EMPLOYMENT AGREEMENT

        EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of March,
1998 by and between Morton L. Newman ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").

        WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of March 10, 1994 (the "Prior Agreement"); and

        WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon Properties, Inc. ("Avalon"), dated as of March 9, 1998
(the "Merger Agreement"), Avalon will merge into the Company (the "Merger"); and

        WHEREAS, Executive and the Company desire to enter into a new employment
agreement, effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Effective Date"), to replace the Prior Agreement.

        NOW, THEREFORE, the parties hereto do hereby agree as follows.

        1.     Term. Subject to the consummation of the merger contemplated by
the Merger Agreement, the Company hereby agrees to employ Executive, and
Executive hereby agrees to remain in the employ of the Company subject to the
terms and conditions of this Agreement for the period commencing on the
Effective Date and terminating on the third anniversary of the Effective Date
(the "Original Term"), unless earlier terminated as provided in Section 7. The
Original Term shall be extended automatically for additional 1 year periods
(each a "Renewal Term"), unless notice that this Agreement will not be extended
is given by either party to the other 6 months prior to the expiration of the
Original Term or any Renewal Term. Notwithstanding the foregoing, upon a Change
in Control, the Employment Period shall be extended automatically to 3 years
from the date of such Change in Control. (The period of Executive's employment
hereunder within the Original Term and any Renewal Terms is herein referred to
as the "Employment Period.")

        2.     Employment Duties.

               (a)    During the Employment Period, Executive shall be employed
in the business of the Company and its affiliates. Executive shall serve as a
corporate officer of the Company with the title Senior Vice
President-Construction. Executive's duties and authority shall be commensurate
with his title and position with the Company, and shall not be materially
diminished from, or materially inconsistent with, his primary duties and
authority with the Company immediately prior to the date of this Agreement.

               (b)    Executive agrees to his employment as described in this
Section 2 and agrees to devote substantially all of his working time and efforts
to the performance of his duties under this Agreement; provided that nothing
herein shall be interpreted to preclude Executive from (i) participating with
the prior written consent of the Board of Directors as an officer or director
of, or advisor to, any other entity or organization that is not a customer or
material service provider to the Company or a Competing Enterprise, as defined
in Section 8, so long as


<PAGE>   2



such participation does not interfere with the performance of Executive's duties
hereunder, whether or not such entity or organization is engaged in religious,
charitable or other community or non-profit activities, (ii) investing in any
entity or organization which is not a customer or material service provider to
the Company or a Competing Enterprise, so long as such investment does not
interfere with the performance of Executive's duties hereunder, or (iii)
delivering lectures or fulfilling speaking engagements so long as such lectures
or engagements do not interfere with the performance of Executive's duties
hereunder.

               (c)    In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in San Jose, California, or otherwise in the greater San
Francisco Bay area.

               (d)    Breach by either party of any of its respective
obligations under this Section 2 shall be deemed a material breach of that
party's obligations hereunder.

        3.     Compensation/Benefits. In consideration of Executive's services
hereunder, the Company shall provide Executive the following:

               (a)    Base Salary. During the Employment Period, the Executive
shall receive an annual rate of base salary ("Base Salary") in an amount not
less than $200,000. Executive's Base Salary will be reviewed by the Company as
of the first anniversary of the Effective Date, and may be adjusted upward (but
not downward) at such time to reflect any inequities in compensation. Commencing
as of January 1, 2000, Executive's Base Salary shall be reviewed no less
frequently than annually by the Company and may be adjusted upward (but not
downward) by the Company. Upon such annual review during the Renewal Term, if
any, Executive's Base Salary shall be increased to the greatest of (i) an amount
equal to Base Salary for the prior year plus 5%, (ii) a factor measured by the
increase, if any, in the Consumer Price Index for Wage Earners and Clerical
Workers (CPI-W) (City Average for New York - Northern New Jersey - Long Island
1982-84=100), as published by the Bureau of Labor Statistics, for the prior
calendar year (the "CPI Adjustment") or (iii) such greater amount as may be
agreed by Executive and the Company. Base Salary shall be payable in accordance
with the Company's normal business practices, but in no event less frequently
than monthly.

               (b)    Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional payment and the Company's
anticipated financial performance of the present period permits such payment.
The bonuses hereunder shall be paid as a lump sum not later than 60 days after
the end of the Company's preceding fiscal year.

               (c)    Medical Insurance/Physical. During the Employment Period,
the Company shall provide to Executive and Executive's immediate family a
comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a comprehensive annual physical performed, at the
expense of the Company by the physician or medical group of Executive's
choosing.

               (d)    Life Insurance/Disability Insurance. As of the Effective
Date, during the Employment Period, Executive will receive a split dollar life
insurance agreement and comprehensive disability policy comparable to those
provided to comparable Avalon executives.


<PAGE>   3



Such life insurance amount shall equal $750,000, and both the life insurance and
disability policy shall be subject to evidence of Executive's insurability.
Executive agrees to submit to such medical examinations as may be required in
order to establish or maintain such policies of insurance.

               (e)    Vacations. Executive shall be entitled to reasonable paid
vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed 6 weeks per annum,
in the aggregate.

               (f)    Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.

