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Settlement Agreement And Mutual Release

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SETTLEMENT AGREEMENT AND MUTUAL RELEASE


This Settlement Agreement and Mutual Release (the "Agreement") is made and entered into this 1st day of July 2002, between plaintiff HX Investors, L.P., and the additional plaintiffs in the Action who are listed on Exhibit A hereto (collectively, "HX Investors" or the "Purchaser"), the defendants Shelbourne Properties I, Inc., Shelbourne Properties II, Inc., and Shelbourne Properties III, Inc. (each, a "Company", and collectively, the "Companies"), Presidio Capital Investment Company, LLC ("Presidio") and Shelbourne Management, LLC ("Management").


WHEREAS, HX Investors filed an action on May 22, 2002 against the Companies in the Court of Chancery of the State of Delaware in and for New Castle County (the "Court") captioned HX Investors, L.P., et al. v. Shelbourne Properties I, Inc., et al., Del. Ch., C.A. No. 19644 (the "Action"), seeking an order directing that the Companies hold a stockholder election for the purpose of electing directors to nine seats on the boards of each of the Companies;


WHEREAS, on May 9, 2002, the Companies announced that each of their calendar year 2002 annual meetings (collectively, the "Annual Meetings") would take place on July 9, 2002;


WHEREAS, the Court subsequently ordered, and HX Investors and the Companies agreed, that the Annual Meetings be held on September 9, 2002;


WHEREAS, the Companies have not yet announced their nominees for election to the Boards of Directors at the Annual Meetings;


WHEREAS, the parties have entered into certain transactions described below; and;


WHEREAS, the undersigned parties wish to avoid costly litigation between them by compromising and settling the Action;


NOW, THEREFORE, the parties, intending to be legally bound hereby, agree as follows:


1. Upon execution of this Agreement, HX Investors will promptly take such action as necessary and appropriate to have the Action dismissed with prejudice.


2. HX Investors, on behalf of themselves and their past, present and future employees, officers, directors, stockholders, limited and general partners, parents, subsidiaries, affiliates, predecessors, successors, heirs, beneficiaries, trustees, and assigns (collectively in this paragraph, the "Plaintiff Releasors"), hereby irrevocably and unconditionally remise, release, and forever discharge the Companies, and their past, present, and future employees, officers, directors, stockholders, limited and general partners, advisors, agents, representatives, parents, subsidiaries, affiliates, predecessors, successors, and assigns (collectively in this paragraph, the "Shelbourne Releasees"), of and from any and all actions, causes of action, suits, debts, charges, complaints, or liabilities, whether pursuant to statute or common law or otherwise, that the Plaintiff Releasors have against the Shelbourne Releasees relating to any and all matters from the beginning of the world through the date of this Agreement, including without limitation all claims that were asserted in HX Investors' complaint or that arise out of the following:


(a) the reduction of the boards of the Companies, on or about February 13, 2002, from nine seats to four seats;


(b) the resignations, on or about February 13, 2002, of Donald Coons, Robert Martin, Peter Ahl, Dallas Lucas, David Hamamoto, David King, Jr., and W. Edward Sheetz from the boards of the Companies; or


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(c) the reappointment, on or about February 13, 2002, of Donald Coons, Robert Martin, and W. Edward Scheetz to the boards of the Companies.


3. Plaintiff Releasors shall not participate or join in any litigation involving any of the matters described and released in paragraph 2 of this Agreement (including without limitation the pending action styled Hudson v. Northstar Capital Investment Corp. et al., Consol. C.A No. 19442, in the Court of Chancery of the State of Delaware in and for New Castle County). It is further understood and agreed by the parties that any persons designated by HX Investors to serve on the Boards of Directors of any of the Companies (other than the Independent Directors as defined in Exhibit E hereto) shall recuse themselves and not in any way participate in any deliberations, discussions, resolutions or actions taken by such Boards of Directors concerning any of the matters described and released in Paragraph 2 of this Agreement. Nothing contained herein shall prevent HX Investors or its affiliates from responding to compulsory process, discovery requests or orders of any court of competent jurisdiction; provided, however, that HX Investors or its affiliates, as the case may be, shall provide reasonable notice to the Companies in advance of any such responses, to the extent reasonably practicable. Notwithstanding any other provision in this Agreement to the contrary, HX Investors may participate passively as a stockholder in a derivative action or as a class member in a class action including without limitation those involving any of the matters described and released in paragraph 2 of this Agreement solely for the purpose of receiving its portion of the economic or other benefit achieved in such litigation.


