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LEASE AGREEMENT

BETWEEN

HCRI WILBURN GARDENS PROPERTIES, LLC

AND

EMERITUS CORPORATION

March 31, 2005

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SECTION
TABLE OF CONTENTS
PAGE
ARTICLE 1:
LEASED PROPERTY, TERM AND DEFINITIONS
1
1.1
Leased Property
1
1.2
Term
1
1.3
Definitions
1
1.4
Landlord As Agent
10
ARTICLE 2:
RENT
10
2.1
Base Rent
10
2.2
Base Rent Adjustments
10
2.2.1
Annual Increase of Base Rent
10
2.2.2
Additional Landlord Payments
11
2.3
Additional Rent
11
2.4
Place of Payment of Rent
11
2.5
Net Lease
11
2.6
No Termination, Abatement, Etc.
11
2.7
Transaction Fee
12
ARTICLE 3:
IMPOSITIONS AND UTILITIES
12
3.1
Payment of Impositions
12
3.2
Definition of Impositions
13
3.3
Escrow of Impositions
13
3.4
Utilities
14
3.5
Discontinuance of Utilities
14
3.6
Business Expenses
14
3.7
Permitted Contests
14
ARTICLE 4:
INSURANCE
15
4.1
Property Insurance
15
4.2
Liability Insurance
16
4.3
Builder’s Risk Insurance
17
4.4
Insurance Requirements
17
4.5
Replacement Value
18
4.6
Blanket Policy
18
4.7
No Separate Insurance
18
4.8
Waiver of Subrogation
18
4.9
Mortgages
18
4.1
Escrows
19
ARTICLE 5:
INDEMNITY
19
5.1
Tenant’s Indemnification
19
5.1.1
Notice of Claim
19

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SECTION
TABLE OF CONTENTS
PAGE
5.1.2
Survival of Covenants
20
5.1.3
Reimbursement of Expenses
20
5.2
Environmental Indemnity; Audits
20
5.3
Limitation of Landlord’s Liability
20
ARTICLE 6:
USE AND ACCEPTANCE OF PREMISES
21
6.1
Use of Leased Property
21
6.2
Acceptance of Leased Property
21
6.3
Conditions of Use and Occupancy
21
ARTICLE 7:
MAINTENANCE AND MECHANICS’ LIENS
22
7.1
Maintenance
22
7.2
Required Alterations
22
7.3
Mechanic’s Liens
23
7.4
Replacements of Fixtures and Landlord’s Personal Property
23
7.5
Lender Maintenance Reserve Escrow
23
ARTICLE 8:
DEFAULTS AND REMEDIES
24
8.1
Events of Default
24
8.2
Remedies
25
8.3
Right of Setoff
29
8.4
Performance of Tenant’s Covenants
29
8.5
Late Payment Charge
29
8.6
Default Rent
29
8.7
Attorneys’ Fees
29
8.8
Escrows and Application of Payments
30
8.9
Remedies Cumulative
30
8.10
Waivers
30
8.11
Obligations Under the Bankruptcy Code
30
ARTICLE 9:
DAMAGE AND DESTRUCTION
31
9.1
Notice of Casualty
31
9.2
Substantial Destruction
31
9.3
Partial Destruction
32
9.4
Restoration
32
9.5
Insufficient Proceeds
33
9.6
Not Trust Funds
33
9.7
Landlord’s Inspection
33
9.8
Landlord’s Costs
33
9.9
No Rent Abatement
33

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SECTION
TABLE OF CONTENTS
PAGE
ARTICLE 10:
CONDEMNATION
33
10.1
Total Taking
33
10.2
Partial Taking
34
10.3
Condemnation Proceeds Not Trust Funds
34
ARTICLE 11:
TENANT’S PROPERTY
34
11.1
Tenant’s Property
34
11.2
Requirements for Tenant’s Property
34
ARTICLE 12:
RENEWAL OPTIONS
36
12.1
Renewal Options
36
12.2
Effect of Renewal
36
ARTICLE 13:
RIGHT OF FIRST OPPORTUNITY
37
13.1
Right of First Opportunity
37
13.2
Fair Market Value
38
13.3
Closing
40
ARTICLE 14:
NEGATIVE COVENANTS
40
14.1
No Debt
40
14.2
No Liens
40
14.3
No Guaranties
40
14.4
No Transfer
40
14.5
No Dissolution
40
14.6
Subordination of Payments to Affiliates
40
14.7
Change of Location or Name
41
ARTICLE 15:
AFFIRMATIVE COVENANTS
41
15.1
Perform Obligations
41
15.2
Proceedings to Enjoin or Prevent Construction
41
15.3
Documents and Information
41
15.3.1
Furnish Documents
41
15.3.2
Furnish Information
42
15.3.3
Further Assurances and Information
42
15.3.4
Material Communications
42
15.3.5
Requirements for Financial Statements
42
15.4
Compliance With Laws
43
15.5
Broker’s Commission
43
15.6
Existence and Change in Ownership
43
15.7
Financial Covenants
43
15.7.1
Definitions
43

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SECTION
TABLE OF CONTENTS
PAGE
15.7.2
Coverage Ratio
43
15.8
Facility Licensure and Certification
44
15.8.1
Notice of Inspections
44
15.8.2
Material Deficiencies
44
15.9
Transfer of License and Facility Operations
44
15.9.1
Licensure
44
15.9.2
Facility Operations
44
15.10
Bed Operating Rights
45
15.11
Power of Attorney
45
15.12
Compliance with Loan Documents
45
ARTICLE 16:
ALTERATIONS, CAPITAL IMPROVEMENTS, AND SIGNS
47
16.1
Prohibition on Alterations and Improvements
47
 
16.2
Approval of Alterations
47
 
16.3
Permitted Alterations
47
 
16.4
Requirements for Permitted Alterations
47
 
16.5
Ownership and Removal of Permitted Alterations
48
 
16.6
Minimum Qualified Capital Expenditures
48
 
16.7
Signs
49
 
ARTICLE 17:
RESERVED
49
 
ARTICLE 18:
ASSIGNMENT AND SALE OF LEASED PROPERTY
49
 
18.1
Prohibition on Assignment and Subletting
49
 
18.2
Requests for Landlord’s Consent to Assignment, Sublease or Management Agreement
49
 
18.3
Agreements with Residents
50
 
18.4
Sale of Leased Property
50
 
18.5
Assignment by Landlord
51
 
ARTICLE 19:
HOLDOVER AND SURRENDER
51
 
19.1
Holding Over
51
 
19.2
Surrender
51
 
19.3
Indemnity
51
 
ARTICLE 20:
RESERVED
52
 
ARTICLE 21:
QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT AND ESTOPPEL CERTIFICATES
52
 
21.1
Quiet Enjoyment
52
 
21.2
Subordination
52
 
21.3
Attornment
52
 
21.4
Estoppel Certificates
53
 

 

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SECTION
TABLE OF CONTENTS
PAGE
ARTICLE 22:
REPRESENTATIONS AND WARRANTIES
53
22.1
Organization and Good Standing
54
22.2
Power and Authority
54
22.3
Enforceability
54
22.4
Government Authorizations
54
22.5
Financial Statements
54
22.6
Condition of Facility
54
22.7
Compliance with Laws
55
22.8
No Litigation
55
22.9
Consents
55
22.10
No Violation
55
22.11
Reports and Statements
55
22.12
ERISA
56
22.13
Chief Executive Office
56
22.14
Other Name or Entities
56
22.15
Parties in Possession
56
22.16
Access
56
22.17
Utilities
56
22.18
Condemnation and Assessments
56
22.19
Zoning
57
22.20
Environmental Matters
57
22.21
Leases and Contracts
57
22.22
No Default
58
22.23
Tax Status
58
ARTICLE 23:
RESERVED
58
ARTICLE 24:
SECURITY INTEREST
58
24.1
Collateral
58
24.2
Additional Documents
59
24.3
Notice of Sale
59
24.4
Recharacterization
59
24.5
Subordination
59
ARTICLE 25:
MISCELLANEOUS
59
25.1
Notices
59
25.2
Advertisement of Leased Property
60
25.3
Entire Agreement
60
25.4
Severability
60

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SECTION
TABLE OF CONTENTS
PAGE
25.5
Captions and Headings
60
25.6
Governing Law
60
25.7
Memorandum of Lease
60
25.8
Waiver
60
25.9
Binding Effect
61
25.10
No Offer
61
25.11
Modification
61
25.12
Landlord’s Modification
61
25.13
No Merger
61
25.14
Laches
61
25.15
Limitation on Tenant’s Recourse
61
25.16
Construction of Lease
62
25.17
Counterparts
62
25.18
Landlord’s Consent
62
25.19
Custody of Escrow Funds
62
25.20
Landlord’s Status as a REIT
62
25.21
Exhibits
62
25.22
WAIVER OF JURY TRIAL
62
25.23
CONSENT TO JURISDICTION
62
25.24
Attorney’s Fees and Expenses
63
25.25
Survival
63
25.26
Time
63

ADDENDUM TO LEASE AGREEMENT
 
SCHEDULE 1:
INITIAL RENT SCHEDULE

 
EXHIBIT A:
LEGAL DESCRIPTIONS

 
EXHIBIT B:
PERMITTED EXCEPTIONS

 
EXHIBIT C:
FACILITY INFORMATION

 
EXHIBIT D:
LANDLORD’S PERSONAL PROPERTY

 
EXHIBIT E:
DOCUMENTS TO BE DELIVERED

 
EXHIBIT F:
TENANT’S CERTIFICATE AND FACILITY FINANCIAL REPORTS

 
EXHIBIT G:
GOVERNMENT AUTHORIZATIONS TO BE OBTAINED; ZONING PERMITS

 
EXHIBIT H:
PENDING LITIGATION

 
EXHIBIT I:
LIST OF LEASES AND CONTRACTS

 
EXHIBIT J:
WIRE TRANSFER INSTRUCTIONS

 

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LEASE AGREEMENT

This Lease Agreement (“Lease”) is made effective as of March 31, 2005 (the
“Effective Date”) between HCRI WILBURN GARDENS PROPERTIES, LLC, a limited
liability company organized under the laws of the State of Delaware (“Landlord”
as further defined in §1.3 below), having its principal office located at One
SeaGate, Suite 1500, P.O. Box 1475, Toledo, Ohio 43603-1475, and EMERITUS
CORPORATION, a corporation organized under the laws of the State of Washington
(“Tenant”), having its chief executive office located at 3131 Elliott Avenue,
Suite 500, Seattle, Washington 98121.
 
R E C I T A L S
 
A.  As of the date hereof, Landlord acquired the Leased Property (defined below)
and paid the Acquisition Payment (defined below) towards the purchase price for
the Leased Property. The amount paid by Tenant for the costs incurred by
Landlord in connection with its acquisition from Tenant of the Leased Property,
if any, shall be considered Tenant’s contribution.
 
B.  Landlord desires to lease the Leased Property to Tenant and Tenant desires
to lease the Leased Property from Landlord upon the terms set forth in this
Lease.
 
NOW, THEREFORE, Landlord and Tenant agree as follows:
 
ARTICLE 1:   LEASED PROPERTY, TERM AND DEFINITIONS
 
1.1  Leased Property. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the Leased Property, subject, however, to the Permitted Exceptions
and subject to the terms and conditions of this Lease.
 
1.2  Term. The initial term (“Initial Term”) of this Lease commences on the
Effective Date and expires at 12:00 Midnight Eastern Time on the day before the
15th anniversary of the Commencement Date (the “Expiration Date”); provided,
however, that Tenant has one or more options to renew the Lease pursuant to
Article 12.
 
1.3  Definitions. Except as otherwise expressly provided, [i] the terms defined
in this section have the meanings assigned to them in this section and include
the plural as well as the singular; [ii] all accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with generally
accepted accounting principles as of the time applicable; and [iii] the words
“herein”, “hereof” and “hereunder” and similar words refer to this Lease as a
whole and not to any particular section.
 
“Acquisition Payment” means any payment by Landlord to acquire Leased Property.
 
“ADA” means the federal statute entitled Americans with Disabilities Act,
42 U.S.C. §12101, et seq.
 

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“Additional Rent” has the meaning set forth in §2.3.
 
“Affiliate” means any person, corporation, partnership, limited liability
company, trust, or other legal entity that, directly or indirectly, controls, or
is controlled by, or is under common control with Tenant or Guarantor. “Control”
(and the correlative meanings of the terms “controlled by” and “under common
control with”) means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such entity.
“Affiliate” includes, without limitation, Guarantor. An Affiliate of Tenant and
Guarantor shall specifically exclude [i] Saratoga Partners IV, L.P.
(“Saratoga”); [ii] Senior Healthcare Partners, LLC; [iii] Columbia Pacific
Management, Inc.; [iv] Holiday Retirement Corporation; [v] Alterra Healthcare
Corporation, but only prior to the date of Tenant’s acquisition thereof, if such
acquisition were to occur; and [vi] any Affiliate of any of the entities listed
in clauses [i] through [vi].
 
“Affiliate Lease” means each lease now or hereafter made between Landlord or any
Landlord Affiliate and Tenant or any Affiliate, as amended, modified, extended
or renewed from time to time.
 
“Affiliate Tenant” means each Affiliate that is a tenant under an Affiliate
Lease.
 
“Annual Company Budget” means Tenant’s projection of its financial statement for
the next fiscal year (or the 12-month rolling forward period, if applicable),
which shall include the balance sheet, statement of income, statement of cash
flows, statement of shareholders’ equity and statement of capital expenditures
for the applicable period.
 
“Annual Facility Budget” means Tenant’s projection of the Facility Financial
Statement for the next fiscal year (or the 12-month rolling forward period, if
applicable).
 
“Annual Financial Statements” means [i] an audited Facility Financial Statement
for the most recent fiscal year; and [ii] for Guarantor, a current unaudited
personal financial statement.
 
“Annual Rent Increase” means the sum of [i] the product of the Investment Amount
as of the Rent Adjustment Date times the applicable Increaser Rate, plus
[ii] the Rent Shortfall, if any.
 
“Average Daily Census” means the number determined by dividing the total
resident days for a Facility during a specific month by the actual number of
days contained in that month.
 
“Bankruptcy Code” means the United States Bankruptcy Code set forth in 11 U.S.C.
§101, et seq., as amended from time to time.
 
“Base Price” means an amount equal to the greater of [i] Total Investment
Amount; or [ii] the sum of [a] the Total Investment Amount and [b] 50% of the
difference
 

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between the Fair Market Value at the time of the exercise of the Right of First
Opportunity under Article 13 plus the Total Investment Amount.
 
“Base Rent” has the meaning set forth in §2.1, as increased from time to time
pursuant to §2.2.
 
“Borrower” means Fredericksburg Assisted, L.L.C., a Washington limited liability
company.
 
“Business Day” means any day other than a Saturday, Sunday, or national holiday.
 
“Casualty” has the meaning set forth in §9.1.
 
“CERCLA” means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended from time to time.
 