               (g)    Company Stock Option. Notwithstanding the consummation of
the Merger, the Company granted to Executive on March 8, 1998, a non-qualified
employee stock option to purchase 30,000 shares of common stock of the Company,
par value $.01 per share (the "Company Stock Option"). The Company Stock Option
was granted at an exercise price equal to $37.00. The Company Stock Option was
granted with a 10-year term and shall be exercisable as to 100% of the shares
covered thereby on the tenth anniversary of the date of grant so long as
Executive remains employed by the Company or one of its affiliates; provided,
that, if the Merger is consummated, the Company Stock Option shall be
exercisable to the extent of 33 1/3% of the shares covered thereby on each of
the first three anniversaries of the Effective Date, so long as Executive
remains employed by the Company or one of its affiliates. Upon termination of
Executive's employment, vesting and exercisability of the Company Stock Option
shall be governed by the terms of the stock option agreement and this Agreement,
as applicable. During the Employment Period, Executive shall be eligible for
future employee stock option grants on the same basis as other senior management
of the Company.

               (h)    Automobile. Executive shall continue his current car lease
and credit card arrangement with the Company, but following expiration of such
lease, the Company shall provide Executive with a monthly car allowance during
the Employment Period of not less than $750 per month (adjusted annually for
inflation by the CPI Adjustment); provided that, at Executive's election, the
Company may instead purchase or lease, and maintain insurance for, an automobile
of comparable value for use by Executive, who shall be responsible for
maintaining such automobile, at his own expense, with the same standard of care
Executive applies to his own property and as may be required under any
applicable lease agreement.

               (i)    Other Benefits. During the Employment Period, the Company
shall provide to Executive such other benefits, excluding severance benefits,
but including the right to participate in such retirement or pension plans, as
are made generally available to executives of the Company from time to time.

        4.     Expenses/Indemnification.

               (a)    During the Employment Period, the Company shall reimburse
Executive for the reasonable business expenses incurred by Executive in the
course of performing his duties for the Company hereunder, upon submission of
invoices, vouchers or other appropriate documentation, as may be required in
accordance with the policies in effect from time to time for executive employees
of the Company.

               (b)    To the fullest extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
his capacity as an officer


<PAGE>   4



or director or former officer or director of the Company, or any affiliate
thereof for which he may render service in such capacity, whether by or on
behalf of the Company, its shareholders or third parties, and the Company shall
advance to Executive on a timely basis an amount equal to the reasonable fees
and expenses incurred in defending such actions, after receipt of an itemized
request for such advance, and an undertaking from Executive to repay the amount
of such advance, with interest at a reasonable rate from the date of the
request, as determined by the Company, if it shall ultimately be determined that
he is not entitled to be indemnified against such expenses. The Company agrees
to use its best efforts to secure and maintain officers and directors' liability
insurance with respect to Executive.

        5.     Employer's Authority/Policies.

               (a)    General. Executive agrees to observe and comply with the
rules and regulations of the Company as adopted by its Board respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time by the Board.

               (b)    Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company, as reflected in the attachment at
Annex A hereto and made a part hereof.

        6.     Records/Nondisclosure/Company Policies.

               (a)    General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by him of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.

               (b)    Nondisclosure Agreement. Without limitation of the
Company's rights under Section 6(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company executed by Executive and the
Company as reflected in the attachment at Annex B and made a part hereof.

        7.     Termination; Severance and Related Matters.

               (a)    At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 7. Upon any termination hereunder, the Employment Period shall
expire.

               (b)    Definitions. For purposes of this Section 7, the following
terms shall have the indicated definitions:

                      (1)    Cause.  "Cause" shall mean:

                             (i)   Executive is convicted of or enters a plea of
               nolo contendere to an act which is defined as a felony under any
               federal, state or local law, not based upon a traffic violation,
               which conviction or plea has or can be expected to have, in the
               good faith opinion of the Board of Directors, a material adverse
               impact on the business or reputation of the Company;


<PAGE>   5



                             (ii)  any one or more acts of theft, larceny,
               embezzlement, fraud or material intentional misappropriation from
               or with respect to the Company;

                             (iii) a breach by Executive of his fiduciary duties
               under Maryland law as an officer;

                             (iv)  Executive's commission of any one or more
               acts of gross negligence or willful misconduct which in the good
               faith opinion of the Board of Directors has resulted in material
               harm to the business or reputation of the Company; or

                             (v)   default by Executive in the performance of
               his material duties under this Agreement, without correction of
               such action within 15 days of written notice thereof.

        Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:

                             Notice of intention to terminate for Cause has been
               given by the Company within 120 days after the Board of Directors
               learns of the act, failure or event (or latest in a series of
               acts, failures or events) constituting "Cause";

                             The Board of Directors has voted (at a meeting of
               the Board of Directors duly called and held as to which
               termination of Executive is an agenda item) to terminate
               Executive for Cause after Executive has been given notice of the
               particular acts or circumstances which are the basis for the
               termination for Cause and has been afforded at least 20 days
               notice after the meeting and an opportunity to present his
               position in writing; and

                             The Board of Directors has given a Notice of
               Termination to Executive within 20 days of such Board meeting.

        The Company may suspend Executive with pay at any time during the period
commencing with the giving of notice to Executive under clause (i) above until
final Notice of Termination is given under clause (iii) above. Upon the giving
of notice as provided in clause (iii) above, no further payments shall be due
Executive.