4. The Companies, on behalf of themselves and their past, present, and future employees, officers, directors, stockholders, limited and general partners, parents, subsidiaries, affiliates, predecessors, successors, heirs, beneficiaries, trustees, and assigns (collectively in this


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paragraph, the "Shelbourne Releasors"), hereby irrevocably and unconditionally remise, release, and forever discharge HX Investors, and their past, present, and future employees, officers, directors, stockholders, limited and general partners, advisors, agents, representatives, parents, subsidiaries, affiliates, predecessors, successors, and assigns (collectively in this paragraph, the "Plaintiff Releasees"), of and from any and all actions, causes of action, suits, debts, charges, counterclaims, complaints, or liabilities, whether pursuant to statute or common law or otherwise, that the Shelbourne Releasors have against the Plaintiff Releasees relating to any and all matters from the beginning of the world through the date of this Agreement, including without limitation all claims that could be asserted with respect to HX Investors' complaint or that arise out of the following:


(a) the reduction of the boards of the Companies, on or about February 13, 2002, from nine seats to four seats;


(b) the resignations, on or about February 13, 2002, of Donald Coons, Robert Martin, Peter Ahl, Dallas Lucas, David Hamamoto, David King, Jr., and W. Edward Sheetz from the boards of the Companies; or


(c) the reappointment, on or about February 13, 2002, of Donald Coons, Robert Martin, and W. Edward Scheetz to the boards of the Companies.


5. By entering into this Agreement, the Defendants do not admit any liability with respect to any claim asserted in the Action, and nothing in this Agreement shall be construed as an admission of any such liability. Notwithstanding any other provision herein to the contrary, this Agreement does not release any claims that have been asserted in the action styled Hudson v. Northstar Capital Investment Corp., et al., Consol. C.A. No. 19442, in the Court of Chancery of the State of Delaware in and for New Castle County.


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6. Contemporaneously with the execution of this Agreement, the Companies and HX Investors have entered into, and agreed to be bound by, Stock Purchase Agreements attached hereto as Exhibits B, C, and D (each a "Stock Purchase Agreement") and the Board of Directors of each of the Companies have approved the respective Plan of Liquidation attached to each Stock Purchase Agreement as Annex C (each, a "Plan of Liquidation") and resolved to submit such Plans of Liquidation for approval by its stockholders.


7. HX Investors and the Companies hereby incorporate by reference and agree to all of the provisions of Exhibit E, including, without limitation, those relating to corporate governance, the Plan of Liquidation and the Stockholder Meeting.


8. This Agreement incorporates by reference (i) all of the representations and warranties of the Companies contained in Article IV of each of the respective Stock Purchase Agreements and (ii) all of the representations and warranties of the Purchaser contained in Article V of each of the Stock Purchase Agreements.


9. Each Company hereby represents and warrants to HX Investors that (i) its Board of Directors, at a meeting duly called and held on July 1, 2002 has unanimously (a) determined that this Agreement, the Stock Purchase Agreement to which it is a party and the transactions contemplated hereby and thereby, including HX Investors' tender offers for up to 30% of the outstanding shares of common stock, par value $0.01, of such Company (each, an "Offer") and the Plan of Liquidation contemplated by such Stock Purchase Agreement, are fair to, and in the best interests of its stockholders, (b) approved, adopted and declared advisable this Agreement, such Stock Purchase Agreement, such Offer and such Plan of Liquidation (such approval and adoption having been made in accordance with Delaware Law, including, without limitation, Section 203 thereof) and (c) recommended that stockholders desiring to maximize


