of the Board of Directors to
           pass the Resolutions set out above,  and that such Resolutions are in
           conformity with the provisions of said Articles of Incorporation  and
           Bylaws.

             (The balance of this page is intentionally left blank.)

CERTIFICATE OF RESOLUTIONS, Page 3
<PAGE>
     IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company
this 27th day of July 1999.

                                        /s/ Rick Morgan
                                        ------------------------------------
                                        Rick Morgan, Assistant Secretary

(Corporate Seal)

STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLIN    ss.

     SWORN TO AND  SUBSCRIBED  BEFORE ME, this 26 day of July,  1999, to certify
which witness my hand and seal of office.

                                        /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public in and for
                                        __________ County, ___________

My Commission Expires:

----------------------                  ------------------------------------
                                        (Printed Name of Notary)

CERTIFICATE OF RESOLUTIONS, Page 4
<PAGE>
                           CERTIFICATE OF RESOLUTIONS
                                       OF
                               MTH-TEXAS LP, INC.

     I, Rick  Morgan,  Assistant  Secretary of  MTH-TEXAS  LP, INC.,  an Arizona
corporation (the "Company"), do hereby certify as follows:

     (i)   that I am the duly elected and qualified  Assistant  Secretary of the
           Company and the custodian of the Company's records;

     (ii)  that a meeting  of the Board of  Directors  of the  Company  was duly
           called and held on July 27, 1999, and at such meeting a quorum of the
           Directors was present d acting throughout;

     (iii) that set forth  below is a true and  correct  restatement  of certain
           resolutions  adopted by he  Directors  of the Company at such meeting
           held on July 27, 1999;

     RESOLVED, that the President or any Vice President of the Company be and is
hereby  authorized  and  directed to do any and all things  deemed  necessary or
advisable and in the best interest of the Company,  at his sole  discretion,  in
connection  with the  obtainment  by  LEGACY/MONTEREY  HOMES,  L.P.,  an Arizona
limited   partnership   (the   "Partnership")   of  a  loan  in  the  amount  of
$80,000,000.00  (the "Loan"),  to be obtained from GUARANTY FEDERAL BANK, F.S.B.
("Lender")  for the  purpose of the  Partnership  acquiring,  developing  and/or
constructing   various  residential   subdivisions   (herein   collectively  and
singularly called the "Proiect"), to be located in certain counties in Texas; to
execute and deliver appropriate loan instruments in the name of and on behalf of
the Company,  and all documents,  certificates and agreements in this connection
required by Lender including, without limitation, guaranties which guarantee the
Loan, the Loan being reasonably expected to benefit, directly or indirectly, the
Company;

     FURTHER  RESOLVED,  that the seal of the Company and the attestation of the
signature  of the  President  or any  Vice  President  by  the  Secretary  or an
Assistant  Secretary  of the Company will not be  necessary,  but if the seal or
such  attestation  is required by any party in connection  with the  transaction
contemplated by these  resolutions,  the Secretary or an Assistant  Secretary of
the Company is hereby  authorized  to attest,  for and on behalf of the Company,
the  signature  of the  President  or any Vice  President  upon any  instrument,
document or other writing  executed on behalf of the Company by the President or
any Vice President thereof and to affix the seal of the Company thereto;

     FURTHER  RESOLVED,  that the  officers of the Company are hereby  severally
authorized  to (a) sign,  execute,  certify to,  verify,  acknowledge,  deliver,
accept, file and record any and all instruments and documents,  and (b) take, or
cause to be taken, any and all such action in the name

CERTIFICATE OF RESOLUTIONS, Page 1
<PAGE>
and on behalf of the Company or otherwise,  as in any such officer's judgment is
necessary,  desirable or  appropriate  in order to consummate  the  transactions
contemplated   by  or  otherwise  to  effect  the  purposes  of  the   foregoing
resolutions;

     FURTHER RESOLVED, that all actions heretofore taken by the incorporators or
the  directors  or the  officers  of the  Company,  and all things done by their
authority,  with respect to the  organization  of the Company and in  connection
with the  acquisition  of lands for and the  financing and  construction  of the
Project as aforesaid, be and the same are hereby ratified,  approved and adopted
as the acts of the Company;

     FURTHER  RESOLVED,  that said  officers  are  authorized  and  empowered to
perform  all acts  and  execute  and  deliver  all  instruments,  documents  and
agreements required by Lender to carry out the purposes of this resolution.

     (i)   that none of the  resolutions  set  forth  above  have been  amended,
           modified,  revoked or rescinded;  and each such resolution is in full
           force and effect on the date hereof; and

     (ii)  that  the  following  are the duly  elected,  qualified  and  serving
           officers  of the  Company,  that  their  addresses  are as  stated in
           connection  with each,  and that the  signature  set out opposite the
           name of each officer is the genuine signature of such person, to wit:

NAME AND ADDRESS              SIGNATURE
----------------              ---------

President

/s/ John R. Landon
------------------------------------

Vice President:

/s/ RICK MORGAN
------------------------------------

Secretary:

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

CERTIFICATE OF RESOLUTIONS, Page 2
<PAGE>
Assistant Secretary:

/s/ Rick Morgan
------------------------------------

     (iii) that (a) all  franchise  and other taxes  required  to  maintain  the
           Company's  corporate  existence  have  been paid when due and that no
           such taxes are  delinquent;  (b) no  proceedings  are pending for the
           forfeiture  of the  Company's  Certificate  of  Incorporation  or the
           Company's dissolution,  voluntary or involuntary;  (c) the Company is
           duly  qualified  to do  business  in the State of Texas and any other
           states in which it is doing business, and is in good standing in such
           states; (d) there is no provision of the Articles of Incorporation or
           Bylaws of the Company limiting the power of the Board of Directors to
           pass the Resolutions set out above,  and that such Resolutions are in
           conformity with the provisions of said Articles of Incorporation  and
           Bylaws.

             (The balance of this page is intentionally left blank.)

CERTIFICATE OF RESOLUTIONS, Page 3
<PAGE>
     IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company
this 27th day of July 1999.

                                        /s/ Rick Morgan
                                        ------------------------------------
                                        Rick Morgan, Assistant Secretary

(Corporate Seal)

STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLIN    ss.

     SWORN TO AND SUBSCRIBED  BEFORE ME, this 26th day of July, 1999, to certify
which witness my hand and seal of office.

                                        /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public in and for
                                        Collin County, Texas

My Commission Expires:

8-28-99
----------------------                  ------------------------------------
                                        (Printed Name of Notary)

CERTIFICATE OF RESOLUTIONS, Page 4
<PAGE>
                           CERTIFICATE OF RESOLUTIONS
                                       OF
                               MTH-TEXAS GP, INC.

     I, Rick  Morgan,  Assistant  Secretary of  MTH-TEXAS  GP, INC.,  an Arizona
corporation (the "Company"), do hereby certify as follows:

     (i)   that I am the duly elected and qualified  Assistant  Secretary of the
           Company and the custodian of the Company's records;

     (ii)  that a meeting  of the Board of  Directors  of the  Company  was duly
           called and held on July 27, 1999, and at such meeting a quorum of the
           Directors was present and acting throughout;

     (iii) that set forth  below is a true and  correct  restatement  of certain
           resolutions  adopted by the  Directors of the Company at such meeting
           held on July 27, 1999;

     RESOLVED, that the President or any Vice President of the Company be and is
hereby  authorized  and  directed to do any and all things  deemed  necessary or
advisable and in the best interest of the Company,  at his sole  discretion,  in
connection  with (a) the  formation of  LEGACY/MONTEREY  HOMES L.P.,  an Arizona
limited partnership (the "Partnership"); (b) the acquisition by the Company of a
general partnership  interest in the Partnership;  and (c) the obtainment by the
Partnership  of a loan in the  amount  of  $80,000,000.00  (the  "Loan"),  to be
obtained from GUARANTY  FEDERAL BANK,  F.S.B.  ("Lender") for the purpose of the
Partnership acquiring, developing and/or constructing various single family lots
and\or residential  subdivisions  (herein collectively and singularly called the
"Project"),  to be located in certain  counties in Texas; to execute and deliver
appropriate  loan  instruments in the name of end on behalf of the Company,  and
all documents, certificates and agreements in this connection required by Lender
including,  without  limitation,  guaranties  which guarantee the Loan, the Loan
being reasonably expected to benefit, directly or indirectly, the Company;