            (2)       Change in Control. A "Change in Control" shall mean the
occurrence of any one or more of the following events following the Effective
Date:

                      (i)    Any individual, entity or group (a "Person") within
        the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act
        of 1934 (the "Act") (other than the Company, any corporation,
        partnership, trust or other entity controlled by the Company (a
        "Subsidiary"), or any trustee, fiduciary or other person or entity
        holding securities under any employee benefit plan or trust of the
        Company or any of its Subsidiaries), together with all "affiliates" and
        "associates" (as such terms are defined in Rule 12b-2 under the Act) of
        such Person, shall become the "beneficial owner" (as such term is
        defined in Rule 13d-3 under the Act) of securities of the Company
        representing 30% or more of the combined voting power of the Company's
        then outstanding securities having the right to vote generally in an
        election of the Company's Board of Directors


<PAGE>   6



        ("Voting Securities"), other than as a result of (A) an acquisition of
        securities directly from the Company or any Subsidiary or (B) an
        acquisition by any corporation pursuant to a reorganization,
        consolidation or merger if, following such reorganization, consolidation
        or merger the conditions described in clauses (A), (B) and (C) of
        subparagraph (iii) of this Section 7(b)(2) are satisfied; or

                      (ii)   Individuals who, as of the Effective Date,
        constitute the Company's Board of Directors (the "Incumbent Directors")
        cease for any reason to constitute at least a majority of the Board,
        provided, however, that any individual becoming a director of the
        Company subsequent to the date hereof (excluding, for this purpose, (A)
        any such individual whose initial assumption of office is in connection
        with an actual or threatened election contest relating to the election
        of members of the Board of Directors or other actual or threatened
        solicitation of proxies or consents by or on behalf of a Person other
        than the Board of Directors, including by reason of agreement intended
        to avoid or settle any such actual or threatened contest or
        solicitation, and (B) any individual whose initial assumption of office
        is in connection with a reorganization, merger or consolidation,
        involving an unrelated entity and occurring during the Employment
        Period), whose election or nomination for election by the Company's
        shareholders was approved by a vote of at least a majority of the
        persons then comprising Incumbent Directors shall for purposes of this
        Agreement be considered an Incumbent Director; or

                      (iii)  Consummation of a reorganization, merger or
        consolidation of the Company, unless, following such reorganization,
        merger or consolidation, (A) more than 50% of, respectively, the then
        outstanding shares of common stock of the corporation resulting from
        such reorganization, merger or consolidation and the combined voting
        power of the then outstanding voting securities of such corporation
        entitled to vote generally in the election of directors is then
        beneficially owned, directly or indirectly, by all or substantially all
        of the individuals and entities who were the beneficial owners,
        respectively, of the outstanding Voting Securities immediately prior to
        such reorganization, merger or consolidation, (B) no Person (excluding
        the Company, any employee benefit plan (or related trust) of the
        Company, a Subsidiary or the corporation resulting from such
        reorganization, merger or consolidation or any subsidiary thereof, and
        any Person beneficially owning, immediately prior to such
        reorganization, merger or consolidation, directly or indirectly, 30% or
        more of the outstanding Voting Securities), beneficially owns, directly
        or indirectly, 30% or more of, respectively, the then outstanding shares
        of common stock of the corporation resulting from such reorganization,
        merger or consolidation or the combined voting power of the then
        outstanding voting securities of such corporation entitled to vote
        generally in the election of directors, and (C) at least a majority of
        the members of the board of directors of the corporation resulting from
        such reorganization, merger or consolidation were members of the
        Incumbent Board at the time of the execution of the initial agreement
        providing for such reorganization, merger or consolidation;

                      (iv)   Approval by the shareholders of the Company of a
        complete liquidation or dissolution of the Company; or

                      (v)    The sale, lease, exchange or other disposition of
        all or substantially all of the assets of the Company, other than to a
        corporation, with respect to which following such sale, lease, exchange
        or other disposition (A) more than 50% of,


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        respectively, the then outstanding shares of common stock of such
        corporation and the combined voting power of the then outstanding voting
        securities of such corporation entitled to vote generally in the
        election of directors is then beneficially owned, directly or
        indirectly, by all or substantially all of the individuals and entities
        who were the beneficial owners of the outstanding Voting Securities
        immediately prior to such sale, lease, exchange or other disposition,
        (B) no Person (excluding the Company and any employee benefit plan (or
        related trust) of the Company or a Subsidiary or such corporation or a
        subsidiary thereof and any Person beneficially owning, immediately prior
        to such sale, lease, exchange or other disposition, directly or
        indirectly, 30% or more of the outstanding Voting Securities),
        beneficially owns, directly or indirectly, 30% or more of, respectively,
        the then outstanding shares of common stock of such corporation and the
        combined voting power of the then outstanding voting securities of such
        corporation entitled to vote generally in the election of directors and
        (C) at least a majority of the members of the board of directors of such
        corporation were members of the Incumbent Board at the time of the
        execution of the initial agreement or action of the Board of Directors
        providing for such sale, lease, exchange or other disposition of assets
        of the Company.

        Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred for purposes of this Agreement solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate voting power
represented by the Voting Securities beneficially owned by any Person to 30% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any Person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend,
or similar transaction), then a "Change in Control" shall be deemed to have
occurred for purposes of this Agreement.

