Document:

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                                                                    EXHIBIT 10.7

                                LEASE GUARANTEE

     GUARANTEE, dated as of July 28, 2000 (this "Guarantee"), from CITADEL
HOLDING CORPORATION, a Nevada corporation (the "Guarantor"), in favor of SUTTON
HILL CAPITAL, L.L.C., a New York limited liability company (the "Lessor"), and
its successors and assigns.

     WHEREAS, the Guarantor wishes to induce the Lessor to enter into a certain
Lease (as defined below) with an Affiliate (as defined below) of the Guarantor;
and

     WHEREAS, the Lessor is unwilling to enter into the Lease unless the
Guarantor enters into this Guarantee;

     NOW, THEREFORE, in order to induce the Lessor to enter into the Lease, the
Guarantor hereby agrees as follows:

                                   SECTION 1

                                 DEFINED TERMS

                             RULES OF CONSTRUCTION

     1.1  Definitions.  As used in this Guarantee, capitalized terms defined in
          -----------
the preamble, Preliminary Statements and other Sections of this Guarantee shall
have the meanings set forth therein, terms defined in Exhibit A shall have the
meanings set forth therein, and capitalized terms used herein or in Exhibit A
but not otherwise defined herein or in Exhibit A shall, except as otherwise
provided in the Lease, have the meanings set forth in the Lease.

     1.2  Accounting Terms.  All accounting terms not specifically defined
          ----------------
herein shall be construed in accordance with generally accepted accounting
principles.

     1.3  Use of Certain Terms.  Unless the context of this Guarantee requires
          --------------------
otherwise, the plural includes the singular, the singular includes the plural,
and "including" has the inclusive meaning of "including without limitation."
The words "hereof," "herein," "hereby," "hereunder," and other similar terms of
this Guarantee refer to this Guarantee as a whole and not exclusively to any
particular provision of this Guarantee.  All pronouns and any variations thereof
shall be deemed to refer to masculine, feminine, or neuter, singular or plural,
as the identity of the Person or Persons may require.

     1.4  Headings and References.  Section and other headings are for reference
          -----------------------
only, and shall not affect the interpretation or meaning of any provision of
this Guarantee.  Unless otherwise provided, references to Articles, Sections,
Schedules, and Exhibits shall be deemed references to Articles, Sections,
Schedules, and Exhibits of this Guarantee.  References to this Guarantee and any
other Operative Document include this Guarantee and the other Operative
<PAGE>

Documents as the same may be modified, amended, restated or supplemented from
time to time pursuant to the provisions hereof or thereof.  A reference to any
Law shall mean that Law as it may be amended, modified or supplemented from time
to time, and any successor Law.  A reference to a Person includes the successors
and assigns of such Person, but such reference shall not increase, decrease or
otherwise modify in any way the provisions in this Guarantee governing the
assignment of rights and obligations under or the binding effect of any
provision of this Guarantee.

                                   SECTION 2

                                   GUARANTEE

     2.1  Guarantee.  Subject to the terms and conditions in this Guarantee, the
          ---------
Guarantor absolutely, unconditionally and irrevocably guarantees to the Lessor
and each Assignee that     (i) all Payment Obligations will be promptly paid in
full as and when due in accordance with the terms thereof, whether at the stated
due date, by acceleration or otherwise, and (ii) the Lessee will duly and
punctually perform, comply with, and observe all Covenant Obligations as and
when required in accordance with the terms thereof, in each case, without regard
to whether such Obligation is direct or indirect, absolute or contingent, now or
hereafter existing or owing, voluntary or involuntary, created or arising by
contract, operation of Law or otherwise, all to the same extent, except as
otherwise specifically provided herein, as if the Guarantor were the lessee
under the Lease; provided, however, that the foregoing limitation imposing on
the Guarantor obligations hereunder as if it were the lessee under the Lease
(except as herein set forth) shall not limit obligations of the Guarantor
hereunder to the extent the limitations (including termination, disavowal,
rejection or reduction) of any such obligation of the Lessee results from an
Insolvency or Liquidation Proceeding, and in such event the Guarantor shall be
liable in respect of obligations of the Lessee pursuant to the Lease as if no
such Insolvency or Liquidation Proceeding had been initiated.

     If an event permitting the exercise of remedies under the Lease shall at
any time have occurred and be continuing and such exercise, or any consequences
thereof provided in the Lease, shall at such time be prevented by reason of the
pendency of any Insolvency or Liquidation Proceeding, the Guarantor agrees that,
solely for purposes of this Guarantee and its obligations hereunder, the
Obligations and all other amounts payable under the Lease shall be deemed to
have been declared in default, with all attendant consequences as provided in
the Lease, as if such declaration of default and the consequences thereof had
been accomplished in accordance with the terms of the Lease, and the Guarantor
shall forthwith pay any amounts guaranteed hereunder, without further notice or
demand.

     2.2  Guarantee Absolute.  This Guarantee is an absolute, unlimited and
          ------------------
continuing guaranty of performance and payment (and not of collection) of the
Obligations.  This Guarantee is in no way conditioned upon any attempt to
collect from the Lessee or upon any other event or contingency, and shall be
binding upon and enforceable against the Guarantor without regard to
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the validity or enforceability of any Operative Document, or of any term thereof
or obligation thereunder.

     The obligations of the Guarantor set forth herein constitute full recourse
obligations of the Guarantor enforceable against it to the full extent of all
its assets and properties, notwithstanding any provision in the Lease limiting
the ability of any Person to look for payment or performance with respect
thereto.  Without limiting the foregoing, it is agreed and understood that
repeated and successive demands may be made and recoveries may be had hereunder
as and when, from time to time, the Lessee shall be in default with respect to
the Obligations under the terms of the Lease and that, notwithstanding the
recovery hereunder for or in respect of any given default with respect to the
Obligations by the Lessee under the Lease, this Guarantee shall remain in full
force and effect and shall apply to each and every subsequent default with
respect to the Obligations; but the foregoing shall not limit rights and
remedies under the Lease or the Obligations hereunder.

     2.3  Reinstatement.  In case any Operative Document or obligation
          -------------
thereunder shall be terminated as a result of the rejection thereof by any
trustee, receiver or liquidating agent of the Lessee or any of its properties in
any Insolvency or Liquidation Proceeding, the Guarantor's obligations hereunder
shall continue to the same extent as if such agreement had not been so rejected.
The Guarantor agrees that this Guarantee shall continue to be effective or be
reinstated, as the case may be, if at any time payment to the Lessor of the
Obligations or any part thereof is rescinded or must otherwise be returned by
the Lessor upon the Insolvency or Liquidation Proceeding, as though such payment
to the Lessor had not been made.

     2.4  Enforcement.  The Guarantor shall pay all costs, expenses and damages
          -----------
incurred (including reasonable attorneys' fees and disbursements) in connection
with the enforcement of the Obligations to the extent that such costs, expenses
and damages are not paid by the Lessee, and in connection with the enforcement
of the obligations of the Guarantor under this Guarantee.