     FURTHER  RESOLVED,  that the seal of the Company and the attestation of the
signature  of the  President  or any  Vice  President  by  the  Secretary  or an
Assistant  Secretary  of the Company will not be  necessary,  but if the seal or
such  attestation  is required by any party in connection  with the  transaction
contemplated by these  resolutions,  the Secretary or an Assistant  Secretary of
the Company is hereby  authorized  to attest,  for and on behalf of the Company,
the  signature  of the  President  or any Vice  President  upon any  instrument,
document or other writing  executed on behalf of the Company by the President or
any Vice President thereof and to affix the seal of the Company thereto;

     FURTHER  RESOLVED,  that the  officers of the Company are hereby  severally
authorized  to (a) sign,  execute,  certify to,  verify,  acknowledge,  deliver,
accept, file and record any and all instruments and documents,  and (b) take, or
cause to be  taken,  any and all such  action  in the name and on  behalf of the

CERTIFICATE OF RESOLUTIONS, Page 1
<PAGE>
Company or otherwise, as in any such officer's judgment is necessary,  desirable
or  appropriate  in order to  consummate  the  transactions  contemplated  by or
otherwise to effect the purposes of the foregoing resolutions;

     FURTHER RESOLVED, that all actions heretofore taken by the incorporators or
the  directors  or the  officers  of the  Company,  and all things done by their
authority,  with respect to the  organization  of the Company and in  connection
with the  acquisition  of lands for and the  financing and  construction  of the
Project as aforesaid, be and the same are hereby ratified,  approved and adopted
as the acts of the Company;

     FURTHER  RESOLVED,  that said  officers  are  authorized  and  empowered to
perform  all acts  and  execute  and  deliver  all  instruments,  documents  and
agreements required by Lender to carry out the purposes of this resolution.

     (i)   that none of the  resolutions  set  forth  above  have been  amended,
           modified,  revoked or rescinded;  and each such resolution is in full
           force and effect on the date hereof; and

     (ii)  that  the  following  are the duly  elected,  qualified  and  serving
           officers  of the  Company,  that  their  addresses  are as  stated in
           connection  with each,  and that the  signature  set out opposite the
           name of each officer is the genuine signature of such person, to wit:

NAME AND ADDRESS              SIGNATURE
----------------              ---------

President

/s/ John R. Landon
------------------------------------

Vice President:

/s/ Rick Morgan
------------------------------------

Secretary:

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

CERTIFICATE OF RESOLUTIONS, Page 2
<PAGE>
Assistant Secretary:

/s/ Rick Morgan
------------------------------------

     (iii) that (a) all  franchise  and other taxes  required  to  maintain  the
           Company's  corporate  existence  have  been paid when due and that no
           such taxes are  delinquent;  (b) no  proceedings  are pending for the
           forfeiture  of the  Company's  Certificate  of  Incorporation  or the
           Company's dissolution,  voluntary or involuntary;  (c) the Company is
           duly  qualified  to do  business  in the State of Texas and any other
           states in which it is doing business, and is in good standing in such
           states; (d) there is no provision of the Articles of Incorporation or
           Bylaws of the Company limiting the power of the Board of Directors to
           pass the Resolutions set out above,  and that such Resolutions are in
           conformity with the provisions of said Articles of Incorporation  and
           Bylaws.

     IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company
this 27th day of July, 1999.

                                        /s/ Rick Morgan
                                        ------------------------------------
                                        Rick Morgan, Assistant Secretary

(Corporate Seal)

STATE OF TEXAS      ss.
                    ss.
COUNTY OF COLLINS   ss.

     SWORN TO AND  SUBSCRIBED  BEFORE ME, this 26 day of July,  1999, to certify
which witness my hand and seal of office.

                                        /s/ Ana Patterson
                                        ------------------------------------
                                        Notary Public in and for
                                        _________ County, __________

My Commission Expires:

----------------------                  ------------------------------------
                                        (Printed Name of Notary)

CERTIFICATE OF RESOLUTIONS, Page 3
<PAGE>
                               CONSENT OF PARTNERS

     The   undersigned,   being  all  the  general   and  limited   partners  of
MONTEREY/LEGACY  HOMES L.P., an Arizona limited partnership (the "Partnership"),
to induce GUARANTY FEDERAL BANK,  F.S.B., a federal savings bank ("Lender"),  to
make a loan or loans to the Partner  ship in the  original  principal  amount of
$80,000,000.00  (the "Loan"), do hereby,  jointly and severally,  certify to and
agree with Lender as follows:

          (i) That the  undersigned  constitute  all of the  general and limited
     partners of the Partnership;

          (ii)  That  the  undersigned  are the  custodians  of the  Partnership
     records  and have full and  complete  knowledge  of the  matters  set forth
     herein;

          (iii)  That the  Partnership  is  evidenced  and  constituted  by that
     certain Limited Partnership Agreement, dated as of June - 1997, a photocopy
     of which is  attached  hereto as  Exhibit  A, and that such  document  (the
     "Partnership  Agreement") is the only document constituting the Partnership
     Agreement;

          (iv) That the President,  Vice President or CFO of MTH-TEXAS GP, INC.,
     an Arizona  cdrporation is authorized and directed to do any and all things
     deemed  necessary or advisable and in the best interest of the Partnership,
     in his sole discretion, in connection with the Loan, to execute and deliver
     in the name of the  Partnership  instruments  of mortgage and deed of trust
     and all instruments, documents, certificates and

          agreements  required by Lender in connection  with the Loan; and to do
     and perform all acts and things that may be deemed necessary or proper,  in
     the sole  discretion of the  President,  Vice President or CFO of MTH-TEXAS
     GP,  INC.,  an  Arizona   corporation,   regarding  the   negotiation   and
     consummation of the Loan;

          (v) That the  provisions of the  Partnership  Agreement  have not been
     amended, modified or rescinded; the Partnership has been neither terminated
     nor dissolved;  both the Partnership  and the Partnership  Agreement are in
     full force and effect and in existence  on the date hereof;  there exist no
     restrictions  or  limitations  on the  authority  of any one or more of the
     undersigned  partners  of  the  Partnership  to  consummate  the  financing
     contemplated by this Consent; and that such financing will be in conformity
     with the terms,  provisions and requirements of the Partnership  Agreement;
     and

          (vi) Further, to induce Lender to extend the financing contemplated by
     this  Consent,  the  undersigned  agree  that  in  the  event  any  dispute
     whatsoever  arises  among any or all of the  undersigned,  the  undersigned
     jointly  and  severally   will   indemnify   Lender  and  any   corporation
     controlling,  controlled  by or under  common  control  with Lender and any
     officer,  director or employee of Lender of any such corporation,  and will
     hold Lender and such corporation and any such officer, director or employee
     harmless  from and against  all  expenses,  including  (but not limited to)
     legal  fees,   damages  and  other   liabilities  of  any  type  whatsoever
<PAGE>
     (including,  but not limited to, any liabilities  arising out of demands by
     any of the undersigned for undisbursed  loan funds) suffered or incurred as
     a result of or in connection with any such dispute. The foregoing indemnity
     agreement  shall be governed by and construed  according to the laws of the
     State of Texas  unless any such  indemnity  obligation  shall be invalid or
     unenforceable  under such laws, in which event the laws of that state whose
     laws can apply to and validate the obligation hereunder shall apply.

          (vii)  This   Consent  may  be  executed  in  a  number  of  identical
     counterparts, each of which for all purposes is deemed an original, and all
     of which constitute  collectively one (1) Consent;  but, in making proof of
     this Consent, it shall not be necessary to produce or account for more than
     one (1) such counterpart.

     IN WITNESS  WHEREOF,  the undersigned  general and limited  partners of the
Partnership executed this Consent as of the 27th day of July, 1999.