“Closing” means the closing of the lease of the Leased Property to Tenant.
 
“Collateral” has the meaning set forth in §24.1.
 
“Commencement Date” means the Effective Date if such date is the first day of a
month, and if it is not, the first day of the first month following the
Effective Date.
 
“Commitment” means the Amended and Restated Term Sheet for the Lease dated
August 27, 2004 and the Project Approval Letter dated August 13, 2004.
 
“CPI” means the Consumer Price Index for Urban Wage Earners and Clerical
Workers, U.S. Cities Average, All Items, (1982-1984=100) published by the Bureau
of Labor Statistics of the U.S. Department of Labor; provided that if
compilation of the CPI in its present form and calculated on its present basis
is discontinued or transferred to any other governmental department or bureau,
then the index most nearly the same as the CPI published by the Bureau of Labor
Statistics shall be used. If there is no such similar index, a substitute index
which is then generally recognized as being similar to the CPI shall be used,
such substitute index to be reasonably selected by Landlord.
 
“CPI Change” shall be determined by dividing [i] the most recently available CPI
as of the applicable Rent Adjustment Date by [ii] the CPI used for the preceding
Rent Adjustment Date. For the 2nd Lease Year, the Commencement Date shall serve
as the preceding Rent Adjustment Date.
 
“Default Rent” has the meaning set forth in §8.6.
 
“Effective Date” means the date of this Lease.
 
“Environmental Laws” means all federal, state, and local laws, ordinances and
policies the purpose of which is to protect human health and the environment, as
amended from time to time, including, but not limited to, [i] CERCLA; [ii] the
Resource Conservation and
 

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Recovery Act; [iii] the Hazardous Materials Transportation Act; [iv] the Clean
Air Act; [v] Clean Water Act; [vi] the Toxic Substances Control Act; [vii] the
Occupational Safety and Health Act; [viii] the Safe Drinking Water Act; and
[ix] analogous state laws and regulations.
 
“Event of Default” has the meaning set forth in §8.1.
 
“Expiration Date” has the meaning set forth in §1.2.
 
“Facility” means the Facility located on the Land, including the Facility
Property.
 
“Facility Cash Flow” has the meaning set forth in §15.7.1.
 
“Facility Coverage Ratio” has the meaning set forth in §15.7.1.
 
“Facility Financial Statement” means a financial statement for the Facility
which shall include the balance sheet, statement of income, statement of cash
flows, statement of shareholders’ equity, occupancy census data (including payor
mix), statement of capital expenditures and a comparison of the actual financial
data versus the Annual Company Budget for the applicable period.
 
“Facility Name” means the name under which the Facility has done business during
the Term. The Facility Name in use by the Facility on the Effective Date is set
forth on the attached Exhibit C.
 
“Facility Property” means the Land on which the Facility is located, the legal
description of which is set forth on Exhibit A, the Improvements on the Land,
the Related Rights, and Landlord’s Personal Property.
 
“Facility State” means the State in which the Facility is located.
 
“Facility Uses” means the uses relating to the operation of the Facility as a
facility of the type and operating the number of beds and units set forth on
Exhibit C.
 
“Fair Market Value” has the meaning set forth in §13.2.
 
“Financial Statements” means [i] the annual, quarterly and year to date
financial statements of Tenant; and [ii] all operating statements for the
Facility, that were submitted to Landlord prior to the Effective Date.
 
“Fixtures” means all permanently affixed equipment, machinery, fixtures and
other items of real and/or personal property (excluding Landlord’s Personal
Property), including all components thereof, now and hereafter located in, on or
used in connection with, and permanently affixed to or incorporated into the
Improvements, including, without limitation, all furnaces, boilers, heaters,
electrical equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling and
air-conditioning systems and apparatus, sprinkler systems and fire and theft
protection equipment, built-in oxygen and vacuum systems, towers and other
devices for the transmission
 

4

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of radio, television and other signals, all of which, to the greatest extent
permitted by law, are hereby deemed by the parties hereto to constitute real
estate, together with all replacements, modifications, alterations and additions
thereto.
 
“Government Authorizations” means all permits, licenses, approvals, consents,
and authorizations required to comply with all Legal Requirements, including,
but not limited to, [i] zoning permits, variances, exceptions, special use
permits, conditional use permits, and consents; [ii] the permits, licenses,
provider agreements and approvals required for licensure and operation of the
Facility in accordance with the Facility Uses and, if applicable, certified as a
provider under the federal Medicare and state Medicaid programs;
[iii] environmental, ecological, coastal, wetlands, air, and water permits,
licenses, and consents; [iv] curb cut, subdivision, land use, and planning
permits, licenses, approvals and consents; [v] building, sign, fire, health, and
safety permits, licenses, approvals, and consents; and [vi] architectural
reviews, approvals, and consents required under restrictive covenants.
 
“Guarantor” means Individual Guarantor.
 
“Guaranty” means the Unconditional and Continuing Lease Guaranty entered into by
Guarantor to guarantee payment and performance of the Obligor Group Obligations
and any amendments thereto or substitutions or replacements therefore.
 
“Hazardous Materials” means any substance [i] the presence of which poses a
hazard to the health or safety of persons on or about the Land, including, but
not limited to, asbestos containing materials; [ii] which requires removal or
remediation under any Environmental Law, including, without limitation, any
substance which is toxic, explosive, flammable, radioactive, or otherwise
hazardous; or [iii] which is regulated under or classified under any
Environmental Law as hazardous or toxic, including, but not limited to, any
substance within the meaning of “hazardous substance”, “hazardous material”,
“hazardous waste”, “toxic substance”, “regulated substance”, “solid waste” or
“pollutant” as defined in any Environmental Law.
 
“HCN” means Health Care REIT, Inc., a Delaware corporation.
 
“HIPDB” means the Healthcare Integrity and Protection Data Bank maintained by
the Department of Health and Human Services.
 
“Impositions” has the meaning set forth in §3.2.
 
“Improvements” means all buildings, structures, Fixtures and other improvements
of every kind on any portion of the Land, including, but not limited to, alleys,
sidewalks, utility pipes, conduits and lines (on-site and off-site), parking
areas and roadways appurtenant to such buildings and structures, now or
hereafter situated upon any portion of the Land.
 
“Increaser Rate” means .40% for the 2nd, 3rd and 4th Lease Year and .30% for the
5th Lease Year and each Lease Year thereafter plus for each Lease Year the Rate
Shortfall, if any.
 
“Individual Guarantor” means Daniel R. Baty.
 

5

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“Initial Term” has the meaning set forth in §1.2.
 
“Investment Amount” is an aggregate concept and means the sum of all Landlord
Payments outstanding at the applicable time.
 
“Land” means the real property described in Exhibit A attached hereto.
 
“Landlord” means HCRI Wilburn Gardens Properties, LLC, a limited liability
company organized under the laws of the State of Delaware.
 
“Landlord Affiliate” means any person, corporation, partnership, limited
liability company, trust, or other legal entity that, directly or indirectly,
controls, or is controlled by, or is under common control with Landlord.
“Control” (and the correlative meanings of the terms “controlled by” and “under
common control with”) means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such entity.
 
“Landlord Payment” means the Acquisition Payment or any advance by Landlord
under the terms hereof.
 
“Landlord’s Personal Property” means all Personal Property owned by Landlord on
the Effective Date and located at the Facility, including, without limitation,
all personal property listed on the attached Exhibit D, together with any and
all replacements thereof, and all Personal Property that pursuant to the terms
of this Lease becomes the property of Landlord during the Term.
 
“Lease” means this Lease Agreement, as amended from time to time.
 
“Lease Documents” means this Lease and all documents executed by Landlord and
Tenant relating to this Lease or the Facility.
 
“Lease Payments” means the sum of the Base Rent payments (as increased from time
to time) for the applicable period.
 
“Lease Year” means each consecutive period of 365 or 366 days throughout the
Term. The first Lease Year commences on the Commencement Date and expires on the
day before the first anniversary of the Commencement Date.
 
“Leased Property” means all of the Land, Improvements, Related Rights and
Landlord’s Personal Property.
 
“Legal Requirements” means all laws, regulations, rules, orders, writs,
injunctions, decrees, certificates, requirements, agreements, conditions of
participation and standards of any federal, state, county, municipal or other
governmental entity, administrative agency, insurance underwriting board,
architectural control board, private third-party payor, accreditation
organization, or any restrictive covenants applicable to the development,
construction, condition and operation of the Facility by Tenant for the Facility
Uses, including,
 

6

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but not limited to, [i] zoning, building, fire, health, safety, sign, and
subdivision regulations and codes; [ii] certificate of need laws (if
applicable); [iii] licensure to operate as the Facility in accordance with its
Facility Uses; [iv] Medicare and Medicaid certification requirements (if
applicable); [v] the ADA; [vi] any Environmental Laws; and [vii] requirements,
conditions and standards for participation in third-party payor insurance
programs.
 
“Lender” means Collateral Mortgage Capital, LLC, a Delaware limited liability
company.
 
“Loan Documents” as used herein means the Loan Documents, as defined in the
Assumption and Release Agreement of even date herewith, by and among Landlord,
HCN, Borrower, Guarantor, Fannie Mae et al and includes [i] the Note [ii] the
Subordination, Assignment and Security Agreement by and among Tenant, Landlord,
HCN and Fannie Mae; and [iii] any other documents executed in connection with
the assumption of the Note and executed by either Tenant, Guarantor, Landlord
and/or HCN.
 
“Material Obligation” means [i] any indebtedness with respect to any critical
care equipment and for all other equipment any indebtedness in excess of
$250,000.00 at the Facility secured by a security interest in or a lien, deed of
trust or mortgage on any of the Leased Property (or any part thereof, including
any Personal Property) and any agreement relating thereto; [ii] any obligation
or agreement that is material to the construction or operation of the Facility
or that is material to Tenant’s business or financial condition and where a
breach thereunder, if not cured within any applicable cure period, would have a
material adverse affect on the financial condition of Tenant or the results of
operations at the Facility; and [iii] any indebtedness or lease of Tenant, other
than this Lease, that has an outstanding principal balance or obligation of at
least $1,000,000.00.
 
“Mortgage” means the Second Amended and Restated Multifamily Deed of Trust,
Assignment of Rents and Security Agreement dated March 19, 2002 from Borrower in
favor of Lender to secure the Note, as assigned to and assumed by Landlord and
as the same may be amended from time to time.
 
“Net Operating Income” means the pre-tax net income of Tenant plus [i] the
amount of the provision for depreciation and amortization; plus [ii] the amount
of the provision for interest and lease payments, if any; plus [iii] the amount
of the provision for Rent payments; plus [iv] the amount of the provision for
management fees.
 
“Note” means the Multifamily Note dated February 26, 2002 in the original
principal amount of $8,500,000.00 from Borrower to Lender as assigned to and
assumed by Landlord and as the same may be amended from time to time.
 
“Obligor Group Obligations” means all payment and performance obligations of
Tenant or Guarantor to Landlord or any Landlord Affiliate, including, but not
limited to, all obligations under this Lease, any loans extended to Tenant or
Guarantor by Landlord or any Landlord Affiliate and all documents executed by
Tenant or Guarantor in favor of Landlord or any Landlord Affiliate in connection
with this Lease, any loan or any other obligation.
 
“Offer” has the meaning set forth in §13.1.
 

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“Opportunity Notice” has the meaning set forth in §13.1(a).
 
“Organization State” means the State in which an entity is organized.
 
“Organizational Documents” means [i] for a corporation, its Articles of
Incorporation certified by the Secretary of State of the Organization State, as
amended to date, and its Bylaws certified by such entity, as amended to date;
[ii] for a partnership, its Partnership Agreement certified by such entity, as
amended to date, and the Partnership Certificate, certified by the appropriate
authority (if applicable), as amended to date; and [iii] for a limited liability
company, its Articles of Organization certified by the Secretary of State of the
Organization State, as amended to date, and its Operating Agreement certified by
such entity, as amended to date.
 
“Payment Date” means the date on which Landlord makes a Landlord Payment.
 
“Periodic Financial Statements” means [i] for Tenant, an unaudited balance sheet
and statement of income for the most recent quarter; [ii] for the Facility, an
unaudited Facility Financial Statement for the most recent month; and [iii] for
the Individual Guarantor, a current unaudited personal financial statement.
 
“Permitted Exceptions” means all easements, liens, encumbrances, restrictions,
agreements and other title matters existing as of the Effective Date, including,
without limitation, the exceptions to title set forth on Exhibit B attached
hereto, and any sublease of any portion of the Leased Property made in complete
accordance with Article 18.
 
“Permitted Liens” means [i] liens granted to Landlord; [ii] liens customarily
incurred by Tenant in the ordinary course of business for items not delinquent,
including mechanic’s liens and deposits and charges under worker’s compensation
laws; [iii] liens for taxes and assessments not yet due and payable; [iv] any
lien, charge, or encumbrance which is being contested in good faith pursuant to
this Lease; [v] the Permitted Exceptions; and [vi] purchase money financing and
capitalized equipment leases for the acquisition of personal property provided,
however, that Landlord obtains a nondisturbance agreement from the purchase
money lender or equipment lessor in form and substance as may be satisfactory to
Landlord if the original cost of the equipment exceeds $250,000.00.
 
“Personal Property” means all machinery, equipment, furniture, furnishings,
movable walls or partitions, computers (and all associated software), trade
fixtures and other personal property (but excluding consumable inventory and
supplies owned by Tenant) used in connection with the Leased Property, together
with all replacements and alterations thereof and additions thereto, except
items, if any, included within the definition of Fixtures or Improvements.
 
“Pro Forma Statement” means a financial forecast for the Facility for the next
five-year period prepared in accordance with the standards for forecasts
established by the American Institute of Certified Public Accountants.
 

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“Protected Period” has the meaning set forth in §13.1(a).
 
“Qualified Capital Expenditures” means the expenditures capitalized on the books
of Tenant for any of the following: replacement of furniture, fixtures and
equipment, including refrigerators, ranges, major appliances, bathroom fixtures,
doors (exterior and interior), central air conditioning and heating systems
(including cooling towers, water chilling units, furnaces, boilers and fuel
storage tanks) and replacement of siding; roof replacements, including
replacements of gutters, downspouts, eaves and soffits; repairs and replacements
of plumbing and sanitary systems; overhaul of elevator systems; repaving,
resurfacing and sealcoating of sidewalks, parking lots and driveways; repainting
of entire building exterior and normal maintenance and repairs needed to
maintain the quality and condition of the Facility in the market in which it
operates, but excluding Alterations.
 
“Rate Shortfall” means, as of the applicable Rent Adjustment Date, a cumulative
percentage amount equal to the sum of .40% if for the 2nd, 3rd and 4th Lease
Year there was no Annual Rent Increase and .30% for each Lease Year thereafter
in which there was no Annual Rent Increase.
 
“Real Estate Tax Escrow Agreement” means that certain agreement dated as of
March 31, 2005 by and among HCN, Lawyers Title Insurance Corporation and Tenant
with respect to the escrow of sums in furtherance of the satisfaction of real
estate taxes associated with the Land.
 