     2.5  Guarantee Not Subject to Setoff, etc.  The obligations of the
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Guarantor hereunder shall be subject to the same counterclaims, setoffs,
deductions and defenses as would be available to the Guarantor if the Guarantor
were the lessee under the Lease.  The obligations of the Guarantor hereunder
shall not be subject to any counterclaims, setoffs, deductions or defenses
(other than payment, performance or affirmative discharge, release or
termination of this Guarantee by the Lessor and each Assignee whose interest is
then effective in writing) that the Guarantor may have against the Lessee or,
except as stated in the preceding sentence, any other Person, and shall remain
in full force and effect without regard to, and shall not be released,
discharged, reduced or in any way affected by any circumstance or condition
(whether or not the Guarantor shall have any knowledge or notice thereof)
whatsoever which might constitute a legal or equitable discharge or defense
(except as provided in Section 4.2(b)) including (a) the amending, modifying,
supplementing or terminating (by operation of law or
<PAGE>

otherwise), expressly or impliedly, of any Operative Document, or any other
instrument applicable to the Lessee or to its Obligations, or any part thereof;
(b) any failure on the part of the Lessee to perform or comply with any term of
any Operative Document or any failure of any other Person (other than the Lessor
and its Affiliates, to the extent such failure constitutes a defense to
performance by the lessee under the Lease of its obligations thereunder) to
perform or comply with any term of any Operative Document; (c) any waiver,
consent, change, extension, indulgence or other action or any action or inaction
under or in respect of any Operative Document or this Guarantee (except for any
written waiver or modification of the provisions of this Guarantee signed by the
parties hereto), whether or not the Lessor, the Lessee or the Guarantor has
notice or knowledge of any of the foregoing; (d) any Insolvency or Liquidation
Proceeding or any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to the
Guarantor or its properties, or any action taken by any trustee or receiver or
by any court in any such proceeding; (e) any furnishing or acceptance of
additional or substitute security or any release (whether for valuable
consideration or otherwise) of any security (and the Guarantor authorizes the
Lessor to furnish, accept or release said security); (f) any limitation on the
liability or Obligations of the Lessee under any Operative Document (except as
expressly set forth therein) or any termination (by operation of law or
otherwise), cancellation (by operation of law or otherwise), frustration or
unenforceability, in whole or in part, of any Operative Document, or any term
thereof or Obligation thereunder, except to the extent any such limitation,
termination, cancellation, frustration or unenforceability arises in favor of
the Lessee thereunder based on circumstances, conditions or events which would
have limited, terminated, cancelled, frustrated or rendered unenforceable the
obligations of the Guarantor if the Guarantor had been the lessee under the
Lease; (g) any lien, charge or encumbrance on or affecting the Guarantor's or
the Lessee's respective assets and properties; (h) any act, omission or breach
on the part of the Lessor or any Assignee under any Operative Document, or any
other agreement at any time existing between the Lessor and the Lessee or any
other Law or other agreement applicable to the Lessor or any Obligation, except
to the extent such act, omission or breach would have resulted in the limitation
or termination of any liability of the Guarantor if the Guarantor had been the
lessee under the Lease; (i) any claim as a result of any other dealings among
the Lessor, any Assignee, the Guarantor or any of them, except to the extent
such act, omission or breach would have resulted in the limitation or
termination of any liability of the Guarantor if the Guarantor had been the
lessee under the Lease; (j) the assignment or transfer of this Guarantee, any
Operative Document (in accordance with and subject to the terms thereof) or any
other agreement or instrument referred to in any Operative Document or
applicable to the Lessee or the Obligations by the Lessor to any other Person;
(k) any change in the name of the Lessor, any Assignee, the Lessee or any other
Person referred to herein; (l) any subleasing or further subleasing of the
Property or Equipment or any part thereof, or any redelivery, repossession,
sale, transfer or other disposition, surrender or destruction of the Property or
Equipment or any part thereof; (m) the transfer, assignment, mortgaging or
purported transfer, assignment or mortgaging of all or any part of the interest
of the Lessor, its successors or assigns, or the Lessee in the Property or
Equipment; (n) any failure of title with respect to the interest of the Lessee
in the Property or Equipment so long as such failure does not result from a
Landlord Act; (o) any defect in the
<PAGE>

compliance with specifications, condition, design, operation or fitness for use
of, or any damage to or loss or destruction of, or any interruption or cessation
in the use of the Property or Equipment or any portion thereof by the Lessee or
any other Person (excluding the Lessor) except to the extent provided in the
first sentence of this Section 2.5 for any reason whatsoever (including without
limitation any governmental prohibition or restriction, condemnation,
requisition, seizure or any other act on the part of any governmental or
military authority, or any act of God or of the public enemy), and regardless of
the duration thereof (even though such duration would otherwise constitute a
frustration of the Lease), whether or not without fault on the part of the
Lessee or any other Person; (p) any merger or consolidation of the Lessee or the
Guarantor into or with any other Person or any sale, lease or transfer of any
other assets of the Lessee or the Guarantor to any other Person, whether or not
permitted pursuant to the terms of the Operative Documents; (q) the availability
to the Lessor of claims against other parties with respect to the Obligations
(whether or not such parties are then solvent) or the release of any or all of
such claims (whether for valuable consideration or otherwise); or (r) any change
in the ownership of any shares of capital stock of or other evidences of equity
interests in the Guarantor or the Lessee (including any such change which
results in an Affiliate of the Guarantor no longer owning capital stock of, or
any such interests in, the Lessee), whether or not permitted pursuant to the
terms of the Operative Documents; provided, however, that, notwithstanding the
foregoing, this Guarantee shall not constitute a waiver or release by the Lessee
or the Guarantor of any claim of the Lessee or the Guarantor which may be
asserted against the Lessor or any other party in a separate action or
proceeding, or if required by applicable Law as a compulsory counterclaim in
such action.

     2.6  Waiver.  The Guarantor unconditionally waives: (a) notice of any of
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the matters referred to in Section 2.5 hereof; (b) all notices which may be
required by statute, rule of law or otherwise to preserve any rights against the
Guarantor hereunder, including notice of the acceptance of this Guarantee by the
Lessor or any Assignee, or the creation, renewal, extension, modification or
accrual of the Obligations or notice of any other matters relating thereto, any
presentment, demand, notice of dishonor, protest or nonpayment of any damages or
other amounts payable under any Operative Document; (c) any requirement for the
enforcement, assertion or exercise of any right, remedy, power or privilege
under or in respect of any Operative Document, including diligence in collection
or protection of or realization upon the Obligations or any part thereof or any
collateral therefor; (d) any requirement of diligence; (e) any requirement to
mitigate the damages resulting from a default under any Operative Document,
except that this shall not relieve the Lessor of any such obligation if and to
the extent required by the terms of the Operative Documents or required by Law;
(f) the occurrence of every other condition precedent to which the Guarantor or
the Lessee may otherwise be entitled, except as provided in any Operative
Document; and (g) the right to require the Lessor to proceed against the Lessee
or any other Person liable on the Obligations, to proceed against or exhaust
security held from the Lessee or any other Person, or to pursue any other remedy
in the Lessor's power whatsoever, and the Guarantor waives the right to have the
property of the Lessee first applied to the discharge of the Obligations.
<PAGE>

     The Lessor may, at its election, exercise any right or remedy it might have
against the Lessee or any security held by the Lessor, including the right to
foreclose upon any such security by judicial or nonjudicial sale, without
affecting or impairing in any way the liability of the Guarantor hereunder,
except to the extent the Obligations have been indefeasibly paid or satisfied,
and the Guarantor waives any defense arising out of the absence, impairment or
loss of any right of reimbursement, contribution or subrogation or any other
right or remedy of the Guarantor against the Lessee or any such security,
whether resulting from such election by the Lessor or otherwise.  Except to the
extent provided in the first sentence of Section 2.5 hereof, the Guarantor
waives any defense arising by reason of any disability or other defense of the
Lessee (which may nevertheless be asserted in a separate action or proceeding
against the Lessor or any other party), or by reason of the cessation of the
liability, either in whole or in part, of the Lessee to the Lessor for the
Obligations (other than as a result of payment, performance or affirmative
discharge, release or termination of this Guarantee by the Lessor and each
Assignee).