                                        GENERAL PARTNER:

                                        MTH-TEXAS GP, INC.,
                                        an Arizona corporation

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President

                                        LIMITED PARTNER:

                                        MTH-TEXAS LP, INC.,
                                        an Arizona corporation

                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President
<PAGE>
                                    EXHIBIT A

         (A copy of the Partnership Agreement follows this cover page.)
<PAGE>
                        LIMITED PARTNERSHIP AGREEMENT OF
                           LEGACY/MONTEREY HOMES L.P.

     This  Agreement is  effective  as of June 13, 1997,  is entered into by and
among MTH-TEXAS GP, Inc., an Arizona  corporation,  as the General Partner,  and
MTH-TEXAS LP, Inc., an Arizona corporation as the Limited Partner.

     In consideration of the mutual covenants hereinafter set forth, the parties
hereto hereby agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

     1.1 As used in this Agreement,  the following terms shall have the meanings
set forth below:

          "ACQUISITION AGREEMENT" means as defined in Section 2.3.

          "ACT" means Chapter 3 of Title 29 of the Arizona Revised Statutes,  as
          amended.

          "ADJUSTED  CAPITAL ACCOUNT BALANCE" means as defined in Section A.1 of
          Appendix A.

          "AGREEMENT"   means  this   Agreement   of  Limited   Partnership   of
          Legacy/Monterey   Homes  L.P.,  as  amended  from  time  to  time,  if
          applicable.

          "AVAILABLE CASH FLOW" means, for any period,  the Partnership's  gross
          cash  receipts  derived  from any  source  whatsoever  (excluding  the
          receipts  associated  with  a  sale  or  other  disposition  of all or
          substantially  all of  the  Partnership's  assets)  less  the  portion
          thereof  used  to  pay  or  establish   reasonable  reserves  for  all
          Partnership  expenses,  debt,  payments,  asset acquisitions,  capital
          improvements,  expansions, repairs, replacements,  contingencies,  and
          any  other  proper  cash  expenditure  of  the  Partnership,   whether
          contingent or absolute, as determined from time to tune by the General
          Partner.

          "CAPIAL ACCOUNT" means as defined in Section A. I of Appendix A.

          "CAPITAL  CONTRIBUTIONS" means the contributions  required pursuant to
          Section 3.1.
<PAGE>
          "CODE" means the Internal  Revenue Code of 1986,  as amended from time
          to time (or any corresponding provisions of succeeding law).

          "FISCAL YEAR" means the  Partnership's  fiscal year,  which shall be a
          calendar year except as otherwise required by law.

          "GENERAL PARTNER" means MTH-TEXAS GP, Inc., an Arizona corporation, or
          any other Person that becomes a General Partner in accordance with the
          terms of this Agreement, until such time as such Person ceases to be a
          General Partner pursuant to the terms of this Agreement.

          "LIMITED PARTNER" means MTH-TEXAS LP, Inc., an Arizona corporation.

          "LOSSES" means as defined in Section A.1 of Appendix A.

          "PARTNER"  means  any  Person  who is a  General  Partner  or  Limited
          Partner.

          "PARTNERSHIP" means Legacy/Monterey Homes L.P.

          "PERCENTAGE  INTERESTS" means the percentage interests of the Partners
          from time to time and shall be determined with respect to a particular
          Partner at any  particular  time by dividing the number of Units owned
          by such Partner by the aggregate number of outstanding Units.

          "PERSON"  means  any  individual,  trust,  partnership,   corporation,
          association, or other legal entity.

          "REGULATIONS"  means the regulations issued by the Treasury Department
          under the Code.

          "TRANSFER"  means when used as a noun,  any  voluntary or  involuntary
          sale,  assignment,  gift, transfer, or other disposition and when used
          as a  verb,  voluntarily  or  involuntarily  to  sell,  assign,  gift,
          transfer, or otherwise dispose of.

          "UNIT"  means an interest in the capital,  Profits,  and Losses of the
          Partnership  originally issued to the Partners in exchange for Capital
          Contributions.

          "WITHDRAWAL  EVENT" means,  with respect to the General  Partner,  the
          occurrence of any of those events and circumstances  listed in Section
          29-323  of  the  Act,  including,   without  limitation,  the  General
          Partner's withdrawal from the Partnership, dissolution, or bankruptcy.

                                       -2-
<PAGE>
                                    ARTICLE 2
                          FORMATION, PURPOSES AND TERM

     2.1 FORMATION.  The parties hereto hereby form the Partnership as a limited
partnership  pursuant to the Act and in accordance  with the  provisions of this
Agreement.

     2.2 NAME AND OFFICE.  The name of the Partnership shall be  Legacy/Monterey
Homes L.P. The principal  office of the Partnership  (and the office required to
be  maintained  for keeping  Partnership  records  under  Arizona  law) shall be
located at 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona, 85250, or
such other place in the State of Arizona as the General Partner may from time to
time determine with written notice to the other Partners.

     2.3.  PURPOSES.  The  purposes of the  Partnership  shall be (a) to acquire
certain home building and related assets currently owned by Legacy Homes,  Ltd.,
a Texas limited partnership,  pursuant to the terms of that certain Agreement of
Purchase  and Sale of Assets  dated May 29, 1997,  by and among  Monterey  Homes
Corporation,  a Maryland  corporation,  Legacy Homes, Ltd., Legacy  Enterprises,
Inc., a Texas corporation,  and John Landon and Eleanor Landon (the "Acquisition
Agreement"),  (b) to own a home building  business in the State of Texas, (c) to
engage in such other businesses (related to the home building business specified
in clause (b) or otherwise) and purposes in such place or places, if any, as the
General  Partner shall  determine,  and (d) to engage in any and all  activities
necessary,  convenient,  or  incidental,  in the sole  discretion of the General
Partner, to accomplish any of the foregoing purposes.

     2.4 TERM.  The term of the  Partnership  shall  begin  upon the filing of a
certificate of limited  partnership  for the  Partnership in accordance with the
Act, and shall continue,  unless earlier dissolved in accordance with Article IX
until December 31, 2099.

     2.5 AGENT FOR  SERVICE OF  PROCESS.  The  initial  statutory  agent for the
Partnership and the address of such agent shall be CT Corporation  System,  3225
N. Central Ave.,  Phoenix,  Arizona  85012.  The General  Partner may change the
Partnership's statutory agent from time to time in accordance with Arizona law.

                                    ARTICLE 3
                              CAPITAL CONTRIBUTIONS

     3.1 CAPITAL  CONTRIBUTIONS  OF THE PARTNERS.  Not later than June 30, 1997,
the Limited  Partner shall  contribute to the capital of the  Partnership all of
the  assets  acquired  by the  Limited  Partner  pursuant  to the  terms  of the
Acquisition Agreement and the General Partner shall contribute to the capital of
the  Partnership  cash and/or in kind assets the aggregate  value of which shall
equal 1.01 % of the  aggregate  value of the assets  contributed  by the Limited
Partner  pursuant to the  preceding  provisions  of this  sentence.  In exchange
therefor,  the General  Partner shall be issued 10 Units and the Limited Partner
shall be issued 990 Units. Except as set forth in this Section 3.1, the Partners
shall  be  under no  obligation  to make  contributions  to the  capital  of the
Partnership.

                                       -3-
<PAGE>
     3.2 RETURN OF CAPITAL.  Except as otherwise provided in this Agreement,  no
Partner shall be entitled to the return of the Partner's  Capital  Contributions
to the Partnership.  Further,  it is expressly provided that the General Partner
shall have no personal liability for the repayment of the Capital  Contributions
made by any Partner,  it being agreed that any return of capital or Profits made
pursuant  to this  Agreement  shall  be  made  solely  from  the  assets  of the
Partnership.

                                    ARTICLE 4
                                   MANAGEMENT

     4.1 GENERAL PARTNER.  The General Partner shall have the sole and exclusive
right to manage the business of the  Partnership  and to accomplish the purposes
of the  Partnership  set  forth  in  Section  2.3  with  all  powers  necessary,
incidental,  or convenient to the exercise of such management rights,  including
all of the rights and powers that may be possessed by general partners under the
Act. The General Partner shall be authorized to delegate all or a portion of its
management authority to any Person.