“Receivables” means [i] all of Tenant’s rights to receive payment for providing
resident care and services at the Facility as set forth in any accounts,
contract rights, and instruments, and [ii] those documents, chattel paper,
inventory proceeds, provider agreements, participation agreements, ledger
sheets, files, records, computer programs, tapes, and agreements relating to
Tenant’s rights to receive payment for providing resident care services at the
Facility.
 
“Related Rights” means all easements, rights (including bed operating rights)
and appurtenances relating to the Land and the Improvements.
 
“Renewal Date” means the first day of each Renewal Term.
 
“Renewal Fee” means a fee equal to 1% of the Investment Amount.
 
“Renewal Option” has the meaning set forth in §12.1.
 
“Renewal Term” has the meaning set forth in §12.1.
 
“Rent” means Base Rent, Additional Rent and Default Rent.
 
“Rent Adjustment Date” means each anniversary of the Commencement Date during
the Term.
 

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“Rent Schedule” means the schedule issued by Landlord to Tenant showing the Base
Rent to be paid by Tenant pursuant to the terms of this Lease, as such schedule
is amended from time to time by Landlord. The initial Rent Schedule is attached
to this Lease as Schedule 1 or, after review and approval by Tenant, will be
attached following Closing if the Rent Schedule cannot be determined until the
day of Closing.
 
“Rent Shortfall” means the cumulative amount equal to the difference between the
Base Rent payable for each Lease Year in which there was no Annual Rent Increase
and the Base Rent that would have been payable if the Base Rent had been
calculated based upon a rate of return to Landlord that increased by .40% for
the 2nd, 3rd and 4th Lease Year and .30% for the 5th Lease Year and each Lease
Year thereafter.
 
“Replacement Operator” has the meaning set forth in §15.9.1.
 
“Right of First Opportunity Event” has the meaning set forth in §13.1.
 
“Secured Party” has the meaning set forth in §24.1.
 
“Seller” means each person or entity that conveyed title to a Facility to
Landlord.
 
“Tenant” has the meaning set forth in the introductory paragraph of this Lease.
 
“Tenant’s Property” has the meaning set forth in §11.1.
 
“Term” means the Initial Term and each Renewal Term.
 
1.4  Landlord As Agent. With respect to its respective Facility, each HCN
Landlord appoints HCN as the agent and lawful attorney-in-fact of such HCN
Landlord to act for such HCN Landlord for all purposes and actions of Landlord
under this Lease and the other Lease Documents. All notices, consents, waivers
and all other documents and instruments executed by HCN pursuant to the Lease
Documents from time to time and all other actions of HCN as Landlord under the
Lease Documents shall be binding upon such Landlord. All Rent payable under this
Lease shall be paid to HCN.
 
ARTICLE 2:   RENT
 
2.1  Base Rent. Tenant shall pay Landlord base rent (“Base Rent”) in advance in
consecutive monthly installments payable on the first day of each month during
the Term commencing on the Commencement Date. If the Effective Date is not the
first day of a month, Tenant shall pay Landlord Base Rent on the Effective Date
for the partial month, i.e., for the period commencing on the Effective Date and
ending on the day before the Commencement Date. The Base Rent payable for the
Lease Year is as shown on the Rent Schedule, subject to adjustment pursuant to
§2.2.2 if applicable. For the second and each subsequent Lease Lear of the
Initial Term, the Base Rent shall be paid in accordance with the most recent
revised Rent Schedule provided by Landlord pursuant to §2.2, as applicable. The
Base Rent for the Renewal Term will be determined in accordance with §12.2.
 

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2.2  Base Rent Adjustments.
 
2.2.1  Annual Increase of Base Rent. Commencing on the first Rent Adjustment
Date and on each Rent Adjustment Date thereafter, the monthly installment of
Base Rent shall increase by an amount equal to 1/12th of the Annual Rent
Increase; provided, however, that if the CPI Change as of the Rent Adjustment
Date is 0% or less, there shall not be an Annual Rent Increase for such Lease
Year and the Base Rent will be equal to the Base Rent payable for the prior
Lease Year. As of each Rent Adjustment Date, Landlord shall calculate the Annual
Rent Increase and shall deliver the revised Rent Schedule to Tenant no later
than 30 days after the Rent Adjustment Date. Until the revised Rent Schedule is
delivered to Tenant, Tenant shall pay the monthly Base Rent with the Annual Rent
Increase calculated based upon an Increaser Rate of .40% for the 2nd, 3rd and
4th Lease Year and .30% for the 5th Lease Year and each Lease Year thereafter.
After the revised Rent Schedule is delivered to Tenant, if the actual monthly
Base Rent is more or less than the monthly Base Rent paid pursuant to the
preceding sentence, the difference shall be added to or deducted from (as
applicable) the monthly Base Rent payment made for the following month.
Thereafter, Tenant shall make monthly Base Rent payments in accordance with the
revised Rent Schedule.
 
2.2.2  Additional Landlord Payments. If Landlord makes a Landlord Payment other
than the initial Acquisition Payment, the Base Rent will be increased effective
on the Payment Date based upon the applicable rate of return to Landlord as set
forth in the then current Rent Schedule. Until Tenant receives a revised Rent
Schedule from Landlord, Tenant shall for each month [i] continue to make
installments of Base Rent according to the Rent Schedule in effect on the day
before the Payment Date; and [ii] within 10 days following Landlord’s issuance
of an invoice, pay the difference between the installment of Base Rent that
Tenant paid to Landlord for such month and the installment of Base Rent actually
due to Landlord for such month as a result of the Landlord Payment. On the first
day of the month following receipt of the revised Rent Schedule, Tenant shall
pay the monthly installment of Base Rent specified in the revised Rent Schedule.
 
2.3  Additional Rent. In addition to Base Rent, Tenant shall pay all other
amounts, liabilities, obligations and Impositions which Tenant assumes or agrees
to pay under this Lease including any fine, penalty, interest, charge and cost
which may be added for nonpayment or late payment of such items (collectively
the “Additional Rent”).
 
2.4  Place of Payment of Rent. Tenant shall make all payments of Rent to
Landlord by electronic wire transfer in accordance with the wiring instructions
set forth in Exhibit J attached hereto, subject to change in accordance with
other written instructions provided by Landlord from time to time.
 
2.5  Net Lease. This Lease shall be deemed and construed to be an “absolute net
lease”, and Tenant shall pay all Rent and other charges and expenses in
connection with the Leased Property throughout the Term, without abatement,
deduction, recoupment or setoff. Landlord shall have all legal, equitable and
contractual rights,
 

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powers and remedies provided either in this Lease or by statute or otherwise in
the case of nonpayment of the Rent.
 
2.6  No Termination, Abatement, Etc. Except as otherwise specifically provided
in this Lease, Tenant shall remain bound by this Lease in accordance with its
terms. Tenant shall not, without the consent of Landlord, modify, surrender or
terminate the Lease, nor seek nor be entitled to any abatement, deduction,
deferment or reduction of Rent, or setoff or recoupment against the Rent. Except
as expressly provided in this Lease, the obligations of Landlord and Tenant
shall not be affected by reason of [i] any damage to, or destruction of, the
Leased Property or any part thereof from whatever cause or any Taking (as
hereinafter defined) of the Leased Property or any part thereof; [ii] the lawful
or unlawful prohibition of, or restriction upon, Tenant’s use of the Leased
Property, or any part thereof, the interference with such use by any person,
corporation, partnership or other entity, or by reason of eviction by paramount
title; [iii] any claim which Tenant has or might have against Landlord or by
reason of any default or breach of any warranty by Landlord under this Lease or
any other agreement between Landlord and Tenant, or to which Landlord and Tenant
are parties; [iv] any bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding up or other proceeding affecting
Landlord or any assignee or transferee of Landlord; or [v] any other cause,
whether similar or dissimilar to any of the foregoing, other than a discharge of
Tenant from any such obligations as a matter of law. Except as otherwise
specifically provided in this Lease, Tenant hereby specifically waives all
rights, arising from any occurrence whatsoever, which may now or hereafter be
conferred upon it by law [a] to modify, surrender or terminate this Lease or
quit or surrender the Leased Property or any portion thereof; or [b] entitling
Tenant to any abatement, reduction, suspension or deferment of the Rent or other
sums payable by Tenant hereunder. The obligations of Landlord and Tenant
hereunder shall be separate and independent covenants and agreements and the
Rent and all other sums payable by Tenant hereunder shall continue to be payable
in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Lease or by termination of this Lease
other than by reason of an Event of Default. Nothing in this §2.6 shall be
construed to limit any right which Tenant may have to bring a separate action
against Landlord for any claim which Tenant may have or allege to have against
Landlord.
 
2.7  Transaction Fee. On the Effective Date, Tenant shall pay or cause to be
paid a transaction fee to Landlord in an amount equal to 1% of the Investment
Amount.
 
ARTICLE 3:   IMPOSITIONS AND UTILITIES
 
3.1  Payment of Impositions. Tenant shall pay, as Additional Rent, all
Impositions that may be levied or become a lien on the Leased Property or any
part thereof at any time (whether prior to or during the Term), without regard
to prior ownership of said Leased Property, before any fine, penalty, interest,
or cost is incurred; provided, however, Tenant may contest any Imposition in
accordance with §3.7. Tenant shall deliver to Landlord [i] not more than five
days after the due date of each Imposition, copies of the invoice for such
Imposition and except for Impositions being contested by Tenant in accordance
with §3.7 the check delivered for payment thereof; and [ii] not more than
30 days
 

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after the due date of each Imposition, a copy of the official receipt evidencing
such payment or other proof of payment satisfactory to Landlord. Tenant’s
obligation to pay such Impositions shall be deemed absolutely fixed upon the
date such Impositions become a lien upon the Leased Property or any part
thereof. Tenant, at its expense, shall prepare and file all tax returns and
reports in respect of any Imposition as may be required by governmental
authorities. Tenant shall be entitled to any refund due from any taxing
authority if no Event of Default shall have occurred hereunder and be continuing
and if Tenant shall have paid all Impositions due and payable as of the date of
the refund. Landlord shall be entitled to any refund from any taxing authority
if an Event of Default has occurred and is continuing. Any refunds retained by
Landlord due to an Event of Default shall be applied as provided in §8.8.
Landlord and Tenant shall, upon request of the other, provide such data as is
maintained by the party to whom the request is made with respect to the Leased
Property as may be necessary to prepare any required returns and reports. In the
event governmental authorities classify any property covered by this Lease as
personal property, Tenant shall file all personal property tax returns in such
jurisdictions where it may legally so file. Landlord, to the extent it possesses
the same, and Tenant, to the extent it possesses the same, will provide the
other party, upon request, with cost and depreciation records necessary for
filing returns for any property so classified as personal property. Where
Landlord is legally required to file personal property tax returns, Tenant will
be provided with copies of assessment notices indicating a value in excess of
the reported value in sufficient time for Tenant to file a protest. Tenant may,
upon notice to Landlord, at Tenant’s option and at Tenant’s sole cost and
expense, protest, appeal, or institute such other proceedings as Tenant may deem
appropriate to effect a reduction of real estate or personal property
assessments and Landlord, at Tenant’s expense as aforesaid, shall fully
cooperate with Tenant in such protest, appeal, or other action. Tenant shall
reimburse Landlord for all personal property taxes paid by Landlord within
30 days after receipt of billings accompanied by copies of a bill therefore and
payments thereof which identify the personal property with respect to which such
payments are made. Impositions imposed in respect to the tax-fiscal period
during which the Term terminates shall be adjusted and prorated between Landlord
and Tenant as of the termination date, whether or not such Imposition is imposed
before or after such termination, and Tenant’s obligation to pay its prorated
share thereof shall survive such termination.
 
3.2  Definition of Impositions. “Impositions” means, collectively, [i] taxes
(including, without limitation, all capital stock and franchise taxes of
Landlord imposed by the Facility State or any governmental entity in the
Facility State due to this lease transaction or Landlord’s ownership of the
Leased Property and the income arising therefrom, or due to Landlord being
considered as doing business in the Facility State because of Landlord’s
ownership of the Leased Property or lease thereof to Tenant and in the event
Landlord owns or leases property other than the Leased Property in the Facility
State, Landlord agrees to allocate the foregoing on a pro-rata basis to the
Leased Property), all real estate and personal property ad valorem, sales and
use, business or occupation, single business, gross receipts, transaction
privilege, rent or similar taxes; [ii] assessments (including, without
limitation, all assessments for public improvements or benefits, whether or not
commenced or completed prior to the date hereof and whether or not to be
completed within the Term); [iii] ground rents, water, sewer or other rents and
charges, excises, tax levies, and fees (including, without limitation, license,
permit, inspection, authorization and similar fees); [iv] all taxes imposed on
Tenant’s operations of the Leased Property, including, without limitation,
 

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employee withholding taxes, income taxes and intangible taxes; [v] all taxes
imposed by the Facility State or any governmental entity in the Facility State
with respect to the conveyance of the Leased Property by Landlord to Tenant or
Tenant’s designee, including, without limitation, conveyance taxes; and [vi] all
other governmental charges, in each case whether general or special, ordinary or
extraordinary, or foreseen or unforeseen, of every character in respect of the
Leased Property or any part thereof and/or the Rent (including all interest and
penalties thereon due to any failure in payment by Tenant), which at any time
prior to, during or in respect of the Term hereof may be assessed or imposed on
or in respect of or be a lien upon [a] Landlord or Landlord’s interest in the
Leased Property or any part thereof; [b] the Leased Property or any part thereof
or any rent therefrom or any estate, right, title or interest therein; or
[c] any occupancy, operation, use or possession of, or sales from, or activity
conducted on, or in connection with the Leased Property or the leasing or use by
Tenant of the Leased Property or any part thereof. Tenant shall not, however, be
required to pay any capital gains tax or any tax based on net income imposed on
Landlord by any governmental entity other than the capital stock and franchise
taxes described in clause [i] above.
 
3.3  Escrow of Impositions. Consistent with and pursuant to the terms of the
Real Estate Tax Escrow Agreement, Tenant shall deposit with Landlord on the
first day of each month a sum equal to 1/12th of the Impositions assessed
against the Leased Property for the preceding tax year for real estate taxes,
which sums shall be used by Landlord toward payment of such Impositions. In
addition, if an Event of Default occurs and while it remains uncured, Tenant
shall, at Landlord’s election, deposit with Landlord on the first day of each
month a sum equal to 1/12th of the Impositions assessed against the Leased
Property for the preceding tax year other than for real estate taxes, which sums
shall be used by Landlord toward payment of such Impositions. Tenant, on demand,
shall pay to Landlord any additional funds necessary to pay and discharge the
obligations of Tenant pursuant to the provisions of this section. The receipt by
Landlord of the payment of such Impositions by and from Tenant shall only be as
an accommodation to Tenant, the mortgagees, and the taxing authorities, and
shall not be construed as rent or income to Landlord, Landlord serving, if at
all, only as a conduit for delivery purposes. The foregoing provision shall
become applicable only at such time as the escrow of Impositions is not required
by Lender, it being understood and agreed that for so long as Lender requires
that the real estate tax portion of the Imposition be escrowed with Lender,
Tenant shall be deemed to have fulfilled its obligations under this §3.3 with
respect to the real estate tax portion of the Imposition provided Tenant
receives notice either from Lender or from Landlord as required pursuant to
§15.12.3 and then Tenant makes the required escrow payment of the real estate
tax portion of the Imposition to Lender as and when due.
 