     The Guarantor assumes the responsibility for being and keeping informed of
the financial condition of the Lessee and of all other circumstances bearing
upon the risk of nonpayment of the Obligations and agrees that neither the
Lessor nor any Assignee shall have any duty to advise the Guarantor of
information regarding any condition or circumstance or any change in such
condition or circumstance.  The Guarantor acknowledges that the Lessor has not
made any representation to the Guarantor concerning the financial condition of
the Lessee.

                                   SECTION 3

                         REPRESENTATIONS & WARRANTIES

     The Guarantor represents and warrants to the Lessor that the following
statements are true and correct in all material respects:

     3.1  Corporate Existence; Compliance with Law.  The Guarantor (a) has been
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duly incorporated and is validly existing as a corporation in good standing
under the laws of the State of Nevada, and (b) has full power, authority and
legal right to own and operate its properties and to conduct its business as
presently conducted.

     3.2  Corporate Power; Authorization; Enforceable Obligations.  The
          ------------------------------------------- -----------
Guarantor has full power and authority to execute, deliver and perform its
obligations under this Guarantee and has taken all necessary corporate action to
authorize the execution, delivery and performance of this Guarantee.  No consent
of any other Person (including stockholders and creditors of the Guarantor), and
no authorization of, notice to, or other act by or in respect of the Guarantor
by or with any governmental authority, agency or instrumentality which has not
been given or obtained is required in connection with the execution, delivery,
performance, validity or enforceability of this Guarantee.  This Guarantee has
been duly executed and delivered by the Guarantor and constitutes a legal, valid
and binding obligation of the Guarantor, enforceable against the Guarantor in
accordance with its terms, except as the enforceability of this Guarantee may be
<PAGE>

limited by the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and by general
principles of equity.

     3.3  No Legal Bar.  Neither the execution, delivery or performance by the
          ------------
Guarantor of this Guarantee will violate any provision of any existing Law
applicable to the Guarantor or any order or decree applicable to the Guarantor
of any court, arbitrator or governmental authority, or of the articles of
incorporation or bylaws of the Guarantor or of any security issued by the
Guarantor of any mortgage, indenture, lease, contract or other agreement or
undertaking to which the Guarantor is a party or by which the Guarantor or any
of its properties or assets is bound, or will result in the creation or
imposition of any lien, charge, encumbrance or security interest on any of the
properties or assets of the Guarantor pursuant to the provisions of any of the
foregoing.

     3.4  Ownership of Lessee; Guarantor's Business.  All of the Lessee's common
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stock is owned beneficially and of record by the Guarantor or a Subsidiary.

                                   SECTION 4

                                 MISCELLANEOUS

     4.1  Payments.  Each payment by the Guarantor under this Guarantee shall be
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made in immediately available funds to or on the order of the Lessor, in each
case without setoff or counterclaim except as permitted herein; provided that no
such payment shall be deemed a waiver of any rights the Guarantor may have
against the Lessor or the Lessee.

     4.2  Parties.  (a)  This Guarantee shall inure to the benefit of the Lessor
          -------
and each Assignee and its and their respective successors, assigns or
transferees, and shall be binding upon the Guarantor and its successors and
assigns.  Except as provided in Section 4.2(b), the Guarantor may not delegate
any of its duties under this Guarantee without the prior written consent of the
Lessor.  Upon notice to the Guarantor, the Lessor and its successors, assigns
and transferees may assign its or their rights and benefits under this Guarantee
to (i) any financial institutions providing financing to the Lessor in
connection with the Property or Equipment or any trustee for such financial
institutions, and (ii) any purchaser or transferee of all or a substantial
portion of the rights and interests of the Lessor and its successors, assigns or
transferees in and to the Property and Equipment.

     (b)  If in connection with a Business Sale (i) either (A) the Lessee shall
assign to any Person the Lessee's obligations under the Lease or (B) the
Guarantor shall transfer the capital stock of the Lessee to any Person which is
not an Affiliate of the Guarantor (whether by transfer of the stock of the
Lessee or any Subsidiary of the Guarantor which owns such  stock, by merger of
the Lessee or any such Subsidiary of the Guarantor, or otherwise), and (ii) a
Suitable Replacement (which may be the successor lessee or any Affiliate
thereof) either assumes the Lessee's obligations under the Lease or executes and
delivers to the Lessor a Lease Guarantee substantially similar to this Guarantee
(subject to such modifications as may be reasonably
<PAGE>

acceptable to the Lessor), this Guarantee shall be terminated and the Guarantor
shall have no further liability hereunder with respect to Obligations thereafter
arising.

     4.3  Notices.  All notices, offers, acceptances, approvals, waivers,
          -------
requests, demands and other communications hereunder shall be in writing, shall
be addressed as provided below and shall be considered as properly given (a) if
delivered in person, (b) if sent by express courier service (including Federal
Express, Emery, DHL, Airborne Express, and other similar express delivery
services), (c) in the event overnight delivery services are not readily
available, if mailed through the United States Postal Service, postage prepaid,
registered or certified with return receipt requested, or (d) if sent by
telecopy and confirmed; provided, that in the case of a notice by telecopy, the
sender shall in addition confirm such notice by writing sent in the manner
specified in clauses (a), (b) or (c) of this Section 4.3.  All notices shall be
effective upon receipt by the addressee; provided, however, that if any notice
is tendered to an addressee and the delivery thereof is refused by such
addressee, such notice shall be effective upon such tender.  For the purposes of
notice, the addresses of the parties shall be as set forth below; provided,
however, that any party shall have the right to change its address for notice
hereunder to any other location by giving written notice to the other party in
the manner set forth herein.  The initial addresses of the parties hereto are as
follows:

          If to the Lessor:

               Sutton Hill Capital, L.L.C.
               120 North Robertson Blvd.
               Los Angeles, California  90048
               Attention:  Ira Levin

               Telecopier: (310) 855-8416

          If to the Guarantor:

               Citadel Holding Corporation
               550 South Hope Street
               Suite 1825
               Los Angeles, CA 90071
               Attention: President
               Telecopier: (213) 239-0548

     4.4  Remedies.  The Guarantor stipulates that the remedies at law in
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respect of any default or threatened default by the Guarantor in the performance
of or compliance with any of the terms of this Guarantee are not and will not be
adequate, and that any of such terms may be specifically enforced by a decree
for specific performance or by an injunction against violation of any such terms
or otherwise, in each case to the same extent as if the Guarantor were the
lessee under the Lease subject to the proviso in Section 2.l hereof.
<PAGE>

     4.5  Right to Deal with the Lessee.  At any time and from time to time,
          -----------------------------
without terminating, affecting or impairing the validity of this Guarantee or
the obligations of the Guarantor hereunder, the Lessor or any Assignee may deal
with the Lessee in the same manner and as fully and as if this Guarantee did not
exist and shall be entitled, among other things, to grant the Lessee, without
notice or demand and without affecting the Guarantor's liability hereunder, such
extension or extensions of time to perform, renew, compromise, accelerate or
otherwise change the time for payment of or otherwise change the terms of
payment or any part thereof contained in or arising under any Operative
Document, or to waive any Obligation of the Lessee to perform any act or acts as
the Lessor or any Assignee may deem advisable.