     4.2 RELIANCE UPON ACTIONS BY GENERAL  PARTNER.  Any Person dealing with the
Partnership  may rely upon any action taken by the General  Partner on behalf of
the Partnership and, accordingly,  any and all contracts or instruments executed
by the General  Partner on behalf of the  Partnership  shall be binding upon the
Partnership.  All of the  Partners  agree that a copy of this  Agreement  may be
shown to the appropriate  parties in order to confirm the same. Without limiting
the generality of the foregoing,  any person  dealing with the  Partnership  may
rely upon a certificate or written  statement  signed by the General  Partner as
to:

          (a) The identity of the General Partner or any Limited Partner;

          (b) The existence or nonexistence of any fact or facts that constitute
a condition  precedent  to acts by the General  Partner or that are in any other
manner germane to the affairs of the Partnership;

          (c)  The  Persons  who are  authorized  to  execute  and  deliver  any
instrument or documents of the Partnership; or

          (d) Any act or failure to act by the  Partnership  on any other matter
whatsoever involving the Partnership, to the extent applicable.

     4.3 DEVOTION OF TIME TO PARTNERSHIP  ACTIVITIES.  The General Partner shall
devote so much of its time to  activities  on behalf of the  Partnership  as the
General  Partner  determines to be necessary for the business and affairs of the
Partnership.

                                       -4-
<PAGE>
     4.4 REIMBURSEMENT OF EXPENSES OF GENERAL PARTNER. The Partnership shall pay
or reimburse the General Partner (or any Person providing  services on behalf of
the General Partner) for all expenses reasonably incurred in connection with the
business and purposes of the Partnership.

                                    ARTICLE 5
                          PRE-LIQUIDATION DISTRIBUTIONS

     5.1 INTERIM DISTRIBUTIONS OF AVAILABLE CASH FLOW. The General Partner shall
have  the  sole  discretion  to  determine  the  time,  amount,  and  manner  of
distributions of Available Cash Flow to the Partners prior to the liquidation of
the Partnership;  provided,  however,  that any  distributions of Available Cash
Flow to the  Partners  shall be made pro rata to all  Partners  of record on the
date of distribution in accordance with the Partners' Percentage Interests.

     5.2   DISTRIBUTIONS  OF  CASH  FLOW  DURING   LIQUIDATION.   Following  the
dissolution of the  Partnership  and the  commencement  of the winding up of its
business  and  affairs,  the  Available  Cash Flow and  remaining  assets of the
Partnership shall be distributed in accordance with Section 9.2 hereof.

     5.3  AMOUNTS  WITHHELD.  All amounts  withheld  pursuant to the Code or any
provision of any state or local tax law with respect to any  distribution by the
Partnership  to the  Partners or any  allocation  of income  shall be treated as
amounts  distributed to the Partners pursuant to this Article V for all purposes
under this Agreement.

                                    ARTICLE 6
                        ALLOCATION OF PROFITS AND LOSSES

     6.1 PROFIT ALLOCATIONS. After making any special allocations required under
Appendix A,  Profits for each Fiscal Year (and each item of income,  gain,  loss
and deduction  entering into the  computation  thereof) shall be allocated among
the  Partners  (and  credited  to  their  respective  Capital  Accounts)  in the
following order and priority:

          (a)  First,  to the  General  Partner  until  the  cumulative  Profits
allocated pursuant to this Section 6.1(a) are equal to the cumulative Losses, if
any, previously  allocated to the General Partner pursuant to Section 6.2(c) for
all prior periods;

          (b) Second,  to the Partners  until the cumulative  Profits  allocated
pursuant to this  Section 6.1 (b) are equal to the  cumulative  Losses,  if any,
previously  allocated to the Partners  pursuant to Section  6.2(b) for all prior
periods in  proportion to the  Partners'  respective  shares of the Losses being
offset; and

          (c)  Third,  to the  Partners  in  accordance  with  their  Percentage
Interests.

                                       -5-
<PAGE>
     6.2 LOSS ALLOCATIONS.  After making any special allocations  required under
Appendix A, Losses for each Fiscal Year (and each item of income, gain, loss and
deduction  entering into the  computation  thereof) shall be allocated among the
Partners  (and charged to their  respective  Capital  Accounts) in the following
order and priority:

          (a) First,  to the extent that Profits have  previously been allocated
to the Partners for prior,  periods  pursuant to Section 6.1 (c) hereof,  Losses
shall be allocated to the Partners to offset such Profits in  proportion  to the
Partners' respective shares of the Profits being offset; provided, however, that
in no event shall any  allocation  pursuant  to this  Section  6.2(a)  create or
increase a Partner's deficit in such Partner's Capital Account.

          (b) Second, to the Partners in proportion to their respective  Capital
Account  balances until the Adjusted Capital Account balance of each Partner has
been reduced to zero; and

          (c) Third, the balance, if any, to the General Partner.

     6.3 TAX ALLOCATIONS.

          (a) Except as otherwise  provided in Section A.2(a) of Appendix A, for
income tax purposes,  all items of income,  gain, loss,  deduction and credit of
the  Partnership  for any tax period  shall be  allocated  among the Partners in
accordance with the allocations of Profit and Loss prescribed in this Article VI
and in Appendix A.

          (b) The  Partners  are aware of the  income  tax  consequences  of the
allocations trade by this Article VI and Appendix A and hereby agree to be bound
by  the  provisions  of  this  Article  VI and  Appendix  A in  reporting  their
distributive  shares of  Partnership  taxable  income  and loss for  income  tax
purposes.

     6.4 MODIFICATION IN ALLOCATIONS. The General Partner shall be authorized to
modify the method of  allocating  Profits and Losses to the Partner upon receipt
of advice from counsel that such change is required by applicable law.

                                    ARTICLE 7
                            RESTRICTIONS ON TRANSFERS
                            OF PARTNERSHIP INTERESTS

     7.1 GENERAL. No Partner shall be authorized to Transfer all or a portion of
such Person's Units. Any purported  Transfer of Units shall be null and void and
of no force and effect whatsoever.

     7.2 LEGENDS.  Each  Partner  agrees that the  restrictions  on Transfer set
forth in Section 7.1 may be placed upon any counterpart of this Agreement or any
other instrument or document evidencing ownership of Units.

                                       -6-
<PAGE>
                                    ARTICLE 8
                                BOOKS AND RECORDS
                                   TAX MATTERS

     8.1  BOOKS  AND  RECORDS.  The  General  Partner,  at  the  expense  of the
Partnership,  shall  maintain  the  records of the  Partnership  required  to be
maintained   pursuant  to  A.R.S.   29-305.   Any  Partner  or  its   designated
representative  shall have the right, at any reasonable  time, to have access to
and may inspect and copy the contents of such books o: records.

     8.2 TAX INFORMATION.  The General Partner shall instruct the  Partnership's
accountants to prepare and deliver all necessary tax returns and  information to
each Partner within a reasonable  period  following the end of each Fiscal Year.
The General Partner shall have sole authority  relating to matters pertaining to
the  preparation  of tax  returns  and the  administration  of the  tax  affairs
relating to the Partnership and, in connection therewith, shall be authorized:

          (a) To make any and all  elections  for  federal,  state and local tax
purposes,   including,   without  limitation,  any  election,  if  permitted  by
applicable  law, to adjust the basis of  Partnership  property  pursuant to Code
Sections 754, 734(b) and 743(b), or comparable provisions of state or local law,
in connection with the transfers or liquidations of Partnership interests;

          (b) To act as the "tax matters partner" of the Partnership (within the
meaning of Section 6231 of the Code) and in any similar capacity with respect to
the Partnership under state or local law;

          (c) To  extend  the  statute  of  limitations  for  assessment  of tax
deficiencies  against Partners with respect to adjustments to the  Partnership's
federal, state or local tax returns;

          (d) To  represent  the  Partnership  and the  Partners  before  taxing
authorities  or courts of competent  jurisdiction  in tax matters  affecting the
Partnership  and the Partners in their capacity as Partners,  and to execute any
agreements  or other  documents  relating  to or  affecting  such  tax  matters,
including  agreements or other  documents that bind the Partners with respect to
such tax matters.