3.4  Utilities. Tenant shall pay, as Additional Rent, all taxes, assessments,
charges, deposits, and bills for utilities, including, without limitation,
charges for water, gas, oil, sanitary and storm sewer, electricity, telephone
service, and trash collection, which may be charged against the occupant of the
Improvements during the Term. If an Event of Default occurs and while it remains
uncured, Tenant shall, at Landlord’s election, deposit with Landlord on the
first day of each month a sum equal to 1/12th of the amount of the annual
utility expenses for the preceding Lease Year, which sums shall be used by
Landlord to pay such utilities. Tenant shall, on demand, pay to Landlord any
additional amount needed to pay such utilities. Landlord’s receipt of such
payments shall only be an accommodation to Tenant and the utility companies and
shall not constitute rent or income to Landlord. Absent circumstances
 

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beyond Tenant’s reasonable control, Tenant shall at all times maintain that
amount of heat necessary to ensure against the freezing of water lines. Tenant
hereby agrees to indemnify and hold Landlord harmless from and against any
liability or damages to the utility systems and the Leased Property that may
result from Tenant’s failure to maintain sufficient heat in the Improvements
absent circumstances beyond Tenant’s reasonable control.
 
3.5  Discontinuance of Utilities. Landlord will not be liable for damages to
person or property or for injury to, or interruption of, business for any
discontinuance of utilities nor will such discontinuance in any way be construed
as an eviction of Tenant or cause an abatement of rent or operate to release
Tenant from any of Tenant’s obligations under this Lease.
 
3.6  Business Expenses. Tenant shall promptly pay all expenses and costs
incurred in connection with the operation of the Facility on the Leased
Property, including, without limitation, employee benefits, employee vacation
and sick pay, consulting fees, and expenses for inventory and supplies.
 
3.7  Permitted Contests. Tenant, on its own or on Landlord’s behalf (or in
Landlord’s name), but at Tenant’s expense, may contest, by appropriate legal
proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any Legal
Requirement or insurance requirement or any lien, attachment, levy, encumbrance,
charge or claim provided that [i] in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the Leased Property; [ii] neither the Leased Property nor any
Rent therefrom nor any part thereof or interest therein would be in any
immediate danger of being sold, forfeited, attached or lost; [iii] in the case
of a Legal Requirement, Landlord would not be in any immediate danger of civil
or criminal liability for failure to comply therewith pending the outcome of
such proceedings; [iv] in the event that any such contest shall involve a sum of
money or potential loss in excess of $50,000.00, Tenant shall deliver to
Landlord and its counsel an opinion of Tenant’s counsel to the effect set forth
in clauses [i], [ii] and [iii], to the extent applicable; [v] in the case of a
Legal Requirement and/or an Imposition, lien, encumbrance or charge, Tenant
shall give such reasonable security as may be demanded by Landlord to insure
ultimate payment of the same and to prevent any sale or forfeiture of the
affected Leased Property or the Rent by reason of such nonpayment or
noncompliance; provided, however, the provisions of this section shall not be
construed to permit Tenant to contest the payment of Rent (except as to contests
concerning the method of computation or the basis of levy of any Imposition or
the basis for the assertion of any other claim) or any other sums payable by
Tenant to Landlord hereunder; [vi] in the case of an insurance requirement, the
coverage required by Article 4 shall be maintained; and [vii] if such contest be
finally resolved against Landlord or Tenant, Tenant shall, as Additional Rent
due hereunder, promptly pay the amount required to be paid, together with all
interest and penalties accrued thereon, or comply with the applicable Legal
Requirement or insurance requirement. Landlord, at Tenant’s expense, shall
execute and deliver to Tenant such authorizations and other documents as may be
reasonably required in any such contest, and, if reasonably requested by Tenant
or if Landlord so desires, Landlord shall join as a party therein. Tenant hereby
agrees to indemnify and save Landlord harmless from and
 

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against any liability, cost or expense of any kind that may be imposed upon
Landlord in connection with any such contest and any loss resulting therefrom.
 
ARTICLE 4:   INSURANCE
 
4.1  Property Insurance. At Tenant’s expense, Tenant shall maintain in full
force and effect a property insurance policy or policies insuring the Leased
Property against the following:
 
(a)  Loss or damage commonly covered by a “All Risk” or “Special Form”, policy
insuring against physical loss or damage to the Improvements and Personal
Property, including, but not limited to, risk of loss from fire and other
hazards, collapse, transit coverage, vandalism, malicious mischief, theft,
earthquake (if the Leased Property is in earthquake zone 1 or 2) and sinkholes
(if usually recommended in the area of the Leased Property). The policy shall be
in the amount of the full replacement value (as defined in §4.5) of the
Improvements and Personal Property and shall contain a deductible amount
acceptable to Landlord. Landlord shall be named as an additional insured. The
policy shall include a stipulated value endorsement or agreed amount endorsement
and endorsements for contingent liability for operations of building laws,
demolition costs, and increased cost of construction.
 
(b)  If applicable, loss or damage by explosion of steam boilers, pressure
vessels, or similar apparatus, now or hereafter installed on the Leased
Property, in commercially reasonable amounts acceptable to Landlord.
 
(c)  Consequential loss of rents and income coverage insuring against all “All
Risk” or “Special Form”, risk of physical loss or damage with limits and
deductible amounts acceptable to Landlord covering risk of loss during the first
nine months of reconstruction, and containing an endorsement for extended period
of indemnity of at least 90 days, and shall be written with a stipulated amount
of coverage if available at a reasonable premium.
 
(d)  If the Leased Property is located, in whole or in part, in a federally
designated 100-year flood plain area, flood insurance for the Improvements in an
amount equal to the lesser of [i] the full replacement value of the
Improvements; or [ii] the maximum amount of insurance available for the
Improvements under all federal and private flood insurance programs.
 
(e)  Loss or damage caused by the breakage of plate glass in commercially
reasonable amounts acceptable to Landlord.
 
(f)  Loss or damage commonly covered by blanket crime insurance, including
employee dishonesty, loss of money orders or paper currency, depositor’s
forgery, and loss of property of patients accepted by Tenant for safekeeping, in
commercially reasonable amounts acceptable to Landlord.
 

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4.2  Liability Insurance. At Tenant’s expense, Tenant shall maintain liability
insurance against the following:
 
(a)  Claims for personal injury or property damage commonly covered by
comprehensive general liability insurance with endorsements for incidental
malpractice, contractual, personal injury, owner’s protective liability,
voluntary medical payments, products and completed operations, broad form
property damage, and extended bodily injury, with commercially reasonable
amounts for bodily injury, property damage, and voluntary medical payments
acceptable to Landlord, but with a combined single limit of not less than
$5,000,000.00 per occurrence.
 
(b)  Claims for personal injury and property damage commonly covered by
comprehensive automobile liability insurance, covering all owned and non-owned
automobiles, with commercially reasonable amounts for bodily injury, property
damage, and for automobile medical payments acceptable to Landlord, but with a
combined single limit of not less than $5,000,000.00 per occurrence.
 
(c)  Claims for personal injury commonly covered by medical malpractice and
professional liability insurance in commercially reasonable amounts acceptable
to Landlord.
 
(d)  Claims commonly covered by workers’ compensation insurance for all persons
employed by Tenant on the Leased Property. Such workers’ compensation insurance
shall be in accordance with the requirements of all applicable local, state, and
federal law.
 
4.3  Builder’s Risk Insurance. In connection with any construction, Tenant shall
maintain in full force and effect a builder’s completed value risk coverage
(“Builder’s Risk Policy”) of insurance in a nonreporting form insuring against
all “All Risk” or “Special Form” risk of physical loss or damage to the
Improvements, including, but not limited to, risk of loss from fire and other
hazards, collapse, transit coverage, vandalism, malicious mischief, theft,
earthquake (if Leased Property is in earthquake zone 1 or 2) and sinkholes (if
usually recommended in the area of the Leased Property). The Builder’s Risk
Policy shall include endorsements providing coverage for building materials and
supplies and temporary premises. The Builder’s Risk Policy shall be in the
amount of the full replacement value of the Improvements and shall contain a
deductible amount acceptable to Landlord. Landlord shall be named as an
additional insured. The Builder’s Risk Policy shall include an endorsement
permitting initial occupancy.
 
4.4  Insurance Requirements. The following provisions shall apply to all
insurance coverages required hereunder:
 
(a)  The form and substance of all policies shall be subject to the approval of
Landlord, which approval will not be unreasonably withheld.
 

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(b)  The carriers of all policies shall have a Best’s Rating of “A” or better
and a Best’s Financial Category of XII or higher and shall be authorized to do
insurance business in the Facility State.
 
(c)  Tenant shall be the “named insured” and Landlord shall be an “additional
insured” on each policy.
 
(d)  Tenant shall deliver to Landlord certificates or policies showing the
required coverages and endorsements. The policies of insurance shall provide
that the policy may not be canceled or not renewed, and no material change or
reduction in coverage may be made, without at least 30 days’ prior written
notice to Landlord.
 
(e)  The policies shall contain a severability of interest and/or
cross-liability endorsement, provide that the acts or omissions of Tenant or
Landlord will not invalidate the coverage of the other party, and provide that
Landlord shall not be responsible for payment of premiums.
 
(f)  All loss adjustment shall require the written consent of Landlord and
Tenant, as their interests may appear.
 
(g)  At least 30 days prior to the expiration of each insurance policy, Tenant
shall deliver to Landlord a certificate showing renewal of such policy and
payment of the annual premium therefor and a current Certificate of Compliance
(in the form delivered at the time of Closing) completed and signed by Tenant’s
insurance agent.
 
4.5  Replacement Value. The term “full replacement value” means the actual
replacement cost thereof from time to time, including increased cost of
construction endorsement, with no reductions or deductions. Tenant shall, in
connection with each annual policy renewal, deliver to Landlord a
redetermination of the full replacement value by the insurer or an endorsement
indicating that the Leased Property is insured for its full replacement value.
If Tenant makes any Permitted Alterations (as hereinafter defined) to the Leased
Property, Landlord may have such full replacement value redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement value was last determined.
 
4.6  Blanket Policy. Notwithstanding anything to the contrary contained in this
Article 4, Tenant may carry the insurance required by this Article under a
blanket policy of insurance, provided that the coverage afforded Tenant will not
be reduced or diminished or otherwise be different from that which would exist
under a separate policy meeting all of the requirements of this Lease.
 
4.7  No Separate Insurance. Tenant shall not take out separate insurance
concurrent in form or contributing in the event of loss with that required in
this Article, or increase the amounts of any then existing insurance, by
securing an additional policy or additional policies, unless all parties having
an insurable interest in the subject matter of the insurance, including Landlord
and any mortgagees, are included therein as
 

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additional insureds or loss payees, the loss is payable under said insurance in
the same manner as losses are payable under this Lease, and such additional
insurance is not prohibited by the existing policies of insurance. Tenant shall
immediately notify Landlord of the taking out of such separate insurance or the
increasing of any of the amounts of the existing insurance by securing an
additional policy or additional policies.
 
4.8  Waiver of Subrogation. Each party hereto hereby waives any and every claim
which arises or may arise in its favor and against the other party hereto during
the Term for any and all loss of, or damage to, any of its property located
within or upon, or constituting a part of, the Leased Property, which loss or
damage is covered by valid and collectible insurance policies, to the extent
that such loss or damage is recoverable under such policies. Said mutual waiver
shall be in addition to, and not in limitation or derogation of, any other
waiver or release contained in this Lease with respect to any loss or damage to
property of the parties hereto. Inasmuch as the said waivers will preclude the
assignment of any aforesaid claim by way of subrogation (or otherwise) to an
insurance company (or any other person), each party hereto agrees immediately to
give each insurance company which has issued to it policies of insurance,
written notice of the terms of said mutual waivers, and to have such insurance
policies properly endorsed, if necessary, to prevent the invalidation of said
insurance coverage by reason of said waivers, so long as such endorsement is
available at a reasonable cost.
 
4.9  Mortgages. The following provisions shall apply if Landlord now or
hereafter places a mortgage on the Leased Property or any part thereof:
[i] Tenant shall obtain a standard form of lender’s loss payable clause insuring
the interest of the mortgagee; [ii] Tenant shall deliver evidence of insurance
to such mortgagee; [iii] loss adjustment shall require the consent of the
mortgagee; and [iv] Tenant shall provide such other information and documents as
may be required by the mortgagee.
 
4.10  Escrows. After an Event of Default occurs hereunder, Tenant shall make
such periodic payments of insurance premiums in accordance with Landlord’s
requirements after receipt of notice thereof from Landlord.
 
ARTICLE 5:   INDEMNITY
 
5.1  Tenant’s Indemnification. Tenant hereby indemnifies and agrees to hold
harmless Landlord and HCN (jointly and severally, “Indemnified Party”), any
successors or assigns of Indemnified Party, and Indemnified Party’s and such
successor’s and assign’s directors, officers, employees and agents from and
against any and all demands, claims, causes of action, fines, penalties, damages
(including consequential damages), losses, liabilities (including strict
liability), judgments, and expenses (including, without limitation, reasonable
attorneys’ fees, court costs, and the costs set forth in §8.7) incurred in
connection with or arising from: [i] the use or occupancy of the Leased Property
by Tenant or any persons claiming under Tenant; [ii] any activity, work, or
thing done, or permitted or suffered by Tenant in or about the Leased Property;
[iii] any acts, omissions, or negligence of Tenant or any person claiming under
Tenant, or the contractors, agents, employees, invitees, or visitors of Tenant
or any such person; [iv] any breach, violation, or nonperformance by Tenant or
any person claiming under Tenant or the employees, agents, contractors,
invitees, or visitors of
 

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Tenant or of any such person, of any term, covenant, or provision of this Lease
or any law, ordinance, or governmental requirement of any kind, including,
without limitation, any failure to comply with any applicable requirements under
the ADA; [v] any injury or damage to the person, property or business of Tenant,
its employees, agents, contractors, invitees, visitors, or any other person
entering upon the Leased Property; [vi] any construction, alterations, changes
or demolition of the Facility performed by or contracted for by Tenant or its
employees, agents or contractors; [vii] any obligations, costs or expenses
arising under any Permitted Exceptions; and [viii] strictly subject to the
limitations of the terms of §15.12.2, any claim under a Loan Document arising
solely from the acts or omissions of Tenant or Guarantor, including, but not
limited to, (a) any claim against HCN under an Indemnity Agreement granted by
HCN to Lender; and (b) any applicable make-whole premium payable to Lender as a
result of an acceleration of the Loan, as applicable. If any action or
proceeding is brought against Landlord, its employees, or agents by reason of
any such claim, Tenant, upon notice from Landlord, will defend the claim at
Tenant’s expense with counsel reasonably satisfactory to Landlord. All amounts
payable to Landlord under this section shall be payable on written demand and
any such amounts which are not paid within 10 days after demand therefore by
Landlord shall bear interest at Landlord’s rate of return as provided in the
Commitment. In case any action, suit or proceeding is brought against Tenant by
reason of any such occurrence, Tenant shall use its commercially reasonable
efforts to defend such action, suit or proceeding. Nothing in this §5.1 shall be
construed as requiring Tenant to indemnify Landlord, its agents or employee,
with respect to Landlord, its agents or employee gross negligence or willful
misconduct or with respect to any claim under the Loan Documents arising from
the acts or omissions of Landlord or HCN.
 