     4.6  Subrogation.  The Guarantor will not exercise any rights which it may
          -----------
acquire by way of subrogation hereunder, by any payment made hereunder or
otherwise, until all of the Obligations have been indefeasibly paid in full in
cash and performed in full.  If any amount shall be paid to the Guarantor on
account of such subrogation rights at any time when all of the Obligations shall
not have been paid in full in cash, such amount shall be held in trust for the
benefit of the Lessor and shall forthwith be paid as provided in Section 4.1
hereof to be credited and applied upon the Obligations, whether matured or
unmatured, in accordance with the terms of the Operative Documents.  If (a) the
Guarantor shall make payment to the Lessor or any successor, assignee or
transferee of the Lessor of all or any part of the Obligations and (b) all the
Obligations shall be indefeasibly paid in full in cash, the Lessor or any such
successor, assignee or transferee of the Lessor will, at the Guarantor's request
and expense, execute and deliver to the Guarantor appropriate documents, without
recourse as set forth in Section 30 of the Lease, and without representation or
warranty, necessary to evidence the transfer by subrogation to the Guarantor of
an interest in the Obligations resulting from such payment by the Guarantor.

     4.7  Survival of Representations, Warranties, etc.  All representations,
          --------------------------------------------
warranties, covenants and agreements made herein and in statements or
certificates delivered pursuant hereto shall survive any investigation or
inspection made by or on behalf of the Lessor or any Assignee and shall continue
in full force and effect until all of the obligations of the Guarantor under
this Guarantee shall be fully performed in accordance with the terms hereof,
including without limitation the payment and performance in full of all
Obligations.

     4.8  Governing Law.  THIS GUARANTEE HAS BEEN EXECUTED AND DELIVERED IN THE
          -------------
STATE OF NEW YORK.  THE GUARANTOR AND LESSOR AGREE THAT, TO THE MAXIMUM EXTENT
PERMITTED BY THE LAWS OF THE STATE OF NEW YORK, THIS GUARANTEE, AND THE RIGHTS
AND DUTIES OF THE GUARANTOR AND LESSOR HEREUNDER, SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING,
WITHOUT LIMITATION, SECTIONS 51401 AND 51402 OF THE NEW YORK GENERAL OBLIGATIONS
LAW) IN ALL RESPECTS, IN RESPECT OF ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
<PAGE>

     4.9  Consent to Jurisdiction.  THE GUARANTOR HEREBY IRREVOCABLY SUBMITS,
          ------------------------
FOR ITSELF AND ITS PROPERTIES, TO THE JURISDICTION OF THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE SUPREME COURT OF THE STATE
OF NEW YORK IN THE COUNTY OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT
AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS GUARANTEE, AND TO THE
EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR HEREBY WAIVES AND AGREES NOT
TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION
OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION
OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT
THIS GUARANTEE OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY SUCH
COURT.  THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE AND DOES NOT PRECLUDE
LESSOR OR ANY ASSIGNEE FROM OBTAINING JURISDICTION OVER THE GUARANTOR IN ANY
COURT OTHERWISE HAVING JURISDICTION.

     4.10 Waiver of Jury Trial.  TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE
          --------------------
GUARANTOR AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE
JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION
WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT.  THE
GUARANTOR AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR
REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS GUARANTEE OR ANY
METHOD AUTHORIZED BY THE LAWS OF NEW YORK.

     THE GUARANTOR AND LESSOR EXPRESSLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM RELATED TO THIS GUARANTEE. THE GUARANTOR AND
LESSOR ACKNOWLEDGE THAT THE PROVISIONS OF SECTIONS 4.8, 4.9 AND 4.10 HAVE BEEN
BARGAINED FOR AND THAT THEY HAVE BEEN REPRESENTED BY COUNSEL IN CONNECTION
THEREWITH.

     4.11 Severability.  If any term of this Guarantee or any application
          ------------
thereof shall be invalid or unenforceable, the remainder of this Guarantee and
any other application of such term shall not be affected thereby.  Any term of
this Guarantee may be amended, modified, waived, discharged or terminated only
by an instrument in writing signed by the Guarantor and Lessor.

     4.12 Counterparts.  This Guarantee may be executed in any number of
          ------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
<PAGE>

     4.13  No Merger.  There shall be no merger of this Guarantee and the Lease
           ---------
by reason of the fact that the same person, firm or entity is, directly or
indirectly, the Guarantor and a lessee under the Lease or acquires or holds the
leasehold estate created by the Lease or any part of such leasehold estate.

     4.14  No Waiver.  No delay on the part of the Lessor in exercising any
           ---------
power or right hereunder or under any Operative Document shall operate as a
waiver thereof; nor shall any single or partial exercise of any power or right
hereunder or the failure to exercise same in any instance preclude other or
further exercise thereof or the exercise of any other power or right; nor shall
the Lessor be liable for exercising or failing to exercise any such power or
right; the rights and remedies hereunder expressly specified are cumulative and
not exclusive of any rights or remedies which the Lessor may or will otherwise
have. The Guarantor hereby agrees and acknowledges that to the extent in any
instance claims under this Guarantee consist of claims for the payment of money
only, the Lessor, at its sole option, shall have the right to bring a motion or
proceeding under New York State Civil Practice Law and Rules Section 3213.

     4.15  Limitations.  In no event shall the Guarantor have any liability to
           -----------
the Lessor hereunder for any lost or prospective profits or any other special,
punitive, exemplary, consequential, incidental or indirect losses or damages (in
tort, contract or otherwise).  The parties further agree that no claim for
direct damages by a party hereunder shall include any amounts for which such
party has been reimbursed or is entitled to be reimbursed under any insurance
actually obtained under the Lease or acquired in connection therewith.

     IN WITNESS WHEREOF, the undersigned have caused this Guarantee to be
executed and delivered as of the day and year first above written.

                              CITADEL HOLDING CORPORATION
                              as Guarantor

                              By: /s/ Andrzej Matyczynski
                                  ------------------------------------
                                 Name: Andrzej Matyczynski
                                 Title:   Chief Financial Officer

Acknowledged and Agreed:

SUTTON HILL CAPITAL, L.L.C.

By: /s/ James Cotter
    ----------------
Name: James Cotter
Title: Operating Manager
<PAGE>

                                   EXHIBIT A

                                 DEFINED TERMS

     "Affiliate" of any Person means any other Person controlling, controlled by
or under direct or indirect common control with such Person.  For the purposes
of this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have the meanings
correlative to the foregoing.  Notwithstanding the foregoing:  (a) the Lessor
and its Affiliates (the "Lessor's Affiliates") shall not include the Guarantor
and its Subsidiaries; and (b) the Guarantor and its Subsidiaries (including the
Lessee), on the one hand, and the Lessor and the Lessor's Affiliates, on the
other hand, shall not be considered Affiliates of each other.

     "Covenant Obligations" means all obligations, covenants, and undertakings
of the Lessee contained in the Operative Documents, other than Payment
Obligations.

     "Indemnification Obligations" means any amount or amounts due to any
Indemnified Person from the Lessee pursuant to Section 11 of the Lease.