                                    ARTICLE 9
                           DISSOLUTION AND WINDING UP

     9.1 DISSOLUTION.  The Partnership shall dissolve upon the first to occur of
any of the following events:

          (a) The unanimous written agreement of all of the Partners;

          (b) The expiration of the term set forth in Section 2.4;

                                       -7-
<PAGE>
          (c) The entry of a decree of  dissolution  under  Section  8.02 of the
Act;

          (d) The sale or other  disposition of all or substantially  all of the
assets of the Partnership; or

          (e) The failure of the Limited Partner,  within ninety (90) days after
a  Withdrawal  Event with  respect to the sole  remaining  General  Partner,  to
unanimously elect a new General Partner and to continue the Partnership  without
dissolution pursuant to Section 10.3.

     9.2 WINDING UP. Upon a dissolution of the Partnership,  the General Partner
(or, if there is no General Partner,  the Limited Partner or a Person designated
by the Limited Partner) shall take full account of the Partnership's liabilities
and assets,  and the Partnership's  assets shall be liquidated as promptly as is
consistent  with obtaining the fair value thereof.  The proceeds of liquidation,
to the extent  sufficient  therefor,  shall be applied  and  distributed  in the
following order:

          (a) First,  to the payment and  discharge of all of the  Partnership's
debts  and  liabilities  owed or owing to  creditors  other  than the  Partners,
including the establishment of any necessary reserves;

          (b) Second,  to the payment and discharge of all of the  Partnership's
debts and liabilities owed to the Partners;

          (c) Third, to the Partners in accordance with the positive  balance of
each  Partner's  Capital  Account as  determined  after  taking into account all
Capital Account adjustments for the Partnership's  taxable year during which the
liquidation  occurs.  Any such distributions to the Partners in respect of their
Capital  Accounts  shall  be  made  within  the  time  requirements  of  Section
1.704-1(b)(3)(ii)(b)(2) of the Regulations.

     9.3. COMPLIANCE WITH REGULATIONS.

          (a)  Distributions  required  by Section 9.2 may be  distributed  to a
trust  established  for  the  benefit  of  the  Partners  for  the  purposes  of
liquidating  Partnership  property,  collecting amounts owed to the Partnership,
and paying any  contingent  or  unforeseen  liabilities  or  obligations  of the
Partnership or of the General  Partner  arising out of or in connection with the
Partnership.  The assets of any such trust shall be  distributed to the Partners
from  time to  time,  in the  discretion  of the  General  Partner,  in the same
proportions  as the amount  distributed to such trust by the  Partnership  would
otherwise have been distributed to the Partners pursuant to this Agreement.

          (b) If any  General  Partner  whose  interest  in the  Partnership  is
liquidated    within   the    meaning    of    Treasury    Regulation    Section
1.704-1(b)(2)(ii)(g)  has a negative  balance in the General  Partner's  Capital
Account  after  such  liquidation,   such  General  Partner  shall  pay  to  the

                                       -8-
<PAGE>
Partnership an amount equal to such negative  Capital  Account  balance no later
than the end of the Partnership  taxable year in which such  liquidation  occurs
(or,  if later,  within  ninety  (90) days after the date of such  liquidation);
provided,  however,  that if such  Person  is and  remains  obligated  after the
liquidation  to contribute  additional  funds to the  Partnership  in the manner
described in  Regulation  Section  1.704-1(b)(2)(ii)(c),  such Partner  shall be
required to pay to the Partnership, within the time period set forth above, only
the amount,  if any, by which the Partner's  negative  Capital  Account  balance
exceeds the amount of funds the Partner is so  obligated to  contribute.  If any
Limited Partner has a negative  balance in such Partner's  Capital Account after
such  liquidation,  such Limited  Partner  shall have no  obligation to make any
contribution to the capital of the Partnership with respect to such deficit, and
such deficit  shall not be considered a debt owed to the  Partnership  or to any
other Person for any purpose whatsoever.

     9.4  CERTIFICATE OF  CANCELLATION.  When all of the remaining  property and
assets have been applied and  distributed  in  accordance  with Section 9.2, the
General Partner (or, if there is no General  Partner,  the Limited Partners or a
Person  designated by the Limited Partners) shall cause to be executed and filed
a certificate of cancellation in accordance with the Act.

     9.5 In Kind  Distributions.  A Partner  shall  have no right to demand  and
receive  any  distribution  from the  Partnership  in any form  other than cash.
However, a Partner may be compelled to accept a distribution of an asset in kind
if the Partnership is unable to dispose of all of its assets for cash.

                                   ARTICLE 10
                        EVENTS AFFECTING GENERAL PARTNER

     10.1  CESSATION.  A Person  shall  cease to be a General  Partner  upon the
occurrence  of a Withdrawal  Event  affecting  such Person.  Except as otherwise
provided  herein,  upon the  occurrence of any  Withdrawal  Event  affecting the
General  Partner,  such Person or its  transferee  shall  maintain  the right to
receive  distributions and allocations with respect to Units held by the General
Partner prior to the occurrence of the Withdrawal but shall not be authorized to
exercise any additional management rights.

     10.2 RIGHT OF REMAINING  GENERAL  PARTNER.  Following any Withdrawal  Event
affecting a General  Partner  under  Section  10.1 hereof,  a remaining  General
Partner  (if any) may  elect to  continue  the  Partnership's  business  without
dissolution in conformity with the provisions of this Agreement.

     10.3  ELECTION  OF NEW  GENERAL  PARTNER.  If no  General  Partner  remains
following a Withdrawal  Event  affecting a General  Partner  under  Section 10.1
hereof or the Act,  any Limited  Partner may  nominate  one or more  Persons for
election as General  Partner(s)  to continue the  Partnership  business  without
dissolution.  No Person so  nominated  shall  become a  General  Partner  unless
elected  by all of the  Limited  Partners  within  ninety  (90)  days  after the
Withdrawal Event affecting the sole General Partner.

                                       -9-
<PAGE>
                                   ARTICLE 11
                                  MISCELLANEOUS

     11.1 BINDING EFFECT.  Except as otherwise provided in this Agreement and by
applicable law, every  covenant,  term, and provision of this Agreement shall be
binding  upon and inure to the  benefit  of the  Partners  and their  respective
heirs, legatees, legal representatives, successors, transferees, and assigns.

     11.2  CREDITORS  AND OTHER THIRD  PARTIES.  None of the  provisions of this
Agreement  shall be for the benefit of or  enforceable  by any  creditors of the
Partnership or by other third parties.

     11.3  SECTION  AND OTHER  REFERENCES.  Except as  otherwise  provided,  any
reference herein to the term "Section,"  "Article," or "Appendix" shall refer to
the corresponding section, article, or appendix of this Agreement.

     11.4 HEADINGS.  Section and other headings  contained in this Agreement are
for reference purposes only and are not intended to describe, interpret, define,
or limit the  scope,  extent or  interest  of this  Agreement  or any  provision
hereof.

     11.5  SEVERABILITY.  Every  provision  of this  Agreement is intended to be
severable.  If any term or provision hereof is illegal or invalid for any reason
whatsoever,  such  illegality  or  invalidity  shall not affect the  validity or
legality of the remainder of this Agreement.

     11.6 ADDITIONAL  DOCUMENTS.  Each Partner,  upon the request of the General
Partner,  agrees to perform all further  acts and to execute,  acknowledge,  and
deliver  any  documents  that  may  be  reasonably  necessary,  appropriate,  or
desirable-to carry out the provisions of this Agreement.

     11.7  GOVERNING  LAW.  The  laws of the  State of Texas  shall  govern  the
validity  of  this  Agreement,   the   construction   of  its  terms,   and  the
interpretation of the rights and duties of the Partners.