5.1.1  Notice of Claim. Landlord shall notify Tenant in writing of any claim or
action brought against Landlord in which indemnity may be sought against Tenant
pursuant to this section. Such notice shall be given in sufficient time to allow
Tenant to defend or participate in such claim or action, but the failure to give
such notice in sufficient time shall not constitute a defense hereunder nor in
any way impair the obligations of Tenant under this section unless the failure
to give such notice precludes or materially adversely affects Tenant’s defense
of any such action.
 
5.1.2  Survival of Covenants. The covenants of Tenant contained in this section
shall remain in full force and effect after the termination of this Lease until
the expiration of the period stated in the applicable statute of limitations
during which a claim or cause of action may be brought and payment in full or
the satisfaction of such claim or cause of action and of all expenses and
charges incurred by Landlord relating to the enforcement of the provisions
herein specified.
 
5.1.3  Reimbursement of Expenses. Unless prohibited by law, Tenant hereby agrees
to pay to Landlord all of the reasonable fees, charges and reasonable
out-of-pocket expenses related to the Facility and required hereby, or incurred
by Landlord in enforcing the provisions of this Lease.
 
5.2  Environmental Indemnity; Audits. Tenant hereby indemnifies and agrees to
hold harmless Landlord, any successors to Landlord’s interest in this Lease, and
Landlord’s and such successors’ directors, officers,
 

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employees and agents from and against any losses, claims, damages (including
consequential damages), penalties, fines, liabilities (including strict
liability), costs (including cleanup and recovery costs), and expenses
(including expenses of litigation and reasonable consultants’ and attorneys’
fees) incurred by Landlord or any other indemnitee or assessed against any
portion of the Leased Property by virtue of any claim or lien by any
governmental or quasi-governmental unit, body, or agency, or any third party,
for cleanup costs or other costs pursuant to any Environmental Law. Tenant’s
indemnity shall survive the termination of this Lease. Provided, however, Tenant
shall have no indemnity obligation with respect to [i] Hazardous Materials first
introduced to the Leased Property subsequent to the date that Tenant’s occupancy
of the Leased Property shall have fully terminated; or [ii] Hazardous Materials
introduced to the Leased Property by Landlord, its agent, employees, successors
or assigns. If at any time during the Term of this Lease any governmental
authority notifies Landlord or Tenant of a violation of any Environmental Law or
Landlord reasonably believes that a Facility may violate any Environmental Law,
Landlord may require one or more environmental audits of such portion of the
Leased Property, in such form, scope and substance as specified by Landlord, at
Tenant’s expense. Tenant shall, within 30 days after receipt of an invoice from
Landlord, reimburse Landlord for all costs and expenses incurred in reviewing
any environmental audit, including, without limitation, reasonable attorneys’
fees and costs.
 
5.3  Limitation of Landlord’s Liability. Landlord, its agents, and employees,
will not be liable for any loss, injury, death, or damage (including
consequential damages) to persons, property, or Tenant’s business occasioned by
theft, act of God, public enemy, injunction, riot, strike, insurrection, war,
court order, requisition, order of governmental body or authority, fire,
explosion, falling objects, steam, water, rain or snow, leak or flow of water
(including water from the elevator system), rain or snow from the Leased
Property or into the Leased Property or from the roof, street, subsurface or
from any other place, or by dampness or from the breakage, leakage, obstruction,
or other defects of the pipes, sprinklers, wires, appliances, plumbing, air
conditioning, or lighting fixtures of the Leased Property, or from construction,
repair, or alteration of the Leased Property or from any acts or omissions of
any other occupant or visitor of the Leased Property, or from any other cause
beyond Landlord’s control. Nothing in this §5.3 shall be construed as relieving
Landlord or its agents or employees from any liability arising directly out of
Landlord’s or its agents’ or employees’ own gross negligence or willful
misconduct.
 
ARTICLE 6:   USE AND ACCEPTANCE OF PREMISES
 
6.1  Use of Leased Property. Tenant shall use and occupy the Leased Property
exclusively for the Facility Uses specified for the Facility and for all lawful
and licensed ancillary uses, including the operation of an Alzheimer’s Memory
Loss Unit, provided Tenant complies with all applicable Legal Requirements
material to permit the foregoing and for no other purpose without the prior
written consent of Landlord. Tenant shall obtain and maintain all approvals,
licenses, and consents needed to use and operate the Leased Property as herein
permitted. Landlord agrees that in the event that Tenant has not obtained a
license to operate the Facility on the Effective Date, Tenant shall be in
compliance with this section provided [i] Tenant has entered into contractual
arrangements with the current licenseholder and/or manager of the Facility,
including a sublease and/or a management
 

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agreement (the “Interim Agreements”), which contractual arrangements are in
compliance with all Legal Requirements material thereto authorizing Tenant or
licenseholder, as applicable, to operate and manager to manage the Facility; and
[ii] Tenant proceeds in a diligent manner to obtain a license to operate the
Facility. Tenant shall deliver (or cause to be delivered) to Landlord complete
copies of surveys, examinations, certification and licensure inspections,
compliance certificates, and other similar reports issued to Tenant by any
governmental agency within 10 Business Days after Tenant’s receipt of each item.
 
6.2  Acceptance of Leased Property. Tenant acknowledges that [i] Tenant and its
agents have had an opportunity to inspect the Leased Property; [ii] Tenant has
found the Leased Property fit for Tenant’s use; [iii] Landlord will deliver the
Leased Property to Tenant in “as-is” condition; [iv] Landlord is not obligated
to make any improvements or repairs to the Leased Property; and [v] the roof,
walls, foundation, heating, ventilating, air conditioning, telephone, sewer,
electrical, mechanical, elevator, utility, plumbing, and other portions of the
Leased Property are in good working order. Tenant waives any claim or action
against Landlord with respect to the condition of the Leased Property. LANDLORD
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE
LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO QUALITY OF
THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL
SUCH RISKS ARE TO BE BORNE BY TENANT.
 
6.3  Conditions of Use and Occupancy. Tenant agrees that during the Term it
shall use and keep the Leased Property in a careful, safe and proper manner; not
commit or suffer waste thereon; not use or occupy the Leased Property for any
unlawful purposes; not use or occupy the Leased Property or permit the same to
be used or occupied, for any purpose or business deemed extra-hazardous on
account of fire or otherwise; keep the Leased Property in such repair and
condition as may be required by the Board of Health, or other city, state or
federal authorities, free of all cost to Landlord; not permit any acts to be
done which will cause the cancellation, invalidation, or suspension of any
insurance policy; and permit Landlord and its agents to enter upon the Leased
Property at all reasonable times upon prior notice (except in the case of an
emergency where no prior notice shall be required) to examine the condition
thereof. Landlord shall have the right to have an annual inspection of the
Leased Property performed and Tenant shall pay an inspection fee of the lesser
of $1,500.00 or Landlord’s reasonable out-of-pocket expenses within 30 days
after receipt of Landlord’s invoice.
 
ARTICLE 7:   MAINTENANCE AND MECHANICS’ LIENS
 
7.1  Maintenance. Tenant shall maintain, repair, and replace the Leased
Property, including, without limitation, all structural and nonstructural
repairs and replacements to the roof, foundations, exterior walls, HVAC systems,
equipment, parking areas, sidewalks, water, sewer and gas connections, pipes and
mains. Tenant shall pay, as Additional Rent, the full cost of maintenance,
repairs, and replacements. Tenant shall maintain all drives, sidewalks, parking
areas, and lawns on or about the Leased Property in a clean and
 

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orderly condition, free of accumulations of dirt, rubbish, snow and ice. Tenant
shall at all times maintain, operate and otherwise manage the Leased Property on
a basis and in a manner consistent with the standards currently maintained by
Tenant at the Leased Property. All repairs shall, to the extent reasonably
achievable, be at least equivalent in quality to the original work or the
property to be repaired shall be replaced. Tenant will not take or omit to take
any action the taking or omission of which might materially impair the value or
the usefulness of the Leased Property or any parts thereof for the Facility
Uses. Tenant shall permit Landlord to inspect the Leased Property at all
reasonable times and on reasonable advance notice, and if Landlord has a
reasonable basis to believe that there are maintenance problem areas and gives
Tenant written notice thereof setting forth its concerns in reasonable detail,
Tenant shall deliver to Landlord a plan of correction within 10 Business Days
after receipt of the notice. Tenant shall diligently pursue correction of all
problem areas within 60 days after receipt of the notice or such longer period
as may be necessary for reasons beyond its reasonable control such as shortage
of materials or delays in securing necessary permits, but not caused by lack of
diligence by Tenant and, upon expiration of the 60-day period, shall deliver
evidence of completion to Landlord or an interim report evidencing Tenant’s
diligent progress towards completion and, at the end of the next 60-day period,
evidence of satisfactory completion. Upon completion, Landlord shall have the
right to re-inspect the Facility and Tenant shall pay a re-inspection fee of
$750.00 plus Landlord’s reasonable out-of-pocket expenses within 30 days after
receipt of Landlord’s invoice. At each inspection of the Leased Property by
Landlord, the Facility employee in charge of maintenance shall be available to
tour the Facility with Landlord and answer questions.
 
7.2  Required Alterations. Tenant shall, at Tenant’s sole cost and expense, make
any additions, changes, improvements or alterations to the Leased Property,
including structural alterations, which may be required by any governmental
authorities, including those required to maintain licensure or certification
under the Medicare and Medicaid programs (if so certified), whether such changes
are required by Tenant’s use, changes in the law, ordinances, or governmental
regulations, defects existing as of the date of this Lease, or any other cause
whatsoever. All such additions, changes, improvements or alterations shall be
deemed to be Permitted Alterations and shall comply with all laws requiring such
alterations and with the provisions of §16.4.
 
7.3  Mechanic’s Liens. Tenant shall have no authority to permit or create a
mechanic’s lien or construction lien against Landlord’s interest in the Leased
Property, and Tenant shall post notices or file such documents as may be
required to protect Landlord’s interest in the Leased Property against such
liens. Tenant shall notify any and all contractors of this provision of the
Lease prior to entering into any contracts for improvements. Tenant hereby
agrees to defend, indemnify, and hold Landlord harmless from and against any
mechanic’s liens or construction liens against the Leased Property by reason of
work, labor, services or materials supplied or claimed to have been supplied on
or to the Leased Property. Subject to Tenant’s right to contest the same in
accordance with the terms of this Lease, Tenant shall remove, bond-off, or
otherwise obtain the release of any mechanic’s lien or construction liens filed
against the Leased Property within 15 days after notice of the filing thereof.
Tenant shall pay all expenses in connection therewith, including, without
limitation, damages, interest, court costs and reasonable attorneys’ fees.
 

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7.4  Replacements of Fixtures and Landlord’s Personal Property. Tenant shall not
remove Fixtures and Landlord’s Personal Property from the Leased Property except
to replace the Fixtures and Landlord’s Personal Property with other similar
items of equal quality and value. Items being replaced by Tenant may be removed
and shall become the property of Tenant and items replacing the same shall be
and remain the property of Landlord. Tenant shall execute, upon written request
from Landlord, any and all documents reasonably necessary to evidence Landlord’s
ownership of Landlord’s Personal Property and replacements therefor. Tenant may
finance replacements for the Fixtures and Landlord’s Personal Property by
equipment lease or by a security agreement and financing statement if, with
respect to any financing of critical care equipment and with respect to any
other Personal Property having a value in excess of $250,000.00 [i] Landlord has
consented to the terms and conditions of the equipment lease or security
agreement; and [ii] the equipment lessor or lender has entered into a
nondisturbance agreement with Landlord upon terms and conditions reasonably
acceptable to Landlord, including, without limitation, the following:
[a] Landlord shall have the right (but not the obligation) to assume such
security agreement or equipment lease upon the occurrence of an Event of Default
under this Lease; [b] the equipment lessor or lender shall notify Landlord of
any default by Tenant under the equipment lease or security agreement and give
Landlord a reasonable opportunity to cure such default; and [c] Landlord shall
have the right to assign its rights under the equipment lease, security
agreement, or nondisturbance agreement. Tenant shall, within 30 days after
receipt of an invoice from Landlord, reimburse Landlord for all costs and
expenses incurred in reviewing and approving the equipment lease, security
agreement, and nondisturbance agreement, including, without limitation,
reasonable attorneys’ fees and costs.
 
7.5  Lender Maintenance Reserve Escrow. Upon request from Tenant, Landlord shall
take all necessary action to cooperate with Tenant to secure the release of
funds held by Lender in any Lender Maintenance Reserve Escrow and/or the
Replacement Reserve (as defined in the Loan Documents) to the extent such funds
are available as set forth in the Loan Documents. Tenant’s obligations set forth
in this Article 7 shall not be conditioned upon the release of funds by Lender
from any Lender Maintenance Reserve Fund and/or the Replacement Reserve.
 
ARTICLE 8:   DEFAULTS AND REMEDIES
 
8.1  Events of Default. The occurrence of any one or more of the following shall
be an event of default (“Event of Default”) hereunder without any advance notice
to Tenant unless specified herein:
 
(a)  Tenant fails to pay in full any installment of Base Rent, any Additional
Rent or any other monetary obligation payable by Tenant under this Lease within
10 days after such payment is due.
 
(b)  Tenant or Guarantor (where applicable) fails to comply with any covenant
set forth in Article 14, §§15.6, 15.7, 15.8 or 15.12 of this Lease.
 

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(c)  Tenant fails to observe and perform any other covenant, condition or
agreement under this Lease to be performed by Tenant and [i] such failure
continues for a period of 30 days after written notice thereof is given to
Tenant by Landlord; or [ii] if, by reason of the nature of such default it
cannot be remedied within 30 days, Tenant fails to proceed with diligence
reasonably satisfactory to Landlord after receipt of the notice to cure the
default or, in any event, fails to cure such default within 60 days after
receipt of the notice. The foregoing notice and cure provisions do not apply to
any Event of Default otherwise specifically described in any other subsection of
§8.1.
 