               (3)    Complete Change in Control. A "Complete Change in Control"
shall mean that a Change in Control has occurred, after modifying the definition
of "Change in Control" by deleting clause (i) from Section 7(b)(2) of this
Agreement.

               (4)    Constructive Termination Without Cause. "Constructive
Termination Without Cause" shall mean a termination of Executive's employment
initiated by Executive not later than 12 months following the occurrence (not
including any time during which an arbitration proceeding referenced below is
pending), without Executive's prior written consent, of one or more of the
following events (or the latest to occur in a series of events), and effected
after giving the Company not less than 10 working days' written notice of the
specific act or acts relied upon and right to cure:

                      (i)    a material adverse change in the functions, duties
        or responsibilities of Executive's position which would reduce the
        level, importance or scope of such position; or any removal of Executive
        from or failure to reappoint or reelect Executive to any position set
        forth in this Agreement, except in connection with the termination of
        Executive's employment for Disability, Cause, as a result of Executive's
        death or by Executive other than for a Constructive Termination Without
        Cause;

                      (ii)   any material breach by the Company of this
        Agreement;

                      (iii)  any purported termination of Executive's employment
        for Cause


<PAGE>   8



        by the Company which does not comply with the terms of Section 7(b)(1)
        of this Agreement;

                      (iv)   the failure of the Company to obtain an agreement,
        satisfactory to the Executive, from any successor or assign of the
        Company, to assume and agree to perform this Agreement, as contemplated
        in Section 10 of this Agreement;

                      (v)    the failure by the Company to continue in effect
        any compensation plan in which Executive participates immediately prior
        to a Change in Control which is material to Executive's total
        compensation, unless comparable alternative arrangements (embodied in
        ongoing substitute or alternative plans) have been implemented with
        respect to such plans, or the failure by the Company to continue
        Executive's participation therein (or in such substitute or alternative
        plans) on a basis not materially less favorable, in terms of the amount
        of benefits provided and the level of Executive's participation relative
        to other participants, as existed during the last completed fiscal year
        of the Company prior to the Change in Control;

                      (vi)   the relocation of the Company's San Jose offices to
        a new location more than fifty (50) miles from San Jose or the failure
        to locate Executive's own office at the San Jose office (or at the
        office to which such office is relocated which is within 50 miles of San
        Jose); or

                      (vii)  any termination of employment by the Executive for
        any reason during the 12-month period immediately following a Complete
        Change in Control of the Company.

Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.

               (5)    Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's Covered Compensation as
calculated for the calendar year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by three.

               (6)    Covered Compensation. "Covered Compensation," for any
calendar year, shall mean an amount equal to the sum of (i) Executive's Base
Salary for the calendar year (disregarding any decreases made effective during
the Employment Period), (ii) the cash bonus actually earned by Executive with
respect to such calendar year, and (iii) the value of all stock


<PAGE>   9



and other equity-based compensation awards made to Executive during such
calendar year.

               Covered Compensation shall be calculated according to the
following rules:

                             (A)   In valuing awards for purposes of clause
               (iii) above, all such awards shall be treated as if fully vested
               when granted, stock grants shall be valued by reference to the
               fair market value on the date of grant of the Company's common
               stock, par value $.01 per share, and other equity-based
               compensation awards shall be valued at the value established by
               the Compensation Committee of the Board of Directors on the date
               of grant.

                             (B)   In determining the cash bonus actually paid
               with respect to a calendar year, if no cash bonus has been paid
               with respect to the calendar year in which the Date of
               Termination occurs, the cash bonus paid with respect to the
               immediately preceding calendar year shall be assumed to have been
               paid in each of the current and immediately preceding calendar
               years, and if no cash bonus has been paid by the Date of
               Termination with respect to the immediately preceding calendar
               year, the cash bonus paid with respect to the second preceding
               calendar year shall be assumed to have been paid in all three of
               the calendar years taken into account in determining Covered
               Average Compensation.

                             (C)   If any cash bonus paid with respect to the
               current or immediately preceding calendar year was paid within
               three months of Executive's Date of Termination, and is lower
               than the last cash bonus paid more than three months from the
               Date of Termination, any such cash bonus paid within three months
               of the Date of Termination shall be disregarded and the last cash
               bonus paid more than three months from the Date of Termination
               shall be substituted for each cash bonus so disregarded.

                             (D)   In determining the amount of stock and other
               equity-based compensation awards made during a calendar year
               during the averaging period, rules similar to those set forth in
               subparagraphs (B) and (C) of this Section 7(b)(6) shall be
               followed, except that all awards made in connection with the
               Company's initial public offering shall be disregarded.

               (7)    Disability. "Disability" shall mean Executive has been
determined to be disabled and to qualify for long-term disability benefits under
the long-term disability insurance policy obtained pursuant to Section 3(d) of
this Agreement.

               (c)    Rights Upon Termination.

                      (i)    Payment of Benefits Earned Through Date of
        Termination. Upon any termination of Executive's employment during the
        Employment Period, Executive, or his estate, shall in all events be paid
        all accrued but unpaid Base Salary and all earned but unpaid cash
        incentive compensation earned through his Date of Termination. Executive
        shall also retain all such rights with respect to vested equity-based
        awards as are provided under the circumstances under the applicable
        grant or award agreement, and shall be entitled to all other benefits
        which are provided under the circumstances in accordance with the
        provisions of the Company's generally applicable employee benefit plans,
        practices and policies, other than severance plans.