     11.8  WAIVER OF ACTION  FOR  PARTITION.  Each of the  Partners  irrevocably
waives any right that it tray have to  maintain  any action for  partition  with
respect to any of the Partnership's assets and properties.

     11.9 SOLE AND ABSOLUTE  DISCRETION.  Except as  otherwise  provided in this
Agreement,  all actions that the General Partner may take and all determinations
that the General  Partner may make  pursuant to this  Agreement may be taken and
trade at the sole and absolute discretion of the General Partner.

                                      -10-
<PAGE>
     11.10  INVESTMENT  REPRESENTATIONS.  By execution of this Agreement  below,
each Limited Partner represents and covenants as follows:

          (a) The Partner has full legal right,  power,  and  authority to enter
into this  Agreement  and to  perform  the  obligations  under  this  Agreement,
including the obligation to make the Capital  Contributions set forth in Article
III;

          (b) The Agreement constitutes the legal, valid, and binding obligation
of  the  Partner  enforceable  in  accordance  with  its  terms,  except  as the
enforcement  thereof  may be  limited  by  bankruptcy  and other laws of general
application relating to creditors' rights or general principles of equity;

          (c) The Agreement does not violate,  conflict with, result in a breach
of the terms,  conditions or provisions  of, or constitute a default or an event
of default under any other agreement of which the Partner is a party; and

          (d) The  acquisition  of  Units  in the  Partnership  is made  for the
Partner's  own account for  investment  purposes only and not with a view to the
resale or distribution of such Units.

     11.11  NOTICES.  All notices under this  Agreement  shall be in writing and
shall  be  effective  upon  personal  delivery,  or,  if sent by  registered  or
certified mail, postage repaid,  addressed to the party at the address set forth
with respect to such party as reflected in the records of the  Partnership n the
deposit of such notice in the United States mail.

     11.12 COUNTERPART  EXECUTION.  This Agreement may be executed in any number
of  counterparts  with the same effect as if all of the  Partners had signed the
same document. All counterparts shall be construed together and shall constitute
one agreement.

                                      -11-
<PAGE>
                                   APPENDIX A

                                      -12-
<PAGE>
     IN WITNESS WHEREOF,  the parties have entered into this Agreement as of the
day first above set forth.

                                        MTH-TEXAS GP, Inc.,
                                        an Arizona corporation

                                        By: /s/ William W. Cleverly
                                            ------------------------------------
                                            Name: William W. Cleverly
                                            Its: Chairman and Co-Chief Executive
                                                 Officer

                                        and

                                        By: /s/ Steven J. Hilton
                                            ------------------------------------
                                            Name: Steven J. Hilton
                                            Its: President and Co-Chief
                                                 Executive Officer

                                        MTH-TEXAS LP, Inc.,
                                        an Arizona corporation

                                        By: /s/ William W. Cleverly
                                            ------------------------------------
                                            Name: William W. Cleverly
                                            Its: Chairman and Co-Chief Executive
                                                 Officer

                                        and

                                        By: /s/ Steven J. Hilton
                                            ------------------------------------
                                            Name: Steven J. Hilton
                                            Its: President and Co-Chief
                                                 Executive Officer

                                      -13-
<PAGE>
                                   Appendix A

                      SPECIAL TAX AND ACCOUNTING PROVISIONS

     A.1  ACCOUNTING   DEFINITIONS.   The  following   terms,   which  are  used
predominantly  in this  Appendix A, shall have the  meanings set forth below for
all purposes under this Agreement:

          "ADJUSTED CAPITAL ACCOUNT BALANCE" means, with respect to any Partner,
the  balance of such  Partner's  Capital  Account as of the end of the  relevant
Fiscal Year, after giving effect to the following adjustments:

          (a) Credit to such Capital  Account any amounts  which such Partner is
obligated to restore  pursuant to this  Agreement or as  determined  pursuant to
Regulations  Section  1.704-1(b)(2)(ii)(Q),  or is  deemed  to be  obligated  to
restore   pursuant  to  the  penultimate   sentences  of  Regulations   Sections
1.704-2(g)(1) and 1.704-2(i)(5); and

          (b) Debit to such Capital  Account the items described in clauses (4),
(5) and (6) of Section 1.704-1(b)(2)(ii)(d) of the Regulations.

The foregoing  definition  of Adjusted  Capital  Account  Balance is intended to
comply with the provisions of Section  1.704-1(b)(2)(ii)(d)  of the  Regulations
and shall be interpreted consistently therewith.

          "BOOK VALUE" means,  with respect to any asset,  the asset's  adjusted
basis for federal income tax purposes, except as follows:

          (a)  The  initial   Book  Value  for  any  asset  (other  than  money)
contributed by a Partner to the  Partnership  shall be the value as set forth in
this Agreement or, if not set forth in this Agreement,  as reasonably determined
by the General Partner;

          (b) The Book Value of all  Partnership  assets  shall be  adjusted  to
equal their respective gross fair market values, as reasonably determined by the
General  Partner as of the following  times:  (i) the  acquisition of additional
Units in the  Partnership  by any new or existing  Partner in exchange  for more
than a de minimis Capital Contribution; (ii) the distribution by the Partnership
to a  Partner  of  more  than  a de  minimis  amount  of  cash  or  property  as
consideration  for  Units  in  the  Partnership,  if (m  any  such  event)  such
adjustment  is  necessary  or  appropriate,  in the  reasonable  judgment of the
General Partner,  to reflect the relative economic  interests of the Partners in
the Partnership;  or (iii) the liquidation of the Partnership for federal income
tax purposes pursuant to Regulations Section 1.704-1(b)(2)(ii)(g);
<PAGE>
          (c) The Book Value of any Partnership asset distributed to any Partner
shall  be  adjusted  to  equal  its  gross  fair  market  value  on the  date of
distribution, as reasonably determined by the General Partner;

          (d) The Book Values of the Partnership's assets shall be increased (or
decreased)  to reflect  any  adjustments  to the  adjusted  basis of such assets
pursuant to Code Section 734(b) or Code Section  743(b),  but only to the extent
that such  adjustments  are taken into account in determining  Capital  Accounts
pursuant to Regulation Section  1.704-1(b)(2)(iv)(m)  and Section A.2(g) hereof;
provided,  however,  that Book  Values  shall not be  adjusted  pursuant to this
subsection  (d) to the extent that an adjustment  pursuant to subsection  (b) of
this  definition is necessary or  appropriate  in connection  with a transaction
that would  otherwise  result in an adjustment  pursuant to this subsection (d);
and

          (e) If the Book  Value of an asset  has been  determined  or  adjusted
pursuant to subsection (a), (b) or (d) above,  such Book Value shall  thereafter
be  adjusted  by the  Depreciation  taken  into  account  from time to time with
respect to such asset for purposes of computing Profits and Losses.

          "CAPITAL ACCOUNT" means, with respect to any Partner or other owner of
Units in the  Partnership,  the Capital  Account  maintained  for such Person in
accordance with the following provisions:

          (a) To each such Person's Capital Account, there shall be credited the
amount of cash  contributed  to the capital of the  Partnership  and the initial
Book Value of any noncash assets  contributed to the capital of the  Partnership
by such Person, such Person's distributive share of Profits and any items in the
nature of income or gain that are specially  allocated  pursuant to Sections A.2
and A.3 hereof,  and the amount of any Partnership  liabilities  assumed by such
person  (excluding  assumed  liabilities  that have been taken  into  account in
computing  the  Book  Value  of any  Partnership  property  distributed  to such
Person);

          (b) To each such Person's  Capital  Account there shall be debited the
amount of cash and the Book Value of any  Partnership  property  distributed  to
such  Person  pursuant  to  any  provision  of  this  Agreement,  such  person's
distributive  share of Losses, and any items in the nature of expenses or losses
that are specially  allocated  pursuant to Sections A.2 and A.3 hereof,  and the
amount of any liabilities of such Person assumed by the Partnership;

          (c) In the event  any  Units in the  Partnership  are  transferred  in
accordance with the terms of this.  Agreement,  the transferee  shall succeed to
the  Capital  Account  of  the  transferor  to  the  extent  it  relates  to the
transferred interest;

