Exhibit 10.3

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (the “Agreement”) made as of the 1st day of January,
2012 by and between HEARTH & HOME OF VANDALIA, INC. an Ohio corporation, with
offices at 5057 Troy Road, Springfield, Ohio, 45502 (referred to in this
Agreement as the “Debtor”), and RED MORTGAGE CAPITAL, LLC, a Delaware limited
liability company, having an office and place of business at Two Miranova Place,
12th Floor, Columbus, Ohio 43215 (referred to in this Agreement as the “Secured
Party”).

 

The Debtor is indebted to the Secured Party in the amount of $3,721,500.00 in
connection with the financing of a health care facility known as “HEARTH & HOME
OF VANDALIA”, FHA Project No. 046-43057, located in Vandalia, Montgomery County,
Ohio (referred to in this Agreement as the “Project”). The indebtedness (which
is referred to in this Agreement as the “Indebtedness”) is evidenced by a
Mortgage Note dated of even date herewith, payable to the order of the Secured
Party (referred to in this Agreement as the “Note”), and is secured by a
Mortgage (the “Mortgage”) dated of even date herewith, and recorded or to be
recorded among the land records for Montgomery County, Ohio. The Mortgage
securing the Indebtedness is insured by the Secretary of Housing and Urban
Development (referred to in this Agreement as the “Secretary”) under Section 232
pursuant to Section 223(f) of the National Housing Act, as amended.

 

To further secure the repayment of the Indebtedness and at the request of the
Secured Party and the Secretary, the Debtor wishes to grant to the Secured
Party, pursuant to the Uniform Commercial Code as in effect in the State of Ohio
(referred to in this Agreement as the “State”) a security interest in certain
property related to the Project. The parties also intend to set forth in this
instrument their agreement with respect to that security interest.

 

NOW, THEREFORE, in consideration of the foregoing and of the mutual promises set
forth below, and in further consideration of the sum of One Dollar ($1.00) and
other good and valuable consideration in hand paid by each party to the other,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:

 

1.                       Creation of Security Interest.

 

(a)                            Granting Clause. The Debtor hereby grants a
security interest (referred to in this Agreement as the “Security Interest”) to
the Secured Party in all property (referred to in this Agreement as the
“Collateral”) which (i) is owned by the Debtor or becomes the property of the
Debtor hereafter and is used in the operation of the Project, and/or (ii) is
described in Exhibit “B” and Exhibit “C” attached to this Agreement; and/or
(iii) is part of, attached to, or located on the land and premises legally
described in Exhibit “A” attached to this Agreement. Exhibits “A,” “B,” and “C”
are hereby incorporated into this Agreement by reference. The Security Interest
is granted for the purpose of securing the Indebtedness.

 

(b)                            Warranty. The Debtor warrants and represents to
the Secured Party that it owns the Collateral free and clear of any lien,
security interest, encumbrance, and other claim of any kind, other than the
Security Interest created by this Agreement, and has the full power to grant the
Security Interest; provided, however that this warranty is subject to: (i) the
rights of the lessor with respect to any personal property or equipment leased
by the Debtor, as lessee; (ii) the rights of the lessee with respect to any
personal property or equipment leased by the Debtor, as lessor (iii) any
security deposits, accounts or monies in the custody of the Debtor or under its
control which are subject to the rights of third parties; and (iv) any account
or deposit which is

 

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subject to terms and conditions contained in special purpose escrow agreements
and other documents relating to the indebtedness.

 