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immediate liquidity of their shares of common stock accept the respective Offer and tender their shares of common stock pursuant to such Offer and stockholders not seeking immediate liquidity, but desiring to receive their pro rata portion of the liquidation proceeds contemplated by the Plans of Liquidation, should not accept such Offer, and should vote to approve the adoption of such Plan of Liquidation at a meeting of the stockholders to be held to consider such matter, and (ii) Lazard Freres & Co., LLC (the "Financial Advisor") has delivered to each Board of Directors a written opinion that the price per share of common stock offered pursuant to each Offer together with the distributions of the proceeds from the respective liquidation of each Company in accordance with each Plan of Liquidation, taken as a whole, to be received by the stockholders of each Company in the respective Offer and Plan of Liquidation, is fair to such stockholders from a financial point of view.


10. In the event that the Offers (i) shall not have expired (other than solely by reason of a breach by HX Investors of this Agreement or the Stock Purchase Agreements) prior to the date proxy materials for the September 9, 2002 annual meetings have been mailed, or (ii) closes on a date that would make it impracticable to change the proxy materials required by the terms of this Agreement or the Stock Purchase Agreements prior to the date on which amended proxy materials would as a matter of law have to be mailed, then the parties hereto will use all reasonable efforts to cooperate to have the Court enter an order permitting the Companies to change the date of the annual meetings to a later date proposed by the parties. The date proposed by the parties shall be a date selected by HX Investors, L.P., subject to the approval of the Companies, such approval not to be unreasonably withheld.


11. The parties hereby agree:


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(a) HX Investors, L.P. will receive as compensation from Management an amount equal to the total of (i) any return received by Management as a result of its investment in the Class A Preferred Partnership Units of each of Shelbourne Properties I, L.P, Shelbourne Properties II, L.P and Shelbourne Properties III, L.P, (the "Limited Partnerships") respectively, multiplied by, in the case of each of the Limited Partnerships, (ii) the quotient resulting by dividing (x) the number of shares of common stock of the respective related Company of such Limited Partnership beneficially owned by HX Investors, L.P. on September 30, 2002, by (y) the total number of issued and outstanding shares of common stock of such Company issued and outstanding on September 30, 2002; and


(b) The Companies, Presidio and Management shall take all action necessary to cause that, as of September 30, 2002 the Purchase and Contribution Agreements, dated as of February 14, 2002, made and entered into by Presidio Capital Investment Company (each, a "Purchase and Contribution Agreements"), each Company and the other parties thereto shall be amended such that the number "150%" as it appears in Section 5.5 of each Purchase and Contribution Agreement shall be replaced by "138%".


(c) Notwithstanding anything expressed or implied to the contrary in this Agreement, the parties do not intend to create a partnership, joint venture, or any other similar arrangement between or among the parties. Each of the parties hereby agrees it will not take any action inconsistent with the preceding sentence for any purpose. Notwithstanding anything in this Section 11 to the contrary, paragraphs (a) and (b) above are conditioned upon the final settlement or dismissal of all existing litigation pending against the Companies identified in Section 4.09 of the Disclosure Schedule, including, but not limited to (i) Hudson v. Northstar Capital Investment Corp., et al., Consol. C.A. No. 19442, in the Court of


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Chancery of the State of Delaware in and for New Castle County, and (ii) HX Investors, L.P., et al. v. Shelbourne Properties I, Inc., et al., C.A. No. 19644 NC, in the Court of Chancery of the State of Delaware in and for New Castle County,


12. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware.


13. Each party will bear its own costs and fees in connection with this Action and Agreement, except that the Companies agree that they shall reimburse HX Investors for all reasonable documented legal fees and expenses in connection with this Action and the settlement thereof incurred through the date hereof (and any legal fees and expenses incurred hereafter in connection with the disposition of this Action) within five business days after submission of an invoice therefor, provided that such documentation need not reveal any attorney client privileged information or information protected by the work product doctrine and that an affidavit of counsel (together with an invoice showing total fees and expenses incurred) shall constitute reasonable documentation.


14. The parties agree that the Court shall have sole and exclusive jurisdiction over actions brought to enforce or interpret this Agreement.