     "Insolvency or Liquidation Proceeding" means:

          (a)  The entry of a decree or order for relief in respect of the
     Lessee by a court having jurisdiction in the premises, or the appointment
     of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or
     other similar official) of the Lessee or of any substantial part of its
     property, or ordering the winding up or liquidation of its affairs, in an
     involuntary case under the Federal bankruptcy laws, as now or hereafter
     constituted, or any other applicable Federal or state bankruptcy,
     insolvency or other similar law; or the commencement against the Lessee of
     an involuntary case under the Federal bankruptcy laws, as now or hereafter
     constituted, or any other applicable Federal or state bankruptcy,
     insolvency or other similar law; or

          (b)  The commencement by the Lessee of a voluntary case under the
     Federal bankruptcy laws, as now or hereafter constituted, or any other
     applicable Federal or state bankruptcy, insolvency or other similar law, or
     the consent by it to the entry of an order for relief in an involuntary
     case under any such law or the consent by it to the appointment of or
     taking possession by a receiver, liquidator, assignee, custodian, trustee,
     sequestrator (or other similar official) of the Lessee or of any
     substantial part of its property, or the making by it of a general
     assignment for the benefit of creditors, or the taking of any action in
     furtherance of any of the foregoing.
<PAGE>

     "Law" shall mean any law (including, without limitation, any environmental
Law), treaty, statute, rule, regulation, ordinance, order, directive, code,
interpretation, judgment, decree, injunction, writ, determination, award,
permit, license, authorization, direction, requirement or decision of or
agreement with or by any governmental or governmental department, commission,
board, court, authority, agency, official or officer having jurisdiction of the
matter in question.

     "Lease" means the Lease Agreement dated as of July 28, 2000 between Sutton
Hill Capital, L.L.C., as Lessor, and Citadel Cinemas, Inc., as Lessee.

                         "Lessee" means Citadel Cinemas, Inc. in its capacity as
Lessee under the Lease, and its successors and assigns and including without
limitation the party holding the interest of the lessee under the Lease from
time to time.

     "Obligations" means Payment Obligations and Covenant Obligations,
individually and collectively.

     "Operative Documents" means the Lease and each agreement, certificate or
instrument delivered by the Lessee pursuant to the terms of the Lease.

     "Payment Obligations" means (a) all amounts of Basic Rent and Additional
Rent stated in the Lease to be payable by the Lessee and (b) all amounts of
Indemnification Obligations.

     "Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, limited liability company,
unincorporated association, joint venture or other entity, or a government or
any political subdivision or agency thereof.

     "Subsidiary" of any Person means any corporation, partnership, limited
liability company, joint venture, trust or estate of which (or in which) more
than 50% of:

                         (a) the outstanding capital stock having voting power
                    to elect a majority of the board of directors of such
                    corporation (irrespective of whether at the time capital
                    stock of any other class or classes of such corporation
                    shall or might have voting power upon the occurrence of any
                    contingency);

                         (b) the interest in the capital or profits of such
                    partnership or joint venture; or

                         (c) the beneficial interest of such trust or estate

is at the time directly or indirectly owned by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's Subsidiaries.<PAGE>

                                                                    EXHIBIT 10.8

                     AGREEMENT WITH RESPECT TO FEE OPTION

     Agreement ("Agreement"), made this 28/th/ day of July, 2000, by and between
                 ---------
Sutton Hill Capital, L.L.C., a New York limited liability company, having an
office at 120 North Robertson Boulevard, Los Angeles, California 90048 ("Option
                                                                         ------
Holder"), and Citadel Realty, Inc., a Nevada corporation, having an office at
------
550 South Hope Street, Suite 1825, Los Angeles, CA 90071 ("Optionee").
                                                           --------

                                   WHEREAS:

     (A)  Option Holder has entered into a certain Lease Agreement ("Lease
                                                                     -----
Agreement"), dated as of July 28, 2000, with Citadel Cinemas, Inc., as tenant
---------
(the "Tenant"), pursuant to which the Tenant has leased from the Option Holder
      ------
certain Theatre Properties, including the Sutton Theatre and Murray Hill
Theatre;

     (B)  Option Holder holds an option ("Fee Option"), a copy of which is
                                          ----------
attached hereto as Exhibit "B", to purchase the land described on Exhibit "A",
                   ----------                                     -----------
being the land underlying the Sutton Theatre and the Murray Hill Theatre (the
"Underlying Fees");
 ---------------

     (C)  Pursuant to the provisions of the Lease Agreement, the Tenant has a
Purchase Option to acquire the Purchased Assets;

     (D)  Option Holder has agreed that, if the Tenant exercises the Purchase
Option pursuant to the Lease Agreement and closes thereunder in accordance with
the terms thereof and if Optionee complies with the terms hereof, Optionee shall
have an option to purchase the Underlying Fees in connection with and at the
time of the closing of the Purchase Option pursuant to the Lease Agreement; and

     (E)  Certain capitalized terms are defined in Section 8 hereof.
                                                   ---------

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

     1.   Purchase Option; Fee Price. Subject to the satisfaction of the
          --------------------------
Conditions Precedent (as defined in Section 4 hereof), Optionee shall have the
                                    ---------
option ("Optionee Fee Option") to acquire the Underlying Fees by funding the
         -------------------
Purchase Price of the Fee Option.

     2.   Procedure for Exercise of Purchase Option. (a) To exercise the
          -----------------------------------------
Optionee Fee Option, Optionee shall give written notice ("Notice") to Option
                                                          ------
Holder by January 5, 2010 but no earlier than the date on which the Tenant gives
notice to the Option Holder pursuant to the Lease Agreement of the exercise by
Tenant of the Purchase Option thereunder.
<PAGE>

     (b)  Upon the receipt by Option Holder of the Notice, Option Holder shall
provide notice to the owner of the Underlying Fees of the exercise by Option
Holder of the Fee Option.

      3.  Closing. (a) The closing of the acquisition of the Underlying Fees
          -------
shall occur simultaneously with the closing on the Purchased Assets pursuant to
the Purchase Option (the "Closing"). At the Closing, Option Holder shall direct
                          -------
the transferor of the Underlying Fees to deliver title thereto directly to
Optionee; provided, however, at the election of Optionee, exercised by written
          --------  -------
notice to Option Holder given not less than 5 days prior to the anticipated date
of the Closing, Option Holder shall direct the transferor of the Underlying Fees
to deliver title to the Underlying Fees as the Optionee shall direct in such
notice.

     (b)  At the Closing, title to the Underlying Fees will be transferred in
accordance with the Fee Option.  The transfer of the Underlying Fees shall be on
an as-is, non-installment sale basis, without warranty by, or recourse to, the
Option Holder, except that such title shall be free of any Liens resulting from
the Option Holder's act or omission; provided, however, that nothing herein
                                     --------  -------
shall obligate the Option Holder to cause any such Lien to be removed or cured
if arising from a Tenant Event.

     (c)  The Optionee shall pay the Purchase Price of the Fee Option at the
Closing by wire transfer or certified funds, as the Option Holder shall
determine in its sole discretion by notice to Optionee no less than two days
prior to the anticipated date of the Closing.

     4.   Conditions Precedents to Optionee's Rights. (a) OPTIONEE RECOGNIZES,
          ------------------------------------------
ACKNOWLEDGES AND AGREES THAT, SUBJECT TO PARAGRAPH 4(b), IF THE FOLLOWING TWO
CONDITIONS ARE NOT STRICTLY ADHERED TO TIMELY (THE "CONDITIONS PRECEDENT"),
                                                    --------------------
OPTIONEE SHALL HAVE NO  RIGHT TO ACQUIRE THE UNDERLYING FEES:  IF THE TENANT
UNDER THE LEASE AGREEMENT:  (1) DOES NOT EXERCISE ITS PURCHASE OPTION THEREUNDER
OR DOES NOT HAVE THE RIGHT TO EXERCISE THE PURCHASE OPTION BY REASON OF THE
OCCURRENCE OF A DEFAULT UNDER SECTION 18(f) OF THE LEASE AGREEMENT OR (2)
EXERCISES ITS PURCHASE OPTION, AND IS NOT IN DEFAULT UNDER SECTION 18(f) OF THE
LEASE AGREEMENT BUT FAILS TO SATISFY ITS OBLIGATIONS TO CLOSE IN ACCORDANCE WITH
THE TERMS AND PROVISIONS OF THE LEASE AGREEMENT.