<PAGE>   10



                      (ii)   Death. In the event of Executive's death during the
        Employment Period, the Company shall, in addition to paying the amounts
        set forth in Section 7(c)(i), take whatever action is necessary to cause
        all of Executive's unvested equity-based awards to become fully vested
        as of the date of death and, in the case of equity-based awards which
        have an exercise schedule, to become fully exercisable and continue to
        be exercisable for such period as is provided in the case of vested and
        exercisable awards in the event of death under the terms of the
        applicable award agreements.

                      (iii)  Disability. In the event the Company elects to
        terminate Executive's employment during the Employment Period on account
        of Disability, the Company shall, in addition to paying the amounts set
        forth in Section 7(c)(i), pay to Executive, in one lump sum, no later
        than 31 days following the Date of Termination, an amount equal to two
        times Covered Average Compensation. The Company shall also, commencing
        upon the Date of Termination:

                             (A)   Continue, without cost to Executive, benefits
               comparable to the medical and disability benefits provided to
               Executive immediately prior to the Date of Termination under
               Section 3(c) and Section 3(d) for a period of 24 months following
               the Date of Termination or until such earlier date as Executive
               obtains comparable benefits through other employment;

                             (B)   Continue to pay, or reimburse Executive, for
               all premiums then due or thereafter payable on the whole-life
               portion of the split-dollar insurance policy referenced under
               Section 3(d) for so long as such payments are due; and

                             (C)   Take whatever action is necessary to cause
               Executive to become vested as of the Date of Termination in all
               stock options, restricted stock grants, and all other
               equity-based awards and be entitled to exercise and continue to
               exercise all stock options and all other equity-based awards
               having an exercise schedule and to retain such grants and awards
               to the same extent as if they were vested upon termination of
               employment in accordance with their terms.

                      (iv)   Non-Renewal. In the event the Company gives
        Executive a notice of non-renewal pursuant to Section 1 above, the
        Company shall, in addition to paying the amounts set forth in Section
        7(c)(i), commencing upon the Date of Termination:

                             (A)   Pay to Executive, for 12 consecutive months,
               commencing with the first day of the month immediately following
               the Date of Termination, a monthly amount equal to the result
               obtained by dividing Covered Average Compensation by twelve;

                             (B)   Continue, without cost to Executive, benefits
               comparable to the medical and disability benefits provided to
               Executive immediately prior to the Date of Termination under
               Section 3(c) and Section 3(d) for a period of 24 months following
               the Date of Termination or until such earlier date as Executive
               obtains comparable benefits through other employment; and

                             (C)   Take whatever action is necessary to cause
               Executive to become vested as of the Date of Termination in all
               stock options, restricted stock grants, and all other
               equity-based awards and be entitled to exercise and continue


<PAGE>   11



               to exercise all stock options and all other equity-based awards
               having an exercise schedule and to retain such grants and awards
               to the same extent as if they were vested upon termination of
               employment in accordance with their terms; and

                             (D)   Continue to pay, or reimburse Executive for,
               all premiums then due or thereafter payable on the whole-life
               portion of the split-dollar insurance policy referenced under
               Section 3(d) for so long as such payments are due.

                      (v)    Termination Without Cause; Constructive Termination
        Without Cause. In the event the Company or any successor to the Company
        terminates Executive's employment without Cause, or if Executive
        terminates his employment in a Constructive Termination without Cause,
        the Company shall, in addition to paying the amounts provided under
        Section 7(c)(i), pay to Executive, in one lump sum no later than 31 days
        following the Date of Termination, an amount equal to three times
        Covered Average Compensation. The Company shall also, commencing upon
        the Date of Termination:

                             (A)   Continue, without cost to Executive, benefits
               comparable to the medical and disability benefits provided to
               Executive immediately prior to the Date of Termination under
               Section 3(c) and Section 3(d) for a period of 36 months following
               the Date of Termination or until such earlier date as Executive
               obtains comparable benefits through other employment;

                             (B)   Continue to pay, or reimburse Executive, for
               so long as such payments are due, all premiums then due or
               payable on the whole-life portion of the split-dollar insurance
               policy referenced under Section 3(d); and

                             (C)   Take whatever action is necessary to cause
               Executive to become vested as of the Date of Termination in all
               stock options, restricted stock grants, and all other
               equity-based awards and be entitled to exercise and continue to
               exercise all stock options and all other equity-based awards
               having an exercise schedule and to retain such grants and awards
               to the same extent as if they were vested upon termination of
               employment in accordance with their terms.

                      (vi)   Termination for Cause; Voluntary Resignation. In
        the event Executive's employment terminates during the Employment Period
        other than in connection with a termination meeting the conditions of
        subparagraphs (ii), (iii), (iv), or (v) of this Section 7(c), Executive
        shall receive the amounts set forth in Section 7(c)(i) in full
        satisfaction of all of his entitlements from the Company. All
        equity-based awards not vested as of the Date of Termination shall
        terminate (unless otherwise provided in the applicable award agreement)
        and Executive shall have no further entitlements with respect thereto.