15. The parties represent that they have read, understood and voluntarily accepted the terms of this Agreement, and that they have had the opportunity to rely upon the advice of their attorneys, who are the attorneys of their own choice, concerning the legal consequences of this Agreement.


16. This Agreement and the Stock Purchase Agreements (including all schedules, exhibits and annexes thereto) constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and may not be amended, supplemented or


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modified, except by a writing signed by the parties hereto and thereto. Modifications not directly affecting the rights of the plaintiff parties hereto and thereto other than HX Investors, L.P. do not require the agreement of the plaintiff parties hereto other than HX Investors, L.P.


17. For purposes of contract interpretation, no party shall be considered the author of the Agreement.


18. The signatories hereto represent that they are authorized to execute the Agreement and bind the respective parties to the terms herein.


19. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.


20. If this Agreement is executed in counterparts, no signatory hereto shall be bound until all of the parties named below have duly executed, or caused to be duly executed, a counterpart of this Agreement.


[Remainder of page intentionally left blank.]


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NOW THEREFORE, intending to be legally bound hereby, the parties hereto set forth their seals on the dates set forth below.


HX INVESTORS, L.P.


By: Exeter Capital Corporation
General Partner


By: /s/ Michael L. Ashner
-----------------------------------------
Name: Michael L. Ashner
Title: President


SHELBOURNE PROPERTIES I, INC.


By /s/ Donald Wallace Coons
-----------------------------------------
Name: Donald Wallace Coons
Title: Director


SHELBOURNE PROPERTIES II, INC.


By /s/ Donald Wallace Coons
-----------------------------------------
Name: Donald Wallace Coons
Title: Director


SHELBOURNE PROPERTIES III, INC.


By /s/ Donald Wallace Coons
-----------------------------------------
Name: Donald Wallace Coons
Title: Director


PRESIDIO CAPITAL INVESTMENT COMPANY, LLC


By: /s/ Richard J. McCready
-----------------------------------------
Name: Richard J. McCready
Title: Vice-President


SHELBOURNE MANAGEMENT, LLC


By: /s/ Richard J. McCready
-----------------------------------------
Name: Richard J. McCready
Title: Vice-President


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Exhibit A
List of Plaintiffs