(d)  Tenant abandons or vacates(except during a period of repair or
reconstruction after damage, destruction or a Taking) the Facility Property or
any material part thereof, ceases to operate any Facility, ceases to do business
or ceases to exist for any reason for five or more days and Tenant has not
implemented the necessary steps to cure.
 
(e)  [i] The filing by Tenant or Guarantor of a petition under the Bankruptcy
Code or the commencement of a bankruptcy or similar proceeding by Tenant or
Guarantor; [ii] the failure by Tenant or Guarantor, as applicable, within
60 days to dismiss an involuntary bankruptcy petition or other commencement of a
bankruptcy, reorganization or similar proceeding against such party, or to lift
or stay any execution, garnishment or attachment of such consequence as will
impair its ability to carry on its operation at the Leased Property; [iii] the
entry of an order for relief under the Bankruptcy Code in respect of Tenant or
Guarantor; [iv] any assignment by Tenant or Guarantor for the benefit of its
creditors; [v] the entry by Tenant or Guarantor into an agreement of composition
with its creditors; [vi] the approval by a court of competent jurisdiction of a
petition applicable to Tenant or Guarantor in any proceeding for its
reorganization instituted under the provisions of any state or federal
bankruptcy, insolvency, or similar laws; [vii] appointment by final order,
judgment, or decree of a court of competent jurisdiction of a receiver of the
whole or any substantial part of the properties of Tenant or Guarantor (provided
such receiver shall not have been removed or discharged within 60 days of the
date of his qualification).
 
(f)  [i] Any receiver, administrator, custodian or other person takes possession
or control of any of the Leased Property and continues in possession for
60 days; [ii] any writ against any of the Leased Property is not released within
60 days; [iii] any judgment is rendered or proceedings are instituted against
the Leased Property, Tenant which adversely affect the Leased Property or any
part thereof, which is not dismissed for 60 days (except as otherwise provided
in this section); [iv] all or a substantial part of the assets of Tenant or
Guarantor are attached, seized, subjected to a writ or distress warrant, or are
levied upon, or come into the possession of any receiver, trustee, custodian, or
assignee for the benefit of creditors; [v] Tenant or Guarantor is enjoined,
restrained, or in any way prevented by court order, or any proceeding is filed
or commenced seeking to enjoin, restrain or in any way prevent Tenant or
Guarantor from conducting all or a substantial part of its business or affairs;
or [vi] except as otherwise permitted hereunder, a final notice of lien, levy or
assessment is filed of record with respect to all or any part of the Leased
Property or any property of Tenant located at the Leased Property and is not
dismissed, discharged, or bonded-off within 30 days.
 

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(g)  Any representation or warranty made by Tenant or Guarantor in this Lease or
any other document executed in connection with this Lease, any guaranty of or
other security for this Lease, or any report, certificate, application,
financial statement or other instrument furnished by Tenant or Guarantor
pursuant hereto or thereto shall prove to be false, misleading or incorrect in
any material respect as of the date made.
 
(h)  [i] Tenant, Guarantor or any Affiliate of Tenant defaults on any
indebtedness or obligation to Landlord or any Landlord Affiliate, any Obligor
Group Obligation or any agreement with Landlord or any Landlord Affiliate,
including, without limitation, any lease with Landlord or any Landlord
Affiliate, or [ii] the occurrence of a default under any Material Obligation,
and any applicable grace or cure period with respect to default under such
indebtedness or obligation expires without such default having been cured. The
foregoing provisions apply to all such indebtedness, obligations and agreements
as they may be amended, modified, extended, or renewed from time to time.
 
(i)  Individual Guarantor dies, is adjudicated incompetent, files a petition in
bankruptcy, or is adjudicated insolvent under the Bankruptcy Code or any other
insolvency law, or fails to comply with any covenant or requirement of such
guarantor set forth in this Lease or in the guaranty of such guarantor, which is
not cured within any applicable cure period and in the case of the death or
incompetency of an Individual Guarantor only, Tenant fails within 30 days to
deliver to Landlord a substitute guaranty or other collateral reasonably
satisfactory to Landlord.
 
(j)  The license for the Facility or any other Government Authorization is
canceled, suspended, reduced to provisional or temporary, or otherwise
invalidated, or license revocation or decertification proceedings are commenced
against Tenant, and in each instance, such action is not stayed pending appeal,
or, as a result of the acts or omissions of Tenant, any reduction of more than
5% occurs in the number of licensed beds or units at the Facility, or an
admissions ban is issued for the Facility and remains in effect for a period of
more than 45 days.
 
8.2  Remedies. Upon the occurrence of an Event of Default under this Lease or
any Lease Document, and at any time thereafter until Landlord waives the default
in writing or acknowledges cure of the default in writing, at Landlord’s option,
without declaration, notice of nonperformance, protest, notice of protest,
notice of default, notice to quit or any other notice or demand of any kind
(unless otherwise expressly stated in this Lease or required by law), Landlord
may exercise any and all rights and remedies provided in this Lease or any Lease
Document or otherwise provided under law or in equity, including, without
limitation, any one or more of the following remedies:
 
(a)  Landlord may re-enter and take possession of the Leased Property without
terminating this Lease, and lease the Leased Property for the account of Tenant,
holding Tenant liable for all costs of Landlord in reletting the Leased Property
and for the difference in the amount received by such reletting and the amounts
payable by Tenant under the Lease.
 

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(b)  Landlord may terminate this Lease by written notice to Tenant, exclude
Tenant from possession of the Leased Property and use commercially reasonable
efforts to lease the Leased Property to others, holding Tenant liable for the
difference in the amounts received from such reletting and the amounts payable
by Tenant under this Lease.
 
(c)  Landlord may re-enter the Leased Property and have, repossess and enjoy the
Leased Property as if this Lease had not been made, and in such event, Tenant
and its successors and assigns shall remain liable for any contingent or
unliquidated obligations or sums owing at the time of such repossession.
 
(d)  Landlord may have access to and inspect, examine and make copies of the
books and records and any and all accounts, data and income tax and other
returns of Tenant insofar as they pertain to the Leased Property subject to
Landlord’s obligation to maintain the confidentiality of any patient or employee
information in accordance with the requirements of applicable State or federal
law.
 
(e)  Landlord may accelerate all of the unpaid Rent hereunder based on the then
current Rent Schedule and Tenant shall be liable for the present value of the
aggregate Rent for the unexpired term of this Lease, discounted at an annual
rate equal to eight percent (8%), which amount shall become immediately due and
payable.
 
(f)  Landlord may demand payment from Tenant of an amount equal to the
Outstanding Straight Line Rent Receivable accrued by Landlord under this Lease
as of the date that Tenant surrenders possession of the Leased Property
(“Surrender Date”). As used herein, the “Outstanding Straight Line Rent
Receivable” means [i] the amount of Base Rent that would have accrued under this
Lease, up to the Surrender Date, if the Base Rent were calculated based upon the
mathematical average of Landlord’s rate of return over the entire Initial Term
after taking into account the Increaser Rate for each Lease Year of the entire
Initial Term, minus [ii] the amount of Base Rent payable under this Lease, up to
the Surrender Date, based upon the Rent Schedule, i.e., based upon the Increaser
Rate imposed for each Lease Year up to the Surrender Date, as computed in
accordance with generally accepted accounting principles.
 
(g)  Landlord may take whatever action at law or in equity as may appear
necessary or desirable to collect the Rent and other amounts payable under this
Lease then due and thereafter to become due, or to enforce performance and
observance of any obligations, agreements or covenants of Tenant under this
Lease.
 
(h)  With respect to the Collateral or any portion thereof and Secured Party’s
security interest therein, Secured Party may exercise all of its rights as
secured party under Article 9 of the Uniform Commercial Code. Secured Party may
sell the Collateral by public or private sale upon five days notice to Tenant.
Tenant agrees that a commercially reasonable manner of disposition of the
Collateral shall include, without limitation and at the option of Secured Party,
a sale of the Collateral, in whole or in part, concurrently with the sale of the
Leased Property.
 

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(i)  Secured Party may obtain control over and collect the Receivables and apply
the proceeds of the collections to satisfaction of the Obligor Group Obligations
unless prohibited by law. For purposes of this §8.2(i), upon the occurrence and
during the continuance of an Event of Default, Tenant appoints Landlord or its
designee as attorney for Tenant with powers [i] to receive, to endorse, to sign
and/or to deliver, in Tenant’s name or Secured Party’s name, any and all checks,
drafts, and other instruments for the payment of money relating to the
Receivables, and to waive demand, presentment, notice of dishonor, protest, and
any other notice with respect to any such instrument; [ii] to sign Tenant’s name
on any invoice or bill of lading relating to any Receivable, drafts against
account debtors, assignments and verifications of Receivables, and notices to
account debtors; [iii] to send verifications of Receivables to any account
debtor; and [iv] to do all other acts and things necessary to carry out this
Lease. Absent gross negligence or willful misconduct of Secured Party, Secured
Party shall not be liable for any omissions, commissions, errors of judgment, or
mistakes in fact or law made in the exercise of any such powers. At Secured
Party’s option, Tenant shall [i] provide Secured Party a full accounting of all
amounts received on account of Receivables with such frequency and in such form
as Secured Party may require, either with or without applying all collections on
Receivables in payment of the Obligor Group Obligations or [ii] deliver to
Secured Party on the day of receipt all such collections in the form received
and duly endorsed by Tenant. At Secured Party’s request, Tenant shall institute
any action or enter into any settlement determined by Secured Party to be
necessary to obtain recovery or redress from any account debtor in default of
Receivables. Secured Party may give notice of its security interest in the
Receivables to any or all account debtors with instructions to make all payments
on Receivables directly to Secured Party, thereby terminating Tenant’s authority
to collect Receivables. After terminating Tenant’s authority to enforce or
collect Receivables, Secured Party shall have the right to take possession of
any or all Receivables and records thereof and is hereby authorized to do so,
and only Secured Party shall have the right to collect and enforce the
Receivables. Prior to the occurrence and during the continuance of an Event of
Default, at Tenant’s cost and expense, but on behalf of Secured Party and for
Secured Party’s account, Tenant shall collect or otherwise enforce all amounts
unpaid on Receivables and hold all such collections in trust for Secured Party,
but Tenant may commingle such collections with Tenant’s own funds, until
Tenant’s authority to do so has been terminated, which may be done only after an
Event of Default. Notwithstanding any other provision hereof, Secured Party does
not assume any of Tenant’s obligations under any Receivable, and Secured Party
shall not be responsible in any way for the performance of any of the terms and
conditions thereof by Tenant.
 
(j)  Without waiving any prior or subsequent Event of Default, Landlord may
waive any Event of Default or, with or without waiving any Event of Default,
remedy any default.
 
(k)  Landlord may terminate its obligation, if any, to disburse any Landlord
Payments.
 
(l)  Landlord may enter and take possession of the Land and the Facility without
terminating this Lease and complete construction and renovation of the
Improvements (or any part thereof) and perform the obligations of Tenant under
the Lease
 

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Documents. Without limiting the generality of the foregoing and for the purposes
aforesaid, upon the occurrence and during the continuance of an Event of
Default, Tenant hereby appoints HCN its lawful attorney-in-fact with full power
to do any of the following: [i] complete construction, renovation and equipping
of the Improvements in the name of Tenant; [ii] use unadvanced funds remaining
under the Investment Amount, or funds that may be reserved, escrowed, or set
aside for any purposes hereunder at any time, or to advance funds in excess of
the Investment Amount, to complete the Improvements; [iii] make changes in the
plans and specifications that shall be necessary or desirable to complete the
Improvements in substantially the manner contemplated by the plans and
specifications; [iv] retain or employ new general contractors, subcontractors,
architects, engineers, and inspectors as shall be required for said purposes;
[v] pay, settle, or compromise all existing bills and claims, which may be liens
or security interests, or to avoid such bills and claims becoming liens against
the Facility or security interest against fixtures or equipment, or as may be
necessary or desirable for the completion of the construction and equipping of
the Improvements or for the clearance of title; [vi] execute all applications
and certificates, in the name of Tenant, that may be required in connection with
any construction; [vii] do any and every act that Tenant might do in its own
behalf, to prosecute and defend all actions or proceedings in connection with
the Improvements; and [viii] to execute, deliver and file all applications and
other documents and take any and all actions necessary to transfer the
operations of the Facility to Secured Party or Secured Party’s designee. This
power of attorney is a power coupled with an interest and cannot be revoked.
 
(m)  Landlord may apply, with or without notice to Tenant, for the appointment
of a receiver (“Receiver”) for Tenant or Tenant’s business or for the Leased
Property. Unless prohibited by law, such appointment may be made either before
or after termination of Tenant’s possession of the Leased Property, without
notice, without regard to the solvency or insolvency of Tenant at the time of
application for such Receiver and without regard to the then value of the Leased
Property, and Secured Party may be appointed as Receiver. After the occurrence
and during the continuance of an Event of Default, Landlord shall be entitled to
appointment of a receiver as a matter of right and without the need to make any
showing other than the existence of an Event of Default. The Receiver shall have
the power to collect the rents, income, profits and Receivables of the Leased
Property during the pendency of the receivership and all other powers which may
be necessary or are usual in such cases for the protection, possession, control,
management and operation of the Leased Property during the whole of said
proceeding. All sums of money received by the Receiver from such rents and
income, after deducting therefrom the reasonable charges and expenses paid or
incurred in connection with the collection and disbursement thereof, shall be
applied to the payment of the Rent or any other monetary obligation of Tenant
under this Lease, including, without limitation, any losses or damages incurred
by Landlord under this Lease. Tenant, if requested to do so, will consent to the
appointment of any such Receiver as aforesaid.
 
(n)  Unless prohibited by law, Landlord may terminate any management agreement
with respect to any of the Leased Property and shall have the right to retain
one or more managers for the Leased Property at the expense of Tenant, such
manager(s) to serve for such term and at such compensation as Landlord
reasonably determines is necessary under the circumstances.
 

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8.3  Right of Setoff. Upon the occurrence and during the continuance of an Event
of Default, Landlord may, and is hereby authorized by Tenant to, at any time and
from time to time without advance notice to Tenant (any such notice being
expressly waived by Tenant), setoff or recoup and apply any and all sums held by
Landlord, any indebtedness of Landlord to Tenant, and any claims by Tenant
against Landlord, against any obligations of Tenant hereunder and against any
claims by Landlord against Tenant, whether or not such obligations or claims of
Tenant are matured and whether or not Landlord has exercised any other remedies
hereunder. The rights of Landlord under this section are in addition to any
other rights and remedies Landlord may have against Tenant.
 
8.4  Performance of Tenant’s Covenants. Landlord may perform any obligation of
Tenant which Tenant has failed to perform after expiration of any applicable
cure period within five days after Landlord has sent a written notice to Tenant
informing it of its specific failure. Tenant shall reimburse Landlord on demand,
as Additional Rent, for any expenditures thus incurred by Landlord and shall pay
interest thereon at Landlord’s rate of return as provided in the Commitment.
 