<PAGE>   12



               (d)    Additional Benefits.

                      (i)    Anything in this Agreement to the contrary
        notwithstanding, in the event it shall be determined that any payment or
        distribution by the Company to or for the benefit of Executive, whether
        paid or payable or distributed or distributable (1) pursuant to the
        terms of Section 7 of this Agreement, (2) pursuant to or in connection
        with any compensatory or employee benefit plan, agreement or
        arrangement, including but not limited to any stock options, restricted
        or unrestricted stock grants issued to or for the benefit of Executive
        and forgiveness of any loans by the Company to Executive or (3)
        otherwise (collectively, "Severance Payments"), would be subject to the
        excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
        as amended (the "Code"), and any interest or penalties are incurred by
        Executive with respect to such excise tax (such excise tax, together
        with any such interest and penalties, are hereinafter collectively
        referred to as the "Excise Tax"), then Executive shall be entitled to
        receive an additional payment (a "Partial Gross-Up Payment"), such that
        the net amount retained by Executive, before accrual or payment of any
        Federal, state or local income tax or employment tax, but after accrual
        or payment of the Excise Tax attributable to the Partial Gross-Up
        Payment, is equal to the Excise Tax on the Severance Payments.

                      (ii)   Subject to the provisions of Section 7(d)(iii), all
        determinations required to be made under this Section 7, including
        whether a Partial Gross-Up Payment is required and the amount of such
        Partial Gross-Up Payment, shall be made by Coopers & Lybrand LLP or such
        other nationally recognized accounting firm as may at that time be the
        Company's independent public accountants immediately prior to the Change
        in Control (the "Accounting Firm"), which shall provide detailed
        supporting calculations both to the Company and Executive within 15
        business days of the Date of Termination, if applicable, or at such
        earlier time as is reasonably requested by the Company or Executive. The
        initial Partial Gross-Up Payment, if any, as determined pursuant to this
        Section 7(d)(ii), shall be paid to Executive within five days of the
        receipt of the Accounting Firm's determination. If the Accounting Firm
        determines that no Excise Tax is payable by Executive, the Company shall
        furnish Executive with an opinion of counsel that failure to report the
        Excise Tax on Executive's applicable federal income tax return would not
        result in the imposition of a negligence or similar penalty. Any
        determination by the Accounting Firm shall be binding upon the Company
        and Executive. As a result of the uncertainty in the application of
        Section 4999 of the Code at the time of the initial determination by the
        Accounting Firm hereunder, it is possible that Partial Gross-Up Payments
        which will not have been made by the Company should have been made (an
        "Underpayment"). In the event that the Company exhausts its remedies
        pursuant to Section 7(d)(iii) and Executive thereafter is required to
        make a payment of any Excise Tax, the Accounting Firm shall determine
        the amount of the Underpayment that has occurred, consistent with the
        calculations required to be made hereunder, and any such Underpayment,
        and any interest and penalties imposed on the Underpayment and required
        to be paid by Executive in connection with the proceedings described in
        Section 7(d)(iii), and any related legal and accounting expenses, shall
        be promptly paid by the Company to or for the benefit of Executive.

                      (iii)  Executive shall notify the Company in writing of
        any claim by the Internal Revenue Service that, if successful, would
        require the payment by the Company of the Partial Gross-Up Payment. Such
        notification shall be given as soon as practicable but no later than 10
        business days after Executive knows of such claim and shall apprise


<PAGE>   13



        the Company of the nature of such claim and the date on which such claim
        is requested to be paid. Executive shall not pay such claim prior to the
        expiration of the 30-day period following the date on which he gives
        such notice to the Company (or such shorter period ending on the date
        that any payment of taxes with respect to such claim is due). If the
        Company notifies Executive in writing prior to the expiration of such
        period that it desires to contest such claim, Executive shall:

                             (A)   give the Company any information reasonably
               requested by the Company relating to such claim,

                             (B)   take such action in connection with
               contesting such claim as the Company shall reasonably request in
               writing from time to time, including, without limitation,
               accepting legal representation with respect to such claim by an
               attorney selected by the Company,

                             (C)   cooperate with the Company in good faith in
               order effectively to contest such claim, and

                             (D)   permit the Company to participate in any
               proceedings relating to such claim; provided, however that the
               Company shall bear and pay directly all costs and expenses
               attributable to the failure to pay the Excise Tax (including
               related additional interest and penalties) incurred in connection
               with such contest and shall indemnify and hold Executive
               harmless, for any Excise Tax up to an amount not exceeding the
               Partial Gross-Up Payment, including interest and penalties with
               respect thereto, imposed as a result of such representation, and
               payment of related legal and accounting costs and expenses (the
               "Indemnification Limit"). Without limitation on the foregoing
               provisions of this Section 7(d)(iii), the Company shall control
               all proceedings taken in connection with such contest and, at its
               sole option may pursue or forego any and all administrative
               appeals, proceedings, hearings and conferences with the taxing
               authority in respect of such claim and may, at its sole option,
               either direct Executive to pay the tax claimed and sue for a
               refund or contest the claim in any permissible manner, and
               Executive agrees to prosecute such contest to a determination
               before any administrative tribunal, in a court of initial
               jurisdiction and in one or more appellate courts, as the Company
               shall determine; provided, however, that if the Company directs
               Executive to pay such claim and sue for a refund, the Company
               shall advance so much of the amount of such payment as does not
               exceed the Excise Tax, and related interest and penalties, to
               Executive on an interest-free basis and shall indemnify and hold
               Executive harmless, from any related legal and accounting costs
               and expenses, and from any Excise Tax, including related interest
               or penalties imposed with respect to such advance or with respect
               to any imputed income with respect to such advance up to an
               amount not exceeding the Indemnification Limit; and further
               provided that any extension of the statute of limitations
               relating to payment of taxes for the taxable year of Executive
               with respect to which such contested amount is claimed to be due
               is limited solely to such contested amount. Furthermore, the
               Company's control of the contest shall be limited to issues with
               respect to which a Partial Gross-Up Payment would be payable
               hereunder and Executive shall be entitled to settle or contest,
               as the case may be, any other issues raised by the Internal
               Revenue Service or any other taxing authority.