     (b)  If, at any time during the Term of the Lease Agreement an Affiliate of
the Optionee shall succeed to the interest of the Option Holder under the Lease
Agreement, then the Conditions Precedent shall be deemed of no further force and
effect.

     5.   Relationship of Optionee to Tenant. Optionee recognizes and
          ----------------------------------
acknowledges that, while it is now an Affiliate of the Tenant, there is no
assurance or requirement that it will in fact be an Affiliate of the Tenant at
the time the Optionee Fee Option is exercised and, even if it is
<PAGE>

then not an Affiliate of the Tenant, Optionee does not have an independent right
to exercise the Optionee Fee Option unless and until, as described in paragraph
4(a) hereof (but subject to paragraph 4(b) hereof), the Tenant (whether or not
then an Affiliate of Optionee) duly and properly exercises the Purchase Option
and, as aforesaid, consummates the transaction and closes.

     6.   '1031 "Like-Kind" Exchange. Option Holder hereby notifies Optionee
          --------------------------
that, if Optionee exercises the Optionee Fee Option in accordance with this
Agreement, the Underlying Fees may be sold pursuant to the like kind exchange
provisions of the Code. Optionee agrees to execute at the Closing all reasonable
and customary documents necessary to accomplish the sale under the like kind
exchange rules as prepared by Option Holder's attorney, provided, however, that
                                                        --------  -------
Optionee shall not be required to execute any document that would or might
require Optionee to incur any cost or expense; require Optionee to take title to
any property other than the Underlying Fees (except for the Purchased Assets);
or require Optionee to incur any liability, whether current, accrued or
contingent. Option Holder shall be responsible for all costs of such
documentation and guarantees that no terms or conditions in this Agreement shall
change due to the execution of the like kind exchange documents, nor shall
Closing be delayed thereby. As aforesaid, Optionee will not be required to
purchase any property (other than the Underlying Fees and Purchased Assets), but
may be required to pay the Purchase Price (or some portion thereof, as the
Option Holder may direct prior to the Closing) into an escrow fund established
for the purpose of the like kind exchange. Option Holder shall defend, indemnify
and save Optionee harmless from any loss, expense, claims or damages in
connection with Optionee executing any such documents. The provisions of this
Section 6 shall survive Closing.

     7.   Notice. Any notices, consents, or other communications between Option
          ------
Holder and Optionee may be oral or in writing, so long as the Option Holder
remains Sutton Hill Capital, L.L.C. or an Affiliate thereof and the Optionee
remains an Affiliate or a Subsidiary of either Citadel or Reading Entertainment,
Inc. or Craig Corporation; provided, however, that, if this Agreement
                           --------  -------
specifically provides that a notice, consent or communication must be in
writing, then such provision controls. Subject to the preceding sentence, all
notices, offers, acceptances, approvals, waivers, requests, demands and other
communications hereunder or under any other instrument, certificate or other
document delivered in connection with the transactions described herein shall be
in writing, shall be addressed as provided below and shall be considered as
properly given (a) if delivered in person, (b) if sent by express courier
service (including, without limitation, Federal Express, Emery, DHL, Airborne
Express, and other similar express delivery services ), (c) in the event
overnight delivery services are not readily available, if mailed by United
States Postal Service, postage prepaid, registered or certified with return
receipt requested, or (d) if sent by telecopy and confirmed; provided, that in
                                                             --------
the case of a notice by telecopy, the sender shall in addition confirm such
notice by writing sent in the manner specified in clause (a), (b) or (c) of this
Section 7. All notices shall be effective upon receipt by the addressee;
---------
provided, however, that if any notice is tendered to an addressee and the
--------  -------
delivery thereof is refused by such addressee, such notice shall be effective
upon such tender. For the
<PAGE>

purposes of notice, the addresses of the parties shall be as set forth below;
provided, however, that any party shall have the right to change its address for
notice hereunder to any other location by giving written notice to the other
party in the manner set forth herein. The initial addresses of the parties
hereto are as follows:

          If to the Option Holder:
          Sutton Hill Capital, L.L.C.
          120 North Robertson Boulevard
          Los Angeles, California 90048
          Attention: Legal Department
          Telecopy: (310) 652-6490

With a copy of all notices under this Section 7 to be simultaneously given,
                                      ---------
delivered or served to Howard E. Peskoe, Esq., at the following address:

          Whitman Breed Abbott & Morgan LLP
          200 Park Avenue
          New York, New York 10166
          Telecopy: (212) 351-3131

          If to the Optionee:
          Citadel Realty, Inc.
          550 South Hope Street
          Suite 1825
          Los Angeles, California 90071;
          Attention: President
          Telecopy: (213) 239-0548

With a copy of all notices under this Section 7 to be simultaneously given,
delivered or served to:

          Citadel Holding Corporation
          550 South Hope Street
          Suite 1825
          Los Angeles, California 90071;
          Attention: President
          Telecopy: (213) 239-0548

     and to Michael H. Margulis, Esq. at the following address:

          Duane, Morris & Heckscher LLP
          380 Lexington Avenue
          New York, New York 10168
<PAGE>

          Telecopy:  (212) 692-1020

     8.   Certain Definitions.  As used herein the following terms shall have
          -------------------
the respective meanings as set forth below:

     (a)  "Affiliate" of any Person means any other Person controlling,
           ---------
controlled by or under direct or indirect common control with such Person. For
the purposes of this definition, "control," when used with respect to any
                                  -------
specified Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
                                                     -----------
"controlled" have the meanings correlative to the foregoing. Notwithstanding the
 ----------
foregoing: (i) the Option Holder and its Affiliates (the "Option Holder's
Affiliates") shall not include Citadel and its Subsidiaries; (ii) Citadel and
its Subsidiaries (including the Tenant), on the one hand, and the Option Holder
and the Option Holder's Affiliates, on the other hand, shall not be considered
Affiliates of each other; and (iii) Nationwide and its Affiliates shall not be
considered an Affiliate of any of Citadel or any of its Subsidiaries or the
Tenant or any of its Affiliates.

     (b)  "Citadel" shall mean Citadel Holding Corporation, a Nevada
           -------
corporation.

     (c)  "Contract" shall mean any contract, agreement, indenture, loan or
           --------
credit agreement, receivable sales or financing agreement, capital note,
mortgage, security agreement, bond or note (or any guarantee of any of the
foregoing).

     (d)  "Code" means the Internal Revenue Code of 1986, as heretofore and
           ----
hereafter amended from time to time, or any successor code as in effect from
time to time.

     (e)  "Indemnity Guarantee" means the guarantee, dated as of the date
           -------------------
hereof, entered into by and among the Messrs. Forman and Cotter, Citadel
Cinemas, Inc. and Optionee.

     (f)  "Insolvency or Liquidation Proceeding" means:
           ------------------------------------

          (i)  The entry of a decree or order for relief in respect of SHC by a
     court having jurisdiction in the premises, or the appointment of a
     receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
     similar official) of SHC or of any substantial part of its property, or
     ordering the winding up or liquidation of its affairs, in an involuntary
     case under the Federal bankruptcy laws, as now or hereafter constituted, or
     any other applicable Federal or state bankruptcy, insolvency or other
     similar law; or the commencement against SHC of an involuntary case under
     the Federal bankruptcy laws, as now or hereafter constituted, or any other
     applicable Federal or state bankruptcy, insolvency or other similar law; or
<PAGE>

          (ii) The commencement by SHC of a voluntary case under the Federal
     bankruptcy laws, as now or hereafter constituted, or any other applicable
     Federal or state bankruptcy, insolvency or other similar law, or the
     consent by it to the entry of an order for relief in an involuntary case
     under any such law or the consent by it to the appointment of or taking
     possession by a receiver, liquidator, assignee, custodian, trustee,
     sequestrator (or other similar official) of SHC or of any substantial part
     of its property, or the making by it of a general assignment for the
     benefit of creditors, or the taking of any action in furtherance of any of
     the foregoing;

provided, however, that, if any of the events described in clauses (i) and (ii)
--------  -------
of this definition shall arise as a result of a Tenant Event, then such an event
shall not constitute an Insolvency or Liquidation Proceeding.