- --------------------------------------------------------------------------------
Sam S. Akiyama and Phyllis J. Akiyama - --------------------------------------------------------------------------------
Dean C. Archer - --------------------------------------------------------------------------------
Harmon Benzee and Elizabeth Benzee - --------------------------------------------------------------------------------
Nancy I. Bidwill - --------------------------------------------------------------------------------
John E. Billus - --------------------------------------------------------------------------------
Robert L. Boebel and Catherine E. Boebel - --------------------------------------------------------------------------------
Marcia L. Bridger - --------------------------------------------------------------------------------
Sheldon Brier - --------------------------------------------------------------------------------
V. June Broce Trust, V. June Broce, Trustee - --------------------------------------------------------------------------------
Rosalie A. Burke - --------------------------------------------------------------------------------
John J. Calderone and Mary J. Calderone - --------------------------------------------------------------------------------
Charles W. Carpenter and Alana J. Carpenter - --------------------------------------------------------------------------------
Cope Irrevocable Trust O. James Cope, Trustee - --------------------------------------------------------------------------------
A. Larry Crain - --------------------------------------------------------------------------------
Jac A. Cushman and Virginia R. Cushman - --------------------------------------------------------------------------------
E.L. Davis Family Trust, Edward L. and Nancy Davis, Trustees - --------------------------------------------------------------------------------
Russell J. Diefendorf and Myrle J. Diefendorf - --------------------------------------------------------------------------------
Mark Raymond Eldridge and Frances Emily Eldridge - --------------------------------------------------------------------------------
Ellingson Family Trust, Reuben and Eunice Ellingson, Trustees - --------------------------------------------------------------------------------
Equity Resource Fund XIV, L.P. - --------------------------------------------------------------------------------
Equity Resource Fund XV, L.P. - --------------------------------------------------------------------------------
Equity Resource Fund XVIII, L.P. - --------------------------------------------------------------------------------
Richard Faitella and Elizabeth Faitella - --------------------------------------------------------------------------------
FBO Charitable Remainder Unitrust dtd 8/15/86, H. Stanton and
Carol A. Johnson, Trustees - --------------------------------------------------------------------------------
Flynn Family Trust dtd 5/29/97, John A. Flynn and
Dorothy C. Flynn, Trustees - --------------------------------------------------------------------------------
The Gagnon Trust, William and Eileen Gagnon, Trustees - --------------------------------------------------------------------------------
Irene Gamm Revocable Trust, Irene Gamm, Trustee - --------------------------------------------------------------------------------
Jean L. Garrison - --------------------------------------------------------------------------------
May C. Gitles Revocable Trust dtd 5/12/92, May C. Gitles,
Trustee - --------------------------------------------------------------------------------
Donald E. Givler, Sr. and Gloria B. Givler - --------------------------------------------------------------------------------
Wendie D. Goudchaux - --------------------------------------------------------------------------------
Greene Family Trust dtd 12/30/96, Ellis P. Greene II and
Adele S. Green, Trustees - --------------------------------------------------------------------------------
John P. Guernsey and Patricia C. Guernsey - --------------------------------------------------------------------------------
Ruth Hansen - --------------------------------------------------------------------------------
J. Michael Harrison - --------------------------------------------------------------------------------
Gearldean M. Henry - --------------------------------------------------------------------------------
The Dorothy L. Hess Living Trust dtd 12/21/92,
Dorothy L. Hess, Trustee - --------------------------------------------------------------------------------
The Hoenig Family Revocable Trust, Matthew M. and
Loretta J. Hoenig, Trustees - --------------------------------------------------------------------------------
Beth Hughes - --------------------------------------------------------------------------------
David L. Jackson - --------------------------------------------------------------------------------
Joan E. Jacques - --------------------------------------------------------------------------------
Alvin and Phyllis May Janklow Living Trust, Alvin A. and
Phyllis May Janklow, Trustees - --------------------------------------------------------------------------------


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- --------------------------------------------------------------------------------
Renetta C. Kazmierczak and Judith A. Drneck - --------------------------------------------------------------------------------
Cecil E. Kearny, Jr., and Nancy L. Kearny - --------------------------------------------------------------------------------
Marilyn M. Kirkley - --------------------------------------------------------------------------------
Robert E. Koehler and Mildred W. Koehler - --------------------------------------------------------------------------------


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- --------------------------------------------------------------------------------
Charles R. Kopta - --------------------------------------------------------------------------------
Norman G. Kurland and Marie Kurland - --------------------------------------------------------------------------------
Kurtz Family 1994 Trust UTD dtd 9/27/94 Exemption Trust, G.
Richard Kurtz, Trustee - --------------------------------------------------------------------------------
Babbette Latham - --------------------------------------------------------------------------------
Latrobe Area Hospital, Inc. - --------------------------------------------------------------------------------
Alan H. Macht, M.D. - --------------------------------------------------------------------------------
Marguerite A. Magoffin Trust dtd 11/1/91, Marguerite A.
Magoffin, Trustee - --------------------------------------------------------------------------------
Phyllis Jean Marston - --------------------------------------------------------------------------------
George R. Matthews and Frances Matthews - --------------------------------------------------------------------------------
Thomas M. McDonough - --------------------------------------------------------------------------------
Michael Menosky, Sr. and Agnes Menosky - --------------------------------------------------------------------------------
Harriet Morse - --------------------------------------------------------------------------------
Ramon J. Mortell - --------------------------------------------------------------------------------
Concepcion Mouliert and Gwen Mouliert - --------------------------------------------------------------------------------
Mukai Family Trust, Kazuno Mukai, Trustee - --------------------------------------------------------------------------------
Stephen Natoli and Joan Natoli - --------------------------------------------------------------------------------
Nelson W. O'Conner and Dorothy O'Conner - --------------------------------------------------------------------------------
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