<PAGE>   14



                      (iv)   If, after the receipt by Executive of an amount
        advanced by the Company pursuant to Section 7(d)(iii), Executive becomes
        entitled to receive any refund with respect to such claim, Executive
        shall (subject to the Company's complying with the requirements of
        Section 7(d)(iii)) promptly pay to the Company so much of such refund
        (together with any interest paid or credited thereon after taxes
        applicable thereto) (the "Refund") as is equal to (A) if the Company
        advanced or paid the entire amount required to be so advanced or paid
        pursuant to Section 7(d)(iii) hereof (the "Required Section 7(d)
        Advance"), the aggregate amount advanced or paid by the Company pursuant
        to this Section 7(d) less the portion of such amount advanced to
        Executive to reimburse him for related legal and accounting costs, or
        (B) if the Company advanced or paid less than the Required Section 7(d)
        Advance, so much of the aggregate amount so advanced or paid by the
        Company pursuant to this Section 7(d) as is equal to the difference, if
        any, between (C) the amount refunded to Executive with respect to such
        claim and (D) the sum of the portion of the Required Section 7(d)
        Advance that was paid by Executive and not paid or advanced by the
        Company plus Executive's related legal and accounting fees, as
        applicable. If, after the receipt by Executive of an amount advanced by
        the Company pursuant to Section 7(d)(iii), a determination is made that
        Executive shall not be entitled to any refund with respect to such claim
        and the Company does not notify Executive in writing of its intent to
        contest such denial of refund prior to the expiration of 30 days after
        such determination, then such advance shall be forgiven and shall not be
        required to be repaid and the amount of such advance shall offset, to
        the extent thereof, the amount of Partial Gross-Up Payment required to
        be paid.

               (e)    Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 7 and Section 9.

               (f)    Date of Termination. "Date of Termination," with respect
to any termination of Executive's employment during the Employment Period, shall
mean (i) if Executive's employment is terminated for Disability, 30 days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of Executive's duties during such 30 day period),
(ii) if Executive's employment is terminated for Cause, the date on which a
Notice of Termination is given which complies with the requirements of Section
7(b)(1) hereof, and (iii) if Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination. In the case of a
termination by the Company other than for Cause, the Date of Termination shall
not be less than 30 days after the Notice of Termination is given. In the case
of a termination by Executive, the Date of Termination shall not be less than 15
days from the date such Notice of Termination is given. Notwithstanding the
foregoing, in the event that Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the Date of Termination and
such acceleration shall not result in the termination being treated as a
Termination without Cause. Upon any termination of his employment, Executive
will concurrently resign his membership on the Board of Directors.

               (g)    No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment, or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
7(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and


<PAGE>   15



payable in accordance with the terms of any promissory notes given by Executive
in favor of the Company, by offset against any amount claimed to be owed by
Executive to the Company or otherwise.

               (h)    Nature of Payments. The amounts due under this Section 7
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims Executive may have in respect of his employment by
the Company or its affiliates and are provided as the sole and exclusive
benefits to be provided to Executive, his estate, or his beneficiaries in
respect of his termination of employment from the Company or its affiliates.

        8.     Non-Competition; Non-Solicitation; Specific Enforcement.

               (a)    Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive (other than a
Constructive Termination Without Cause) prior to a Change in Control, Executive
shall not, without the prior written consent of the Board of Directors, become
associated with, or engage in any "Restricted Activities" with respect to any
"Competing Enterprise," as such terms are hereinafter defined, whether as an
officer, employee, principal, partner, agent, consultant, independent contractor
or shareholder. "Competing Enterprise," for purposes of this Agreement, shall
mean any person, corporation, partnership, venture or other entity which (a) is
a publicly traded real estate investment trust, or (b) is engaged in the
business of managing, owning, leasing or joint venturing residential real estate
within 30 miles of residential real estate owned or under management by the
Company or its affiliates. "Restricted Activities," for purposes of this
Agreement, shall mean executive, managerial, directorial, administrative,
strategic, business development or supervisory responsibilities and activities
relating to all aspects of residential real estate ownership, management,
residential real estate franchising, and residential real estate
joint-venturing.

               (b)    Non-Solicitation. During the Employment Period, and for a
period of one year following the Date of Termination, Executive shall not,
without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates.