          (d)  Section  752(c) of the Code shall be applied in  determining  the
amount of any liabilities  taken into account for purposes of this definition of
"Capital Account"; and

                                       -2-
<PAGE>
          (e)  The  foregoing  provisions  and  the  other  provisions  of  this
Agreement relating to the maintenance of Capital Accounts are intended to COMPLY
with Sections 1.704-1(b) and 1.704-2 of the Regulations and shall be interpreted
and applied in a manner  consistent with such  Regulations.  The General Partner
may modify the manner of computing the Capital Accounts or any debits or credits
thereto (including debits or credits relating to liabilities that are secured by
contributed  or distributed  property or that are assumed by the  Partnership or
any Partner) in order to comply with such  Regulations,  provided  that any such
modification   is  not  likely  to  have  a  material   effect  on  the  amounts
distributable  to any Partner upon the dissolution of the  Partnership.  Without
limiting the  generality of the preceding  sentence,  the General  Partner shall
make any  adjustments  that are necessary or  appropriate  to maintain  equality
between  the  aggregate  sum of the Capital  Accounts  and the amount of capital
reflected  on the  balance  sheet of the  Partnership,  as  determined  for book
purposes in accordance with Section 1.704-1(b)(2)(iv)(g) of the Regulations. The
General Partner shall also make any appropriate  modifications  if unanticipated
events (for example, the availability of investment tax credits) might otherwise
cause this Agreement not to comply with Regulations Section 1.704-1(b).

          "PARTNERSHIP   MINIMUM   GAIN"  has  the  same  meaning  as  the  term
"partnership   minimum  gain"  under  Regulations   Section  1.704-2(d)  of  the
Regulations.

          "DEPRECIATION"  means, for each Fiscal Year or other period, an amount
equal  to the  depreciation,  amortization  or  other  cost  recovery  deduction
allowable with respect to an asset for such year or other period, except that if
the Book Value of an asset  differs from its adjusted  basis for federal  income
tax purposes at the beginning of such year or other period,  Depreciation  shall
be an amount  that  bears the same  ratio to such  beginning  Book  Value as the
federal income tax depreciation,  amortization or other cost recovery  deduction
for such  year or other  period  bears to such  beginning  adjusted  tax  basis;
provided,  however,  that if  such  depreciation,  amortization  or  other  cost
recovery  deductions  with  respect  to any such  asset for  federal  income tax
purposes is zero for any Fiscal  Year,  Depreciation  shall be  determined  with
reference  to the  asset's  BOOK Value at the  beginning  of such year using any
reasonable method selected by the General Partner.

          "PARTNER  NONRECOURSE  DEBT" has the same meaning as the term "partner
nonrecourse debt" under Section 1.704-2(b)(4) of the Regulations.

          "PARTNER  NONRECOURSE  DEBT MINIMUM  GAIN" has the same meaning as the
term "partner nonrecourse debt minimum gain" under Section  1.704-2(i)(2) of the
Regulations and shall be determined in accordance with Section  1.704-2(i)(3) of
the Regulations.

          "PARTNER  NONRECOURSE  DEDUCTIONS"  has the same  meaning  as the term
"partner nonrecourse  deductions" under Regulations Section  1.704-2(i)(1).  The
amount of Partner  Nonrecourse  Deductions with respect to a Partner Nonrecourse
Debt for each Fiscal Year of the  Partnership  equals the excess (if any) of the
net  increase  (if any) in the amount of Partner  Nonrecourse  Debt Minimum Gain
attributable to such Partner  Nonrecourse  Debt during such Fiscal Year over the
aggregate  amount  of  any  distributions during such Fiscal Year to the Partner

                                       -3-
<PAGE>
that bears the economic  risk of loss for such Partner  Nonrecourse  Debt to the
extent that such distributions are from the proceeds of such Partner Nonrecourse
Debt which are allocable to an increase in Partner Nonrecourse Debt Minimum Gain
attributable  to such Partner  Nonrecourse  Debt,  determined in accordance with
Section 1.704-2(i)(2) of the Regulations.

          "NONRECOURSE DEBT" or "NONRECOURSE  LIABILITY" has the same meaning as
the term "nonrecourse liability" under Section 1.704-2(b)(3) of the Regulations.

          "NONRECOURSE   DEDUCTIONS"  has  the  meaning  set  forth  in  Section
1.704-2(b)(1)  of the  Regulations.  The amount of Nonrecourse  Deductions for a
Partnership  Fiscal Year equals the excess (if any) of the net increase (if any)
in the amount of  Partnership  Minimum  Gain  during  that  Fiscal Year over the
aggregate amount of any  distributions  during that Fiscal Year of proceeds of a
Nonrecourse Debt that are allocable to an increase in Partnership  Minimum Gain,
determined according to the provisions of Section 1.704-2(c) of the Regulations.

          "PROFITS" or "LOSSES" means, for each Fiscal Year or other period, the
taxable  income or taxable  loss of the  Partnership  as  determined  under Code
Section  703(x)  (including in such taxable  income or taxable loss all items of
income,  gain, loss or deduction  required to be stated  separately  pursuant to
Section 703(a)(1) of the Code) with the following adjustments:

          (a) All items of gain or loss  resulting  from any  disposition of the
Partnership's  property shall be determined  upon the basis of the Book Value of
such property rather than the adjusted tax basis thereof;

          (b) Any income of the  Partnership  that is exempt from federal income
tax shall be added to such taxable income or loss;

          (c) Any  expenditures  of the  Partnership  that are described in Code
Section  705(a)(2)(B),  or  treated  as such  pursuant  to  Regulations  Section
1.704-1(b)(2)(iv)(j),  and that are not  otherwise  taken  into  account  in the
computation of taxable income or loss of the  Partnership,  shall be deducted in
the determination of Profits or Losses;

          (d) If the Book Value of any Partnership asset is adjusted pursuant to
subsection  (b) or (c) of the  definition  of "Book  Value"-  set  forth in this
Appendix A, the amount of such adjustment shall be taken into account as gain or
loss from the  disposition  of such asset for purposes of  computing  Profits or
Losses unless such gain or loss is specially  allocated  pursuant to Section A.2
hereof;

          (e) In lieu of the depreciation, amortization, and other cost recovery
deductions  taken into account in determining such taxable income or loss, there
shall be deducted  Depreciation,  computed in accordance  with the definition of
such term in this Appendix A; and

                                       -4-
<PAGE>
          (f)  Notwithstanding any of the foregoing  provisions,  any items that
are specially allocated pursuant to Section A.2 or A.3 hereof shall not be taken
into account in computing Profits or Losses.

     A.2  SPECIAL  ALLOCATIONS.  The  allocation  of Profits and Losses for each
Fiscal Year shall be subject to the following  special  allocations in the order
set forth below:

          (a) Section  704(c) In  accordance  with Code  Section  704(c) and the
Regulations  thereunder,  income,  gain,  loss and deduction with respect to any
in-kind property  contributed to the capital of the Partnership,  shall,  solely
for tax purposes,  be allocated  among the Partners so as to take account of any
variation  between the adjusted  basis of such property to the  Partnership  for
federal  income tax purposes  and its initial Book Value.  In the event the Book
Value of any  Partnership  asset is adjusted  pursuant to subsection  (b) of the
definition  of "Book  Value" in Section  A.1 of  Appendix  A to this  Agreement,
subsequent  allocations of income, gain, loss and deduction with respect to such
asset shall take account of any  variation  between the  adjusted  basis of such
asset for federal  income tax  purposes and its Book Value in the same manner as
under Code Section 704(c) and the Regulations thereunder. Any elections or other
decisions relating to such allocations shall be made by the General Partner.  in
any manner that reasonably reflects the purpose and intention of this Agreement.
Allocations  pursuant to this Section are solely for purposes of federal,  state
and local  taxes and shall not  affect,  or in any way be taken into  account in
computing,  any person's  Capital  Account or share of Profits,  Losses or other
items or distributions pursuant to any provision of this Agreement.