(c)                             Perfection. The Debtor agrees, to the best of
its knowledge, to comply with all applicable laws and requirements in order to
grant to Secured Party a valid, perfected first lien in the Collateral,
authorizes the Secured Party to file financing statements pursuant to Uniform
Commercial Code which name Debtor and identify the Collateral in such places as
are necessary and appropriate under the Uniform Commercial Code, and upon the
request of the Secured Party, from time to time execute and deliver to the
Secured Party one or more financing statements pursuant to the Uniform
Commercial Code then in effect in the State, and any other instruments required
by the Secured Party in connection herewith the filing of which is advisable, in
the sole judgment of the Secured Party, to perfect the Secured Party’s Security
Interest in the Collateral under the laws of the United States, the State, or
any other jurisdiction in which the Secured Party shall determine such filings
to be advisable. The Debtor hereby authorizes the Secured Party to execute and
file, at any time and from time to time, on behalf of the Debtor one or more
financing statements with respect to the Collateral, the filing of which is
advisable, in the sole judgment of the Secured Party including, especially, but
without limitation, continuation statements and statements reperfecting a
security interest in any of the Collateral where the financing statements with
respect thereto had lapsed. The Debtor hereby irrevocably appoints the Secured
Party as the Debtor’s attorney-in-fact to execute and file, from time to time,
on its behalf, one or more financing statements with respect to the Collateral
and to execute such other documents and instruments on behalf of the Debtor as
the Secured Party, in its sole judgment, shall deem necessary or desirable for
the purposes of effectuating this Agreement, such power being coupled with an
interest and irrevocable. The Debtor agrees to notify the Secured Party prior to
any change in its mailing address or principal place of business, in order that
a prompt filing or refiling of any outstanding financing statements or other
public notices may be made, if necessary. The Debtor further agrees to advise
the Secured Party promptly of any new facts which, to the best of its knowledge,
would adversely affect the priority of the Security Interest granted to the
Secured Party by this Agreement.

 

(d)                            Proceeds, etc. The Security Interest shall extend
to and include the proceeds of any Collateral and any property which the Debtor
may receive on account of any Collateral.

 

(e)                             Costs and Expenses of Secured Party. The Debtor
will pay any and all fees, costs and expenses, of whatever kind and nature,
which the Secured Party may incur in filing any financing statements or other
public notices, and the charges of any attorneys whom the Secured Party may
engage in preparing and filing such documents, making title examinations and
rendering opinion letters, as well as all costs and expenses incurred by the
Secured Party, including reasonable attorney’s fees and court costs incurred by
the Secured Party hereunder, whether through judicial proceedings or otherwise,
or in defending or prosecuting any actions or proceedings arising out of or
relating to this transaction, promptly after the Debtor shall have been notified
by the Secured Party of the amount of such fees, costs or expenses, together
with interest thereon at the rate of ten percent (10%) per annum until paid.

 

2.                         Care of Collateral. Unless specifically otherwise
agreed by the Secured Party in writing, the Debtor shall at its sole cost and
expense:

 

(a)                            Maintain possession of the Collateral on the
Project premises (which are described in Exhibit “A”) and not remove the
Collateral from that location.

 

(b)                            Keep the Collateral separate and identifiable.

 

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(c)                             Maintain the Collateral in good repair and
condition as the same is as of the date hereof, as the same is when acquired,
reasonable wear and tear excepted, making replacements when and where necessary,
and otherwise deal with the Collateral in all such ways as are considered good
practice by owners of such property.

 

(d)                            Use the Collateral lawfully and only as permitted
by insurance policies.

 

(e)                             Permit the Secured Party to inspect the
Collateral and any records relating to the Collateral upon reasonable request
and notice during normal business hours.

 

(f)                              Insure the Collateral for its full replacement
value, subject to a deductible of not more than the lesser of (i) $10,000 or
(ii) one percent (1%) of the Mortgage Loan (unless the Secured Party has given
written approval of a larger deductible) in the name of and with loss or damage
payable to the Secured Party, the Federal Housing Administration and the Debtor
as their interests may appear. All such policies shall provide for not less than
thirty (30) days minimum written notice to the Secured Party of cancellation or
material change.

 

(g)                             Keep the Collateral free and clear of all liens
and security interests of others.

 

3.                         Defense of Collateral. The Debtor will promptly
defend any proceeding which may affect the Security Interest or the title to the
Collateral, and will reimburse the Secured Party for all costs and expenses
incurred by the Secured Party in connection with such defense.

 

4.                         Charges, Liens and Encumbrances Affecting Collateral.
The Debtor will pay when due all existing or future charges, liens, or
encumbrances on and all taxes and assessments now or hereafter imposed on or
affecting the Collateral.

 

5.                       Remedies on Default. In the event of a default, as
defined in Section 6:

 

(a)                            The Secured Party may, at its option, declare the
full principal amount of the Indebtedness, and any interest accrued on that
amount, to be immediately due and payable; and

 

(b)                            The Secured Party shall have all of the rights
and remedies of a Secured Party against the Collateral under the Uniform
Commercial Code as in effect in the State.

 

Without limitation of those rights and remedies, the Secured Party may, upon
written notice to the Debtor, take, and publicly or privately sell or convey
full right, title and interest in and to, the Collateral, or any part of it, in
the name of the Secured Party and/or its designees. The Debtor hereby
constitutes and appoints the Secured Party as its true and lawful
attorney-in-fact, such power being coupled with an interest and irrevocable, to
assign and transfer its interest in any or all of the Collateral in the event of
a default.