8.5  Late Payment Charge. Tenant acknowledges that any default in the payment of
any installment of Rent payable hereunder will result in loss and additional
expense to Landlord in servicing any indebtedness of Landlord secured by the
Leased Property, handling such delinquent payments, and meeting its other
financial obligations, and because such loss and additional expense is extremely
difficult and impractical to ascertain, Tenant agrees that in the event any Rent
payable to Landlord hereunder is not paid within 10 days after the due date,
within 10 days of receipt of an invoice from Landlord, Tenant shall pay a late
charge of 5% of the amount of the overdue payment as a reasonable estimate of
such loss and expenses, unless applicable law requires a lesser charge, in which
event the maximum rate permitted by such law may be charged by Landlord. The
10-day grace period set forth in this section shall not extend the time for
payment of Rent or the period for curing any default beyond such 10-day grace
period or constitute a waiver of such default following the expiration of such
10-day grace period.
 
8.6  Default Rent. At Landlord’s option at any time after the occurrence of an
Event of Default and while such Event of Default remains uncured, the Base Rent
payable under this Lease shall be increased to reflect Landlord’s rate of return
of 18.5% per annum on the Investment Amount (“Default Rent”); provided, however,
that if a court of competent jurisdiction determines that any other amounts
payable under this Lease are deemed to be interest, the Default Rent shall be
adjusted to ensure that the aggregate interest payable under this Lease does not
accrue at a rate in excess of the maximum legal rate. Tenant shall not be
required to pay interest on any installment of Rent during the 10-day grace
period referenced in §8.5.
 
8.7  Attorneys’ Fees. Tenant shall pay all reasonable costs and expenses
incurred by Landlord in enforcing or preserving Landlord’s rights under this
Lease, whether or not an Event of Default has actually occurred or has been
declared and thereafter cured, including, without limitation, [i] the fees,
expenses, and costs of any
 

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litigation, appellate, receivership, administrative, bankruptcy, insolvency or
other similar proceeding; [ii] reasonable attorney, paralegal, consulting and
witness fees and disbursements, whether in-house counsel or outside counsel; and
[iii] the expenses, including, without limitation, lodging, meals, and
transportation, of Landlord and its employees, agents, attorneys, and witnesses
in preparing for litigation, administrative, bankruptcy, insolvency or other
similar proceedings and attendance at hearings, depositions, and trials in
connection therewith. All such reasonable costs, expenses, charges and fees
payable by Tenant shall be deemed to be Additional Rent under this Lease.
 
8.8  Escrows and Application of Payments. As security for the performance of the
Obligor Group Obligations, Tenant hereby assigns to Landlord all its right,
title, and interest in and to all monies escrowed with Landlord under this Lease
and all deposits with utility companies, taxing authorities and insurance
companies; provided, however, that Landlord shall not exercise its rights
hereunder until an Event of Default has occurred. Any payments received by
Landlord under any provisions of this Lease during the existence or continuance
of an Event of Default shall be applied to the Obligor Group Obligations in the
order which Landlord may determine.
 
8.9  Remedies Cumulative. The remedies of Landlord herein are cumulative to and
not in lieu of any other remedies available to Landlord at law or in equity. The
use of any one remedy shall not be taken to exclude or waive the right to use
any other remedy.
 
8.10  Waivers. Tenant waives [i] any notice required by statute or other law as
a condition to bringing an action for possession of, or eviction from, any of
the Leased Property, [ii] any right of re-entry or repossession, [iii] any right
to a trial by jury in any action or proceeding arising out of or relating to
this Lease, [iv] any objections, defenses, claims or rights with respect to the
exercise by Landlord of any rights or remedies; [v] any right of redemption
whether pursuant to statute, at law or in equity, [vi] all presentments, demands
for performance, notices of nonperformance, protest, notices of protest, notices
of dishonor, notices to quit and any other notice or demand of any kind other
than those specifically provided for in this Lease, and [vii] all notices of the
existence, creation or incurring of any obligation or advance under this Lease
before or after this date.
 
8.11  Obligations Under the Bankruptcy Code. Upon filing of a petition by or
against Tenant under the Bankruptcy Code, Tenant, as debtor and as
debtor-in-possession, and any trustee who may be appointed with respect to the
assets of or estate in bankruptcy of Tenant, agree to pay monthly in advance on
the first day of each month, as reasonable compensation for the use and
occupancy of the Leased Property, an amount equal to all Rent due pursuant to
this Lease. Included within and in addition to any other conditions or
obligations imposed upon Tenant or its successor in the event of the assumption
and/or assignment of this Lease are the following: [i] the cure of any monetary
defaults and reimbursement of pecuniary loss within not more than five Business
Days of assumption and/or assignment; [ii] the deposit of an additional amount
equal to not less than three months’ Base Rent, which amount is agreed to be a
necessary and appropriate deposit to adequately assure the future performance
under this Lease of the Tenant or its assignee; and [iii] the continued use of
the Leased Property for the Facility Uses. Nothing herein shall be
 

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construed as an agreement by Landlord to any assignment of this Lease or a
waiver of Landlord’s right to seek adequate assurance of future performance in
addition to that set forth hereinabove in connection with any proposed
assumption and/or assignment of this Lease.
 
ARTICLE 9:   DAMAGE AND DESTRUCTION
 
9.1  Notice of Casualty. If the Leased Property shall be destroyed, in whole or
in part, or damaged by fire, flood, windstorm or other casualty in excess of
$150,000.00 (a “Casualty”), Tenant shall give written notice thereof to Landlord
within two Business Days after the occurrence of the Casualty. Within 15 days
after the occurrence of the Casualty or as soon thereafter as such information
is reasonably available to Tenant, Tenant shall provide the following
information to Landlord: [i] the date of the Casualty; [ii] the nature of the
Casualty; [iii] a description of the damage or destruction caused by the
Casualty, including the type of Leased Property damaged and the area of the
Improvements damaged; [iv] a preliminary estimate of the cost to repair,
rebuild, restore or replace the Leased Property; [v] a preliminary estimate of
the schedule to complete the repair, rebuilding, restoration or replacement of
the Leased Property; [vi] a description of the anticipated property insurance
claim, including the name of the insurer, the insurance coverage limits, the
deductible amount, the expected settlement amount, and the expected settlement
date; and [vii] a description of the business interruption claim, including the
name of the insurer, the insurance coverage limits, the deductible amount, the
expected settlement amount, and the expected settlement date. Within five days
after request from Landlord, Tenant will provide Landlord with copies of all
correspondence to the insurer and any other information reasonably requested by
Landlord.
 
9.2  Substantial Destruction.
 
9.2.1  If the Facility Improvements are substantially destroyed at any time
other than during the final 18 months of the Initial Term or any Renewal Term,
Tenant shall promptly rebuild and restore such Improvements in accordance with
§9.4 and Landlord shall make the insurance proceeds available to Tenant for such
restoration. The term “substantially destroyed” means any casualty resulting in
the loss of use of 50% or more of the licensed beds at any one Facility.
 
9.2.2  If the Facility Improvements are substantially destroyed during the final
18 months of the Initial Term or any Renewal Term, Landlord may elect to
terminate this Lease and retain the insurance proceeds unless Tenant exercises
its option to renew as set forth in §9.2.3. If Landlord elects to terminate,
Landlord shall give notice (“Termination Notice”) of its election to terminate
this Lease within 30 days after receipt of Tenant’s notice of the damage. If
Tenant does not exercise its option to renew under §9.2.3 within 15 days after
delivery of the Termination Notice, this Lease shall terminate on the 15th day
after delivery of the Termination Notice. If this Lease is so terminated, Tenant
shall be liable to Landlord for all Rent and all other obligations accrued under
this Lease through the effective date of termination.
 
9.2.3  If the Facility Improvements are substantially destroyed during the final
18 months of the Initial Term or the Renewal Term and Landlord gives the
Termination Notice, Tenant shall have the option to renew this Lease. Tenant
shall give Landlord irrevocable notice
 

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of Tenant’s election to renew within 15 days after delivery of the Termination
Notice. If Tenant elects to renew, the Renewal Term will be in effect for the
balance of the then current Term plus a 15-year period. The Renewal Term will
commence on the third day following Landlord’s receipt of Tenant’s notice of
renewal. All other terms of this Lease for the Renewal Term shall be in
accordance with Article 12. The Improvements will be restored by Tenant in
accordance with the provisions of this Article 9 regarding partial destruction.
 
9.3  Partial Destruction. If the Facility Improvements are not substantially
destroyed, then Tenant shall comply with the provisions of §9.4 and Landlord
shall make the insurance proceeds available to Tenant for such restoration.
 
9.4  Restoration. Subject to any limitations imposed by law with respect to the
rebuilding of the Leased Premises, Tenant shall promptly repair, rebuild, or
restore the damaged Leased Property, at Tenant’s expense, so as to make the
Leased Property at least equal in value to the Leased Property existing
immediately prior to such occurrence and as nearly similar to it in character as
is practicable and reasonable. Before beginning such repairs or rebuilding with
respect to any Casualty, or letting any contracts in connection with such
repairs or rebuilding, Tenant will submit for Landlord’s approval, which
approval Landlord will not unreasonably withhold or delay, plans and
specifications meeting the requirements of §16.2 for such repairs or rebuilding.
Promptly after receiving Landlord’s approval of the plans and specifications,
Tenant will begin such repairs or rebuilding and will prosecute the repairs and
rebuilding to completion with diligence, subject, however, to strikes, lockouts,
acts of God, embargoes, governmental restrictions, and other causes beyond
Tenant’s reasonable control. Landlord will make available to Tenant the net
proceeds of any fire or other casualty insurance paid to Landlord for such
repair or rebuilding as the same progresses, after deduction of any costs of
collection, including reasonable attorneys’ fees. Payments will be made against
properly certified vouchers of a competent architect in charge of the work and
approved by Landlord. Payments for deposits for the repairing or rebuilding or
delivery of materials to the Facility will be made upon Landlord’s receipt of
evidence satisfactory to Landlord that such payments are required in advance.
With respect to any Casualty, prior to commencing the repairing or rebuilding,
Tenant shall deliver to Landlord for Landlord’s approval a schedule setting
forth the estimated monthly draws for such work. Landlord will contribute to
such payments out of the insurance proceeds an amount equal to the proportion
that the total net amount received by Landlord from insurers bears to the total
estimated cost of the rebuilding or repairing, multiplied by the payment by
Tenant on account of such work. Landlord may, however, withhold 10% from each
payment until the work is completed and proof has been furnished to Landlord
that no lien or liability has attached or will attach to the Leased Property or
to Landlord in connection with such repairing or rebuilding. Upon the completion
of rebuilding and the furnishing of such proof, the balance of the net proceeds
of such insurance payable to Tenant on account of such repairing or rebuilding
will be paid to Tenant. If required by law as a result of the nature or extent
of the damage, Tenant will obtain and deliver to Landlord a temporary or final
certificate of occupancy before the damaged Leased Property is reoccupied for
any purpose. Tenant shall complete such repairs or rebuilding free and clear of
mechanic’s or other liens, and in accordance with the building codes and all
applicable laws, ordinances, regulations, or orders of any state, municipal, or
other public authority affecting the repairs or rebuilding, and also in
accordance with all requirements of the insurance rating organization, or
 

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similar body. Any remaining proceeds of insurance after such restoration will be
Tenant’s property.
 
9.5  Insufficient Proceeds. If the proceeds of any insurance settlement are not
sufficient to pay the costs of Tenant’s repair, rebuilding or restoration under
§9.4 in full, Tenant shall deposit with Landlord at Landlord’s option, and
within 10 days of Landlord’s request, an amount sufficient in Landlord’s
reasonable judgment to complete such repair, rebuilding or restoration or shall
provide Landlord with evidence reasonably satisfactory to Landlord that Tenant
has available the funds needed to complete such repair, rebuilding or
restoration. Tenant shall not, by reason of the deposit or payment, be entitled
to any reimbursement from Landlord or diminution in or postponement of the
payment of the Rent.
 
9.6  Not Trust Funds. Notwithstanding anything herein or at law or equity to the
contrary, none of the insurance proceeds paid to Landlord as herein provided
shall be deemed trust funds, and Landlord shall be entitled to dispose of such
proceeds as provided in this Article 9. Tenant expressly assumes all risk of
loss, including a decrease in the use, enjoyment or value, of the Leased
Property from any casualty whatsoever, whether or not insurable or insured
against.
 
9.7  Landlord’s Inspection. During the progress of such repairs or rebuilding,
Landlord and its architects and engineers may, from time to time, inspect the
Leased Property and will be furnished, if required by them, with copies of all
plans, shop drawings, and specifications relating to such repairs or rebuilding.
Tenant will keep all plans, shop drawings, and specifications at the building,
and Landlord and its architects and engineers may examine them at all reasonable
times and on reasonable notice. If, during such repairs or rebuilding, Landlord
and its architects and engineers determine that the repairs or rebuilding are
not being done in accordance with the approved plans and specifications,
Landlord will give prompt notice in writing to Tenant, specifying in detail the
particular deficiency, omission, or other respect in which Landlord claims such
repairs or rebuilding do not accord with the approved plans and specifications.
Upon the receipt of any such notice, Tenant will cause corrections to be made to
any deficiencies, omissions, or such other respect. Tenant’s obligations to
supply insurance, according to Article 4, will be applicable to any repairs or
rebuilding under this section.
 
9.8  Landlord’s Costs. Tenant shall, within 30 days after receipt of an invoice
from Landlord, pay the costs, expenses, and fees of any architect or engineer
employed by Landlord to review any plans and specifications and to supervise and
approve any construction, or for any services rendered by such architect or
engineer to Landlord as contemplated by any of the provisions of this Lease, or
for any services performed by Landlord’s attorneys in connection therewith.
 
9.9  No Rent Abatement. Rent will not abate pending the repairs or rebuilding of
the Leased Property; provided, however, that credit will be given for any rental
insurance proceeds received by Landlord.
 

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ARTICLE 10:   CONDEMNATION
 
10.1  Total Taking. If, by exercise of the right of eminent domain or by
conveyance made in response to the threat of the exercise of such right
(“Taking”), the entire Facility Property is taken, or so much of the Facility
Property is taken that the number of licensed beds/units at the Facility
Property is reduced by more than 25% as a result of such Taking, then this Lease
will end with respect to the Facility Property only on the earlier of the
vesting of title to the Facility Property in the condemning authority or the
taking of possession of the Facility Property by the condemning authority. All
damages awarded for such Taking under the power of eminent domain shall be the
property of Landlord, whether such damages shall be awarded as compensation for
diminution in value of the leasehold or the fee of the Facility Property,
provided, however, nothing herein shall preclude Tenant from pursuing a separate
award for the Taking of its Tenant’s Property (as defined below) or for
relocation costs or expenses.
 