     (g)  "Lien" means any security interest, mortgage, pledge, hypothecation,
           ----
assignment, encumbrance, lien (statutory or other), or other security agreement
of any kind or nature whatsoever (including, without limitation, any conditional
sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).

     (h)  "Nationwide" means Nationwide Theatres Corp., a California
           ----------
corporation, and its successors.

     (i)  "Nationwide Agreement" means the agreements, documents and instruments
           --------------------
evidencing or securing the Nationwide Indebtedness, as any thereof may be
amended, restated, modified or supplemented from time to time.

     (j)  "Nationwide Indebtedness" means any and all indebtedness, obligations
           -----------------------
and liabilities of Option Holder from time to time outstanding under the
Nationwide Agreement, whether now existing or hereafter arising, fixed or
contingent, due or not due, liquidated or unliquidated, determined or
undetermined, and whether for principal, premium, interest, fees, indemnities,
costs, expenses or otherwise.

     (k)  "Person" means any individual, corporation, partnership, limited
           ------
liability company, private limited company, joint venture, association, joint-
stock company, trust , unincorporated organization of government or any agency
or political subdivision thereof.

     (l)  "Pledge Agreement" means the agreement, dated as of the date hereof,
           ----------------
entered into between Sutton Hill Associates, as pledgor, and Citadel, as
pledgee, as the same may be amended, restated, modified or supplemented from
time to time.
<PAGE>

     (m)  "Purchased Assets" has the meaning set forth in paragraph (a) of
           ----------------
Section 12 of the Lease Agreement.

     (n)  "Purchase Option" means Tenant's right to purchase the Purchased
           ---------------
Assets as set forth in paragraph (a) of Section 12 of the Lease Agreement.

     (o)  "Purchase Price"  means four million dollars ($4,000,000).
           --------------

     (p)  "Subsidiary" of any Person shall mean any corporation, partnership,
           ----------
limited liability company, joint venture, trust or estate of which (or in which)
more than 50% of

          (i)   the outstanding capital stock having voting power to elect a
     majority of the board of directors of such corporation (irrespective of
     whether at the time capital stock of any other class or classes of such
     corporation shall or might have voting power upon the occurrence of any
     contingency),

          (ii)  the interest in the capital or profits of such partnership or
     joint venture, or

          (iii) the beneficial interest of such trust or estate is at the time
directly or indirectly owned by such Person, by such Person and one or more of
its Subsidiaries or by one or more of such Person's Subsidiaries.

     (q)  "Tenant Event" shall mean an event arising from or attributable to an
           ------------
action or inaction of, or a condition or event relating to, Tenant or any of its
Affiliates (or the agents, officers, directors or employees of the Tenant or any
such Affiliate), or initiated by Tenant or any of its Affiliates (or any such
Person), unless such action, inaction, or event was or resulted from an action
by Tenant or any of its Affiliates to enforce any rights or remedies under the
Lease Agreement or any other Contract or Applicable Law so long as such action
so to enforce was initiated in good faith.

     (r)  "Underlying Lease" shall mean that certain Ground Lease dated as of
           ----------------
August 16, 1985, between Sutcin Holding Corp., as landlord, and Sutton Hill
Associates, as tenant, covering the premises at (a) 205 East 57th Street, New
York, New York 10022, containing the Sutton Theatre, and (b) 160 East 34th
Street, New York, New York 10016, containing the Murray Hill Theatre, as amended
by the First Addendum to Ground Lease, dated as of January 1, 1992, between
Sutcin Holding Corp. and Sutton Hill Associates, Second Addendum to Ground
Lease, dated as of January 1, 1995, between Sutcin Holding Corp. and Sutton Hill
Associates, Third Addendum to Ground Lease, dated as of July 1, 1996, between
Nationwide (successor-in-interest to Sutcin Holding Corp.) and Sutton Hill
Associates, and Fourth Addendum to Ground Lease, dated as of the date hereof,
between Nationwide and Sutton Hill Associates.
<PAGE>

     9    Representations and Warranties
          -------------------------------

     (a)  Option Holder hereby represents and warrants to Optionee that as of
the date hereof:

          (i)  The signatory for Option Holder hereto is in all respects
          authorized and qualified to enter into this Agreement on behalf of
     Option Holder and Option Holder has authorized the assumption of the
     obligations described herein.

          (ii) Attached hereto as Exhibit "B" is a true and correct copy of the
                                  -----------
          option agreement to which Option Holder has been granted the Fee
     Option. The Fee Option is in full force and effect. To the knowledge of
     Option Holder, there is no default under the Fee Option.

     (b)  Optionee hereby represents and warrants to Option Holder that as of
the date hereof:

          (i)  The signatory for Optionee hereto is in all respects authorized
and qualified to enter into this Agreement on behalf of Optionee and Optionee
has authorized the assumption of the obligations described herein.

     10   Indemnities.
          -----------

     (a)  Option Holder shall and hereby does indemnify, defend, protect and
hold harmless Optionee, any successor or successors and any Affiliate of the
foregoing parties, and their respective officers, directors, incorporators,
shareholders, partners, members, employees, agents and servants from and against
all liabilities, losses, obligations, claims, penalties, causes of action,
suits, demands, damages, costs and expenses (including, without limitation,
reasonable attorneys' and accountants' fees and expenses) or judgments of any
nature arising out of or otherwise in respect of a breach of any (i)
representation or (ii) covenant or agreement made by Option Holder hereunder.

     (b)  Notwithstanding anything to the contrary contained herein, all claims
for indemnification under paragraph (a) of this Section 10 shall be made in
                                                ----------
accordance with the procedures set forth in Section 11 of the Lease, shall, in
the case of claims under clause (i) of such paragraph (a), be included in
computing claims for indemnification subject to the limitations set forth in
paragraph (c) of Section 11 of the Lease Agreement, which limits claims brought
under clause (ii) of paragraph (b) of Section 11 of the Lease Agreement, and
shall be subject to the other provisions of paragraph (h) of said Section 11.

     (c)  Optionee shall and hereby does indemnify, defend, protect and hold
harmless Option Holder, any successor or successors and any Affiliate of the
foregoing parties, and their respective officers, directors, incorporators,
shareholders, partners, members, employees, agents
<PAGE>

and servants from and against all liabilities, losses, obligations, claims,
penalties, causes of action, suits, demands, damages, costs and expenses
(including, without limitation, reasonable attorneys' and accountants' fees and
expenses) or judgments of any nature arising out of or otherwise in respect of
(A) the use or occupancy of the Underlying Fees or any Element (as such term is
defined in the Lease Agreement) of any thereof by the Optionee or any Person
claiming under the Optionee; (B) any activity, work, or thing done or permitted
by the Optionee in or about any of the Underlying Fees; (C) any acts, omissions,
or negligence of the Optionee, or any Person claiming under the Optionee, or the
employees, agents, contractors, invitees or visitors of the Optionee or any such
Person; (D) any breach, violation, or nonperformance by the Optionee, or any
Person claiming under the Optionee, or the employees, agents, contractors,
invitees, or visitors of the Optionee or any such Person, of any term, covenant
or provision of this Agreement, the Underlying Lease to the extent the
performance of obligations thereunder has become an obligation of the Optionee
pursuant to the terms hereof or any law, ordinance or governmental requirement
of any kind; or (E) any injury or damage to the Person, property, or business of
the Optionee, its employees, agents, contractors, invitees, visitors or any
other Person entering upon any of the Underlying Fees, as to all of the
foregoing to the extent arising from and after the Closing.