          (b) Partner  Minimum  Gain  Chargeback.  If there is a net decrease in
Partnership  Minimum Gain for any Fiscal Year,  each Partner  shall be specially
allocated  items of  income  and gain for such  year  (and,  if  necessary,  for
subsequent years) in an amount equal to such Partner's share of the net decrease
in  Partnership  Minimum Gain during such year,  determined in  accordance  with
Regulations  Section  1.704-2(g)(2).   Allocations  pursuant  to  the  preceding
sentence  shall be made  among the  Partners  in  proportion  to the  respective
amounts  required to be allocated to each of them  pursuant to such  Regulation.
The items to be so allocated shall be determined in accordance with  Regulations
Section 1.704-2(f)(6). Any special allocation of items of Partnership income and
gain pursuant to this Section  A.2(a) shall be made before any other  allocation
of items under this  Appendix A. This Section  A.2(a) is intended to comply with
the "minimum gain chargeback"  requirement in Regulations Section 1.704-2(f) and
shall be interpreted consistently therewith.

          (c) Partner  Nonrecourse Debt. Minimum Gain Chargeback.  If there is a
net decrease during a Fiscal Year in the Partner  Nonrecourse  Debt Minimum Gain
attributable  to a Partner  Nonrecourse  Debt, then each Partner with a share of
the Partner Nonrecourse Debt Minimum Gain attributable to such debt,  determined
in  accordance  with  Regulations  Section  1.704-2(i)(5),  shall  be  specially
allocated items of income and gain for such year (and, if necessary,  subsequent
years)  an  amount  equal to such  Partner's  share of the net  decrease  in the
Partner  Nonrecourse Debt Minimum Gain attributable to such Partner  Nonrecourse
Debt,   determined  in  accordance  with  Regulations   Section   1.704-2(i)(4).

                                       -5-
<PAGE>
Allocations  pursuant to the preceding sentence shall be made among the Partners
in proportion to the respective amounts to be allocated to each of them pursuant
to such Regulation.  Any special allocation of items of income and gain pursuant
to this  Section  A.2(b)  for a Fiscal  Year  shall  be made  before  any  other
allocation of  Partnership  items under this Appendix A, except only for special
allocations  required under Section A.2(a) hereof.  The items to be so allocated
shall be determined in accordance with Regulations Section  1.704-2(i)(4).  This
Section A.2(b) is intended to comply with the provisions of Regulations  Section
1.704-2(i)(4) and shall be interpreted consistently therewith.

          (d)  QUALIFIED  INCOME  OFFSET.  If any Partner other than the General
Partner receives any  adjustments,  allocations,  or distributions  described in
clauses (4), (5) or (6) of Regulations  Section  1.704-1(b)(2)(ii)(d),  items of
income and gain shall be  specially  allocated to each such Partner in an amount
and  manner  sufficient  to  eliminate  as quickly  as  possible,  to the extent
required by such  Regulation,  any deficit in such  Partner's  Adjusted  Capital
Account  Balance,  such  balance to be  determined  after all other  allocations
provided for under this Appendix A have been tentatively made as if this Section
A.2(d) were not in this Agreement.

          (e) GROSS INCOME  ALLOCATION.  In the event any Partner  other' than a
General  Partner  has a deficit  Capital  Account at the end of any Fiscal  Year
which is in  excess  of the sum of (i) the  amount  (if  any)  such  Partner  is
obligated to restore  pursuant to any provision of this Agreement,  and (ii) the
amount  such  Partner  is deemed to be  obligated  to  restore  pursuant  to the
penultimate  sentences  of  Sections  1.704-2(g)(1)  and  1.704-2(i)(5)  of  the
Regulations,  each such Partner shall be specially allocated items of income and
gain in the  amount of such  excess as  quickly as  possible,  provided  that an
allocation  pursuant  to this  Section  A.2(e)  shall be made only if and to the
extent that such Partner would have a deficit  Capital Account in excess of such
sum after all other  allocations  provided for in this Appendix A have been made
as if Section A.2(d) hereof and this Section A.2(e) were not in this Agreement.

          (t) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any Fiscal Year
or other period shall be specially  allocated to the Partners in  proportion  to
their Percentage Units.

          (g) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for
any Fiscal Year or other period shall be specially allocated, in accordance with
Regulations  Section  1.704-2(i)(1),  to the  Partner or  Partners  who bear the
economic risk of loss for the Partner  Nonrecourse Debt to which such deductions
are attributable.

          (h) CODE SECTION 754  ADJUSTMENTS.  To the extent an adjustment to the
adjusted tax basis of any.Partnership  asset under Code Section 734(b) or 743(b)
is required to be taken into account in determining Capital Accounts pursuant to
Regulations Section  1.704-1(b)(2)(iv)(m),  the amount of such adjustment to the
Capital  Accounts  shall  be  treated  as an  item of  gain  (if the  adjustment
increases  the basis of the  asset) or loss (if the  adjustment  decreases  such
basis), and such gain or loss shall be specially  allocated to the Partners in a
manner  consistent with the manner in which their Capital  Accounts are required
to be adjusted pursuant to such section of the Regulations.

                                       -6-
<PAGE>
     A.3 CURATIVE  ALLOCATIONS.  The  allocations  set forth in subsections  (b)
through (h) of Section A.2 hereof  ("Regulatory  Allocations")  are  intended to
comply with certain requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding  any  other  provisions  of this  Appendix  A  (other  than  the
Regulatory  Allocations  and the next two following  sentences),  the Regulatory
Allocations shall be taken into account in allocating other Profits,  Losses and
items of income,  gain,  loss and  deduction  among the Partners so that, to the
extent possible, the net amount of such allocations of other Profits, Losses and
other items and the Regulatory Allocations to each Partner shall be equal to the
net amount that would have been allocated to each such Partner if the Regulatory
Allocations had not occurred.  For purposes of applying the preceding  sentence,
Regulatory   Allocations  of  Nonrecourse  Deductions  and  Partner  Nonrecourse
Deductions shall be offset by subsequent allocations of items of income and gain
pursuant to this Section A.3 only if (and to the extent)  that:  (a) the General
Partner reasonably determines that such Regulatory Allocations are not likely to
be offset by  subsequent  allocations  under  Section  A.2(a) or Section  A.2(b)
hereof,  and (b) there has been a net decrease in  Partnership  Minimum Gain (in
the  case of  allocations  to  offset  prior  Nonrecourse  Deductions)  or a net
decrease in Partner  Nonrecourse  Debt  Minimum Gain  attributable  to a Partner
Nonrecourse Debt (in the case of allocations to offset prior Partner Nonrecourse
Deductions). The General Partner shall apply the provisions of this Section A.3,
and shall divide the allocations hereunder among the Partners, in such manner as
will minimize the economic  distortions  upon the  distributions to the Partners
that might otherwise result from the Regulatory Allocations.

     A.4 GENERAL ALLOCATION RULES.

          (a) Generally,  all Profits and Losses allocated to the Partners shall
be allocated among them in proportion to their Percentage  Interests,  except as
otherwise  specifically  provided under the terms of this Agreement In the event
Partners are admitted to the  Partnership  on different  dates during any Fiscal
Year,   additional  Units  are  issued  during  a  Fiscal  Year,  or  Units  are
re-allocated  during a Fiscal  Year,  the Profits (or Losses)  allocated  to the
Partners  for each such Fiscal  Year shall be  allocated  among the  Partners in
proportion to the Percentage Interests that each Partner holds from time to time
during  such  Fiscal  Year in  accordance  with  Code  Section  706,  using  any
convention permitted by law and selected by the General Partner.

          (b) For purposes of determining the Profits, Losses or any other items
allocable  to any  period,  Profits,  Losses and any such other  items  shall be
determined  on a daily,  monthly or other basis,  as  determined  by the General
Partner using any method  permissible under Code Section 706 and the Regulations
thereunder.

          (c) For purposes of determining the Partners'  proportionate shares of
the "excess  nonrecourse  liabilities" of the Partnership  within the meaning of
Regulations Section 1.752-3(a)(3), their respective interests in Partner profits
shall be in the same proportions as their Percentage Interests.

                                       -7-

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