 

6.                       Defaults. For purposes of this Agreement, the Debtor
shall be deemed to be in default if:

 

(a)                            The Debtor violates any provision of (i) the Note
(which evidences the Indebtedness); (ii) the Mortgage (which also secures the
Indebtedness); (iii) this Security Agreement; or (iv) any other instrument
related to the Indebtedness (which Note, Mortgage, Security Agreement and other
instruments related to the Indebtedness are hereinafter sometimes collectively
referred to as the “Security Documents”); provided, however, that an event of
default shall not occur unless such violations are not cured within applicable
cure periods, if any, as may be provided in said Security Documents;

 

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(b)                            There occurs any actual or threatened demolition
of or injury or waste to the Project premises, not covered by insurance, or not
replaced or restored by the Debtor, which may impair the value of the
Collateral; or

 

(c)                             A receiver is appointed for or a petition in
bankruptcy is filed by or against the Debtor, its successors or its assigns,
which receiver or involuntary bankruptcy petition is not removed, vacated or
stayed within sixty (60) days from the first date of appointment or filing
thereof; or

 

(d)                            The Debtor is dissolved and liquidation of the
Debtor is commenced in accordance with the Debtor’s organizational documents
and/or the law of the State.

 

(e)                             The Debtor changes its name or the jurisdiction
in which it is originated without the prior written consent of the Secured
Party.

 

7.                         No Waiver. No failure on the part of the Secured
Party to exercise, and no delay on the part of the Secured Party in exercising,
any right or remedy under this Agreement shall operate as a waiver of that right
or remedy. A single or partial exercise by the Secured Party of any right or
remedy under this Agreement shall not constitute an election of remedies by the
Secured Party or preclude any other or further exercise of that right or remedy
or the exercise of any other right or remedy. The remedies provided in this
Agreement are not exclusive of any remedies provided by law.

 

8.                         Priority of Remedies; Renewals and Extensions.
Neither the Debtor nor any other persons interested in the Collateral or the
proceeds of the Collateral shall have any right to require the Secured Party
first to resort to or proceed personally against any other person or to proceed
against any other collateral security, or to give priority or preference to any
item of Collateral, or to proceed upon any guaranty prior to exercising its
rights hereunder. No renewal or extension of the Indebtedness, no release or
surrender of any Collateral given as security for the Indebtedness, no release
of any obligor with respect to the Indebtedness, and no delay by the Secured
Party in enforcing the Indebtedness or exercising any right or power with
respect to the Indebtedness shall affect the Secured Party’s rights with respect
to the Collateral.

 

9.                         Termination. This Agreement, and each of the rights
and remedies afforded to the Secured Party hereunder shall automatically
terminate upon payment of the Indebtedness in full in compliance with the
provisions of the Note. Upon termination hereunder, the Secured Party hereby
agrees to execute a Termination Statement and any other documents reasonably
necessary to terminate this Agreement and release the Collateral from the
Security Interest.

 

10.                  Non-Recourse Obligation. Notwithstanding any other
provision contained herein or in the Note, it is agreed that the execution of
the Note shall impose no personal liability upon the Debtor (nor any of its
present or future members or managers) for payment of the indebtedness evidenced
thereby and in the event of a default, the holder of the Note shall look solely
to the property subject to the Mortgage and this Security Agreement and to the
rents, issues and profits thereof in satisfaction of the indebtedness evidenced
by the Note and will not seek or obtain any deficiency or personal judgment
against the Debtor (or any of its present or future limited or general partners)
except such judgment as may be necessary to foreclose or bar its interest in the
property subject to the Mortgage and this Security Agreement and all other
property mortgaged, pledged, conveyed or assigned to secure payment of the Note;
provided, that nothing in this condition and no action so taken shall operate to
impair any obligation of the Debtor under that certain Regulatory Agreement of
even date herewith between the Debtor and the Secretary.

 

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11.                  Terms. Unless otherwise defined, all words used in this
Agreement shall have the meanings given them in the Uniform Commercial Code as
in effect in the State.