     11   Miscellaneous
          -------------

     (a)  All agreements, indemnities, representations and warranties shall
survive the expiration or other termination hereof.

     (b)  This Agreement and the instruments, documents or agreements referred
to herein constitute the entire agreement between the parties relating to the
subject mater hereof and no representations, warranties, promises, guarantees or
agreements, oral or written, express or implied, have been made by any party
hereto with respect to this Agreement.

     (c)  This Agreement may not be amended, modified or terminated, nor may any
obligation hereunder be waived orally, and no such amendment, modification,
termination or waiver shall be effective for any purpose unless it is in
writing, signed by the party against whom enforcement thereof is sought. The
consent or approval by the Option Holder to or of any act by the Optionee
requiring the Option Holder's consent or approval shall not be deemed to have
been waived by the Option Holder unless such waiver is in writing signed by the
Option Holder waiving such covenant or condition.

     (d)  The captions in this Agreement are for convenience of reference only,
and shall not be deemed to affect the meaning or construction of any of the
provisions hereof. Any provision of this Agreement which is prohibited by law or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and the parties hereto shall negotiate in good
faith appropriate modifications to reflect such changes as may be required by
law, and, as
<PAGE>

nearly as possible, to produce the same economic, financial and tax effects as
the provision which is prohibited or unenforceable; and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the Option Holder and the Optionee hereby waive any provision
of law which renders any provision hereof prohibited or unenforceable in any
respect.

     (e)  THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE STATE OF NEW
YORK. THE OPTION HOLDER AND THE OPTIONEE AGREE THAT, TO THE MAXIMUM EXTENT
PERMITTED BY THE LAW OF THE STATE OF NEW YORK, THIS AGREEMENT, AND THE RIGHTS
AND DUTIES OF THE OPTION HOLDER AND THE OPTIONEE HEREUNDER, SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK
IN ALL RESPECTS, INCLUDING, WITHOUT LIMITATION, IN RESPECT OF ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE. EACH OF THE OPTION HOLDER AND THE
OPTIONEE HEREBY IRREVOCABLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK AND THE SUPREME COURT OF THE STATE OF NEW YORK IN THE COUNTY OF NEW
YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN
CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND TO
THE EXTENT PERMITTED BY APPLICABLE LAW, HEREBY WAIVES AND AGREES NOT TO ASSERT
BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR
PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT
THIS AGREEMENT OR ANY DOCUMENT OR ANY INSTRUMENT REFERRED TO HEREIN OR THE
SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURT. THIS SUBMISSION
TO JURISDICTION IS NONEXCLUSIVE AND DOES NOT PRECLUDE EITHER PARTY FROM
OBTAINING JURISDICTION OVER THE OTHER IN ANY COURT OTHERWISE HAVING
JURISDICTION. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE OPTION
HOLDER AND THE OPTIONEE AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY
REVIEW OF THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR
JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT.
EACH OF THE OPTION HOLDER AND THE OPTIONEE AGREES THAT SERVICE OF PROCESS MAY BE
MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET
FORTH IN THIS AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK.

     (f)  THE OPTION HOLDER AND THE OPTIONEE HEREBY WAIVE THEIR RESPECTIVE RIGHT
TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM,
<PAGE>

COUNTERCLAIM OR CROSS COMPLAINT IN ANY ACTION, PROCEEDING AND/OR HEARING BROUGHT
BY EITHER THE OPTION HOLDER AGAINST THE OPTIONEE OR THE OPTIONEE AGAINST THE
OPTION HOLDER ON ANY MATTER WHATSOEVER ARISING OUT OF, OR IN ANY WAY CONNECTED
WITH THIS AGREEMENT, OR THE RELATIONSHIP OF THE OPTION HOLDER AND THE OPTIONEE,
OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY
LAW, STATUTE OR REGULATION, EMERGENCY OR OTHERWISE, NOW OR HEREAFTER IN EFFECT.
THE OPTION HOLDER AND THE OPTIONEE ACKNOWLEDGE THAT THE PROVISIONS OF THIS
PARAGRAPH (F) OF SECTION_8 HAVE BEEN BARGAINED FOR AND THAT THEY HAVE BEEN
REPRESENTED BY COUNSEL IN CONNECTION THEREWITH.

     (g)  This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.

     (h)  One or more waivers of any covenant or condition by the Option Holder
shall not be construed as a waiver of a subsequent breach of the same covenant
or condition. The giving by the Option Holder of any consent or approval
hereunder (whether affirmatively or by inaction) shall not be deemed a waiver of
the requirement for Optionee to seek such consent or approval in the future for
the same or a dissimilar event. Each and every covenant contained herein shall
be deemed separate and independent and not dependent upon other provisions of
this Lease.

     (i)  This Agreement has been prepared by the Option Holder and its
professional advisors and reviewed by the Optionee and its professional
advisors. The Option Holder, the Optionee and their separate advisors believe
that this Agreement is the product of all of their efforts, that it expresses
their agreement, and that it should not be interpreted in favor of either the
Option Holder or the Optionee or against the Option Holder or the Optionee
merely because of their efforts in preparing it.

     (j)  This Agreement shall be binding on the parties hereto and their
respective successors and assigns but the foregoing shall not affect, alter or
limit the provisions of Section 5 hereof.

     (k)  This Agreement shall expire and become unenforceable against Option
Holder if the Optionee Fee Option is not exercised on or before the earlier to
occur of (i) February 1, 2010 (subject to extension if the Optionee is precluded
from exercising by reason of an Insolvency or Liquidation Proceeding affecting
Option Holder and in such event is extended until the time when such exercise is
not longer so precluded and for five days thereafter) or (ii) the termination of
the Lease Agreement.
<PAGE>

     (l)  Except to the extent of and under the circumstances specifically
provided for in Section 5 of the Pledge Agreement and the Indemnity Guarantee,
no recourse hereunder or any other amount due under this Agreement, or for any
claim based thereon or otherwise in respect thereof or hereof, shall be had
against any direct or indirect partner or owner of the Option Holder or any
incorporator, partner, shareholder, officer, member, Affiliate or director, as
such, past, present or future, of any such direct or indirect partner. Nothing
contained in this paragraph (l) shall be construed to limit the exercise or
enforcement, in accordance with the terms of this Agreement and the other
documents referred to herein, of rights and remedies against the assets of the
limited liability company, or any other Person expressly undertaking in writing
obligations in connection with the transactions contemplated hereby.
<PAGE>

     IN WITNESS WHEREOF, the Option Holder and the Optionee have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the day and year first above written.

          Option Holder:      Sutton Hill Capital, L.L.C., a New York
                               limited liability company

                              By  /s/ James J. Cotter
                                 --------------------
                                  Name:  James J. Cotter
                                  Title: Operating Manager

          Optionee:           Citadel Realty, Inc., a
                               Nevada corporation

                              By: /s/ Andrzej Matyczynski
                                  -----------------------
                                  Name:  Andrzej Matyczynski
                                  Title: Chief Financial Officer

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