               (c)    Specific Enforcement. Executive and the Company agree that
the restrictions, prohibitions and other provisions of this Section 8 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section 8 is unreasonable, the
parties intend and agree that this Agreement shall be construed by the court in
such a manner as to impose all of those restrictions on Executive's conduct that
are reasonable in light of the circumstances and as are necessary to assure to
the Company the benefits of this Agreement. The Company and Executive further
agree that the services to be rendered under this Agreement by Executive are
special, unique and of extraordinary character, and that in the event of the
breach by Executive of the terms and conditions of this Agreement or if
Executive, without the prior consent of the Board of Directors,


<PAGE>   16



shall take any action in violation of this Section 8, the Company will suffer
irreparable harm for which there is no adequate remedy at law. Accordingly,
Executive hereby consents to the entry of a temporary restraining order or ex
parte injunction, in addition to any other remedies available at law or in
equity, to enforce the provisions hereof. Any proceeding or action seeking
equitable relief for violation of this Section 8 must be commenced in the
federal or state courts, in either case in California. Executive and the Company
irrevocably and unconditionally submit to the jurisdiction of such courts and
agree to take any and all future action necessary to submit to the jurisdiction
of such courts.

        9.     Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
5904 Richmond Avenue, Alexandria, VA 22303, and if to Executive at the address
set forth in the Company records (or to such other address as may be provided by
notice).

        10.    Miscellaneous. This Agreement, together with Annex A and Annex B,
constitutes the entire agreement between the parties concerning the subjects
hereof and supersedes any and all prior agreements or understandings, including,
without limitation, any plan or agreement providing benefits in the nature of
severance, but excluding benefits provided under other Company plans or
agreements, except to the extent this Agreement provides greater rights than are
provided under such other plans or agreements. As of the Effective Date, this
Agreement supersedes the Prior Agreement which will have no further force or
effect. Executive hereby waives, to the extent applicable, the effect of the
transactions contemplated by the Merger Agreement (or shareholder approval of
such transaction) on any change in control provisions in any Company employee
benefit plan or agreement. This Agreement shall terminate upon termination of
the Merger Agreement and abandonment of the merger contemplated by the Merger
Agreement. This Agreement may not be assigned by Executive without the prior
written consent of the Company, and may be assigned by the Company and shall be
binding upon, and inure to the benefit of, the Company's successors and assigns.
The Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. Headings herein are
for convenience of reference only and shall not define, limit or interpret the
contents hereof.

        11.    Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of the Company, as the case may be.

        12.    Severability. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.


<PAGE>   17



        13.    Resolution of Disputes.

               (a)    Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 8 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in California in accordance with the National Rules of
the American Arbitration Association governing employment disputes (the
"National Rules"). In any proceeding relating to the amount owed to Executive in
connection with his termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 7(c) and, if applicable, Section 7(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.

               (b)    Attorneys Fees.

                      (i)    Reimbursement After Executive Prevails. Except as
        otherwise provided in this paragraph, each party shall pay the cost of
        his or its own legal fees and expenses incurred in connection with an
        arbitration proceeding. Provided an award is made in favor of Executive
        in such proceeding, all of his reasonable attorneys fees and expenses
        incurred in pursuing or defending such proceeding shall be promptly
        reimbursed to Executive by the Company within five days of the entry of
        the award.

                      (ii)   Reimbursement in Actions to Stay, Enjoin or
        Collect. In any case where the Company or any other person seeks to stay
        or enjoin the commencement or continuation of an arbitration proceeding,
        whether before or after an award has been made, or where Executive seeks
        recovery of amounts due after an award has been made, or where the
        Company brings any proceeding challenging or contesting the award, all
        of Executive's reasonable attorneys fees and expenses incurred in
        connection therewith shall be promptly reimbursed by the Company to
        Executive, within five days of presentation of an itemized request for
        reimbursement, regardless of whether Executive prevails, regardless of
        the forum in which such proceeding is brought, and regardless of whether
        a Change in Control has occurred.

                      (iii)  Reimbursement After a Change in Control. Without
        limitation on the foregoing, solely in a proceeding commenced by the
        Company or by Executive after a Change in Control has occurred, the
        Company shall advance to Executive, within five days of presentation of
        an itemized request for reimbursement, all of Executive's legal fees and
        expenses incurred in connection therewith, regardless of the forum in
        which such proceeding was commenced, subject to delivery of an
        undertaking by Executive to reimburse the Company for such advance if he
        does not prevail in such proceeding (unless such fees are to be
        reimbursed regardless of whether Executive prevails as provided in
        clause (ii) above).

        14.    Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.


<PAGE>   18



        15.    Board Action. Where an action called for under this Agreement is
required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.

        16.    Withholding. All amounts required to be paid by the Company shall
be subject to reduction in order to comply with applicable federal, state and
local tax withholding requirements.

        17.    Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.

        18.    Governing Law. This Agreement shall be construed and regulated in
all respects under the laws of the State of Maryland.


<PAGE>   19


        IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.

                                        Bay Apartment Communities, Inc.



                                        By:   /s/ Gilbert M. Meyer
                                           ------------------------------------
                                           Its: Chairman


                                           /s/ Morton L. Newman
                                        ---------------------------------------
                                        Morton L. Newman

Source: OneCLE Business Contracts.