 

12.                  Notices. All notices, demands and communications between
the parties concerning this Agreement shall be in writing and shall be
delivered, or mailed by registered or certified mail with postage prepaid, or
telegraphed, addressed in each case as follows, and shall be deemed to have been
given or made when so delivered, deposited in the mail, or telegraphed:

 

If to the Debtor, to:

 

HEARTH & HOME OF VANDALIA, INC.

5057 Troy Road

Springfield, Ohio, 45502

Attention: David A. Tenwick

 

If to the Secured Party, to:

 

Red Mortgage Capital, LLC

Two Miranova Place, 12th Floor

Columbus, Ohio 43215

Attention: Edward H. R. Tellings, Senior Managing Director

 

Either party, at any time, by written notice given to the other in accordance
with this Section, may designate a different address to which such
communications shall thereafter be directed.

 

13.                Rights of Secretary as Secured Party.

 

(a)                            Contemporaneously herewith the Secretary and the
Debtor have executed the Regulatory Agreement, which Regulatory Agreement is
hereby incorporated by reference herein.

 

(b)                            The Regulatory Agreement is incorporated in the
Mortgage by reference. Under the terms of the Regulatory Agreement, the
Secretary may exercise certain rights in and to the Collateral prior to the
assignment of the Note, Mortgage, this Security Agreement and any other
collateral documents which have been executed and delivered to the Secretary as
a condition precedent to the Secretary’s endorsement of the Note for mortgage
insurance.

 

(c)                             The Debtor and the Secured Party hereby agree
that the Secretary shall be an additional secured party under this Security
Agreement together with the Secured Party, as their interests may appear, and
that the Secretary shall be listed on the Uniform Commercial Code Financing
Statements to be filed contemporaneously herewith; provided, however, that
nothing herein or in the Uniform Commercial Code Financing Statements shall
require the execution, now or at any future time, of any amendment, extension,
or other document by the Secretary.

 

(d)                            To the extent any party herein is required or
desires to give notice to the Secretary hereunder, such notice shall be
delivered in accordance with the provisions of Paragraph 12 hereof, as follows:

 

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U.S. Department of Housing and Urban Development

Office of Insured Health Care Facilities

451 Seventh Street SW, Room 2247

Washington, DC 20410

Attention: Section 232 Program Manager

 

14.                  Miscellaneous.

 

(a)                            This Agreement is intended to be supplemental to
and not in substitution or in derogation of any security agreement contained in
the Mortgage. In the event of any conflict between this Agreement and the
Mortgage, the Mortgage shall be controlling.

 

(b)                            In any instance where the consent or approval of
the Secured Party may be given or is required or any determination is to be
rendered by the Secured Party hereunder, the granting, withholding or denial of
such consent or approval and the rendering of such determination shall be made
or exercised by the Secured Party at its sole and exclusive option and in its
reasonable discretion.

 

(c)                             It is understood and agreed that no judgment or
decree which may be entered on any debt secured or intended to be secured by the
Mortgage shall operate to abrogate or lessen the effect of this Agreement, but
that this Agreement shall continue in full force and effect until the payment
and discharge of the Indebtedness due under the Security Documents.

 

(d)                            It is understood and agreed that the remedies
granted to the Secured Party herein shall not be deemed exclusive of any other
remedies possessed by the Secured Party under the Note, the Mortgage, any other
of the Security Documents or at law or in equity, but shall be deemed additional
and cumulative thereto.

 

(e)                             This Agreement shall be governed by and
construed in accordance with the laws of the State.

 

(f)                              All captions in this Agreement are for
convenience only, and shall not be considered in construing this Agreement.

 

(g)                             Any reference in this Agreement to a “Section”
shall be construed as referring to a Section of this Agreement.

 

(h)                            This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns.

 

(i)                                The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
the remaining provisions, which shall remain in full force and effect.

 

(j)                               This instrument contains the entire agreement
between the parties as to the rights granted and the obligations assumed in this
instrument. This Agreement may be amended only by a subsequent written
instrument signed by both parties.

 

[SIGNATURES APPEAR ON FOLLOWING PAGES]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year hereinabove first written.

 

 

DEBTOR:

 

HEARTH & HOME OF VANDALIA, INC.

 

an Ohio limited liability company

 

 

 

By:

/s/ David A. Tenwick

 

 

David A. Tenwick

 

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SECURED PARTY:

 

RED MORTGAGE CAPITAL, LLC

 

a Delaware limited liability company

 

 

 

 

By:

/s/ Edward H. R. Tellings

 

 

Edward H. R. Tellings

 

 

Senior Managing Director

 

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