10.2  Partial Taking. If, after a Taking, so much of the Facility Property
remains that the Facility Property can be used for substantially the same
purposes for which it was used immediately before the Taking, then [i] this
Lease will end as to the part taken on the earlier of the vesting of title to
such Leased Property in the condemning authority or the taking of possession of
the Leased Property by the condemning authority and the Rent will be adjusted
accordingly; [ii] at its cost, Tenant shall restore so much of the Facility
Property as remains to a sound architectural unit substantially suitable for the
purposes for which it was used immediately before the Taking, using good
workmanship and new, first-class materials; [iii] upon completion of the
restoration, Landlord will pay Tenant the lesser of the net award made to
Landlord on the account of the Taking (after deducting from the total award,
reasonable attorneys’, appraisers’, and other fees and costs incurred in
connection with the obtaining of the award and amounts paid to the holders of
mortgages secured by the Facility Property), or Tenant’s actual out-of-pocket
costs of restoring the Facility Property; and [iv] Landlord shall be entitled to
the balance of the net award except to the extent specifically allocated to the
value of Tenant’s Property or any relocation costs or expenses incurred by
Tenant as a result of such partial Taking. The restoration shall be completed in
accordance with §§9.4, 9.5, 9.7, 9.8 and 9.9 with such provisions deemed to
apply to condemnation instead of casualty.
 
10.3  Condemnation Proceeds Not Trust Funds. Notwithstanding anything in this
Lease or at law or equity to the contrary, none of the condemnation award paid
to Landlord shall be deemed trust funds, and Landlord shall be entitled to
dispose of such proceeds as provided in this Article 10. Tenant expressly
assumes all risk of loss, including a decrease in the use, enjoyment, or value,
of the Leased Property from any Taking.
 
ARTICLE 11:   TENANT’S PROPERTY
 
11.1  Tenant’s Property. Tenant shall have the right to install, place, and use
on the Leased Property such fixtures, furniture,
 

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equipment, inventory and other personal property in addition to Landlord’s
Personal Property as may be required or as Tenant may, from time to time, deem
necessary or useful to operate the Leased Property for its permitted purposes.
All fixtures, furniture, equipment, inventory, and other personal property
installed, placed, or used on the Leased Property which is owned by Tenant or
leased by Tenant from third parties is hereinafter referred to as “Tenant’s
Property”.
 
11.2  Requirements for Tenant’s Property. Tenant shall comply with all of the
following requirements in connection with Tenant’s Property:
 
(a)  Tenant shall, at Tenant’s sole cost and expense, maintain, repair, and
replace Tenant’s Property.
 
(b)  Tenant shall, at Tenant’s sole cost and expense, keep Tenant’s Property
insured against loss or damage by fire, vandalism and malicious mischief,
sprinkler leakage, earthquake, and other physical loss perils commonly covered
by fire and extended coverage, boiler and machinery, and difference in
conditions insurance in an amount not less than 90% of the then full replacement
cost thereof. Tenant shall use the proceeds from any such policy for the repair
and replacement of Tenant’s Property. The insurance shall meet the requirements
of §4.3.
 
(c)  Tenant shall pay all taxes applicable to Tenant’s Property.
 
(d)  If Tenant’s Property is damaged or destroyed by fire or any other cause,
Tenant shall have the right, but not the obligation, to repair or replace
Tenant’s Property (unless the same is required for the operation of the Leased
Property in compliance with applicable Legal Requirements, in which case Tenant
shall be required to promptly repair or replace the same) unless Landlord elects
to terminate this Lease pursuant to §9.2.2.
 
(e)  Unless an Event of Default or any event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default has occurred,
Tenant may remove Tenant’s Property from the Leased Property from time to time
provided that [i] the items removed are not required to operate the Leased
Property for the Facility Uses (unless such items are being replaced by Tenant);
and [ii] Tenant repairs any damage to the Leased Property resulting from the
removal of Tenant’s Property.
 
(f)  Tenant shall not, without the prior written consent of Landlord or as
otherwise provided in this Lease, remove any Tenant’s Property or Leased
Property. Tenant shall, at Landlord’s option, remove Tenant’s Property upon the
termination or expiration of this Lease and shall repair any damage to the
Leased Property resulting from the removal of Tenant’s Property. If Tenant fails
to remove Tenant’s Property within 30 days after request by Landlord, then
Tenant shall be deemed to have abandoned Tenant’s Property, Tenant’s Property
shall become the property of Landlord, and Landlord may remove, store and
dispose of Tenant’s Property. In such event, Tenant shall have no claim or right
against Landlord for such property or the value thereof regardless of the
disposition thereof by Landlord. Tenant shall pay Landlord, upon demand, all
expenses incurred by Landlord in removing, storing, and disposing
 

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of Tenant’s Property and repairing any damage caused by such removal. Tenant’s
obligations hereunder shall survive the termination or expiration of this Lease.
 
(g)  Tenant shall perform its obligations under any equipment lease or security
agreement for Tenant’s Property. For equipment loans or leases for critical care
equipment and for all other equipment having an original cost in excess of
$250,000.00, Tenant shall cause such equipment lessor or lender to enter into a
nondisturbance agreement with Landlord upon terms and conditions acceptable to
Landlord, including, without limitation, the following: [i] Landlord shall have
the right (but not the obligation) to assume such equipment lease or security
agreement upon the occurrence of an Event of Default by Tenant hereunder;
[ii] such equipment lessor or lender shall notify Landlord of any default by
Tenant under the equipment lease or security agreement and give Landlord a
reasonable opportunity to cure such default; and [iii] Landlord shall have the
right to assign its interest in the equipment lease or security agreement and
nondisturbance agreement. Tenant shall, within 30 days after receipt of an
invoice from Landlord, reimburse Landlord for all costs and expenses incurred in
reviewing and approving the equipment lease, security agreement and
nondisturbance agreement, including, without limitation, reasonable attorneys’
fees and costs.
 
ARTICLE 12:   RENEWAL OPTIONS
 
12.1  Renewal Options. Tenant has the option to renew (“Renewal Option”) this
Lease for one 15-year renewal term (“Renewal Term”). Tenant can exercise the
Renewal Option only upon satisfaction of the following conditions:
 
(a)  There shall be no uncured Event of Default, or any event which with the
passage of time or giving of notice would constitute an Event of Default, at the
time Tenant exercises its Renewal Option nor on the date the Renewal Term is to
commence.
 
(b)  Tenant shall give Landlord irrevocable written notice of renewal no later
than the date which is [i] 90 days prior to the expiration date of the Initial
Term; or [ii] 15 days after Landlord’s delivery of the Termination Notice as set
forth in §9.2.3.
 
(c)  Tenant and each Affiliate Tenant shall concurrently give irrevocable notice
of renewal for each Affiliate Lease.
 
(d)  Tenant shall pay all amounts, costs, expenses, charges, Rent and other
items payable by Tenant to Landlord, including, but not limited to, enforcement
costs as set forth in §8.7 and any unpaid cumulative Rent Shortfall, and the
Renewal Fee to Landlord on the Renewal Date.
 
12.2  Effect of Renewal. The following terms and conditions will be applicable
if Tenant renews the Lease:
 
(a)  Effective Date. Except as otherwise provided in §9.2.3, the effective date
of any Renewal Term will be the first day after the expiration date of the Term.
The first day of the Renewal Term is also referred to as the Renewal Date.
 

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(b)  Investment Amount. Effective as of the Renewal Date, a single Investment
Amount will be computed by summing all Landlord Payments made to date.
 
(c)  Rent Adjustment. Effective as of the Renewal Date, Landlord shall calculate
Base Rent for the Renewal Term based upon the applicable rate of return to
Landlord as set forth in the Commitment and shall issue a new Rent Schedule
reflecting the Base Rent adjustment. Until Tenant receives a revised Rent
Schedule from Landlord, Tenant shall for each month [i] continue to make
installments of Base Rent according to the Rent Schedule in effect on the day
before the Renewal Date; and [ii] within 10 days following Landlord’s issuance
of an invoice, pay the difference between the installment of Base Rent paid to
Landlord for such month and the installment of Base Rent actually due for such
month as a result of the renewal of the Lease.
 
(d)  Other Terms and Conditions. Except for the modifications set forth in this
§12.2, all other terms and conditions of the Lease will remain the same for the
Renewal Term.
 
ARTICLE 13:   RIGHT OF FIRST OPPORTUNITY
 
13.1  Right of First Opportunity. In the event at any time during the Term
either [i] Landlord elects to seek a purchaser of the Leased Property (the
“Right of First Opportunity Event”) or [ii] Landlord receives a bona fide offer
from a third party (the “Offer”) setting forth the terms and conditions upon
which it proposes to purchase the Leased Property which it is interested in
accepting, but in no event shall Landlord be obligated to accept (the “Right of
First Refusal Event”), the following provisions shall apply:
 
(a)  In the event of the occurrence of the Right of First Opportunity Event,
Landlord shall provide Tenant with written notice of its intent to sell the
Leased Property and its proposed terms with respect thereto (the “Opportunity
Notice”). Landlord and Tenant shall have a period of 30 days after Tenant’s
receipt of the Opportunity Notice (the “Protected Period”) to negotiate in good
faith with respect to the terms and conditions under which such transaction
shall occur provided that in no event shall the purchase price be less than the
Base Price and shall occur on the terms and conditions set forth in the
Transaction Documents (as defined below) (the “Opportunity Transaction”). In the
event Landlord and Tenant are unable to reach agreement within the Protected
Period with respect to the terms of the Opportunity Transaction, then Landlord
shall be free to enter into negotiations with respect to the Opportunity
Transaction with any other person or entity; provided, however, that Landlord
shall not be permitted to consummate a transaction with any other person or
entity on terms which are less favorable to Landlord than those offered to
Tenant during the Protected Period without first offering Tenant the opportunity
on written notice setting forth such terms to consummate the Opportunity
Transaction on such alternative terms and conditions (the “Modified Opportunity
Notice”); provided, however, that Tenant shall be deemed to have waived its
right to proceed
 

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with such revised Opportunity Transaction in the event it does not advise
Landlord of its election to proceed within 10 days after its receipt of the
Modified Opportunity Notice.
 
(b)  In the event of the occurrence of a Right of First Refusal Event, Landlord
shall provide Tenant with a true and correct copy of the Offer (the “Right of
First Refusal Notice”). Tenant shall have 20 days from its receipt of the Right
of First Refusal Notice to advise Landlord in writing whether it is prepared to
purchase the Leased Property on the same terms and conditions as set forth in
the Offer. Tenant’s failure to so advise Landlord within such 20 day period
shall be deemed to be a determination by Tenant not to exercise the right of
first refusal provided for herein, at which time Landlord shall be free to
consummate the transaction which was the subject of the Offer; provided,
however, that Landlord shall not be permitted to modify the terms specified in
the Offer in an manner more favorable to the third party than those reflected in
the original Offer (the “Modified Offer”) without first again offering Tenant
the opportunity to consummate a transaction on the terms set forth in the
Modified Offer; provided, however, that Tenant shall be deemed to have waived
its right to proceed with such a transaction in the event it does not advise
Landlord of its election to proceed within 10 days after its receipt of the
Modified Offer.
 
(c)  In the event Landlord does not consummate a transaction on the terms
provided for in the Offer or the Modified Offer, as applicable, within 90 days
after the date thereof, Landlord shall not be permitted to sell the Leased
Property to the Offeror or to any other party, whether on the terms set forth in
the Offer or the Modified Offer, as applicable, or pursuant to a new Offer
without again first offering Tenant an option to consummate a transaction on the
terms specified in the Offer, the Modified Offer or any new Offer, as
applicable; provided, however, that Tenant shall be deemed to have waived its
rights hereunder in the event it does not advise Landlord of its election to
proceed within 10 days after its receipt of another copy of the Offer or of the
Modified Offer or the new Offer, as applicable.
 
(d)  In the event Tenant exercises its right of first refusal or right of first
opportunity provided for herein, Tenant and Landlord shall have a period of
30 days in which to enter into one or more written agreements outlining the
terms and conditions, in addition to those set forth in the Offer or the
Modified Offer, if applicable, on which the sale will occur (the “Transaction
Documents”). In the event Landlord and Tenant fail to execute the Transaction
Documents within said 30 day period, then Tenant shall be deemed to have
forfeited its rights hereunder with respect to such transaction; provided,
however, that Landlord shall not be permitted to sell the Leased Property to any
other person or entity on terms which are less favorable to Landlord than those
offered to Tenant during the Protected Period or beyond the expiration of the
90 day period provided for in clause (c), without first complying with the terms
of this §13.1 unless Landlord and Tenant failed to execute the Transaction
Documents as a result of Tenant’s bad faith in the negotiation of the terms of
such Transaction Documents, in which case Landlord shall be permitted to sell
the Leased Property to any other person or entity regardless of the terms of
such transaction.
 
(e)  Any sale of the Leased Property by Landlord pursuant to this §13, other
than to Tenant, shall be subject to the rights of Tenant under this Lease,
including, but not limited to, its rights under this §13.
 

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13.2  Fair Market Value. The fair market value (the “Fair Market Value”) of the
Leased Property shall be determined as follows:
 
13.2.1  The parties shall attempt to determine the Fair Market Value by mutual
agreement within 15 days after giving the purchase notice (the “Negotiation
Period”). However, if the parties do not agree on the Fair Market Value during
the Negotiation Period, the following provisions shall apply.
 
13.2.2  Landlord and Tenant shall each give the other party notice of the name
of an acceptable appraiser five Business Days after the end of the Negotiation
Period. The two appraisers will then select a third appraiser within an
additional five days. Each appraiser must demonstrate to the reasonable
satisfaction of both Landlord and Tenant that it has significant experience in
appraising properties similar to the Leased Property. Within five days after
designation, each appraiser shall submit a resume to Landlord and Tenant setting
forth such appraiser’s qualifications, including education and experience with
similar properties. A notice of objections to the qualifications of any
appraiser shall be given within 10 days after receipt of such resume. If a party
fails to timely object to the qualifications of an appraiser, then the appraiser
shall be conclusively deemed satisfactory. If a party gives a timely notice of
objection to the qualifications of an appraiser, then the disqualified appraiser
shall be replaced by an appraiser selected by the qualified appraisers or, if
all appraisers are disqualified, then by an appraiser selected by a commercial
arbitrator acceptable to Landlord and Tenant.
 
13.2.3  The Fair Market Value shall be determined by the appraisers within
60 days thereafter as follows. Each of the appraisers shall be instructed to
prepare an appraisal of the Leased Property in accordance with the following
instructions:
 
The Leased Property is to be valued upon the three conventional approaches to
estimate value known as the Income, Sales Comparison and Cost Approaches. Once
the approaches are completed, the appraiser correlates the individual approaches
into a final value conclusion.
 
The three approaches to estimate value are summarized as follows:
 
Income Approach: This valuation approach recognizes that the value of the
operating tangible and intangible assets can be represented by the expected
economic viability of the business giving returns on and of the assets.
 
Sales Comparison Approach: This valuation approach is based upon the principle
of substitution. When a facility is replaceable in the market, the market
approach assumes that value tends to be set at the price of acquiring an equally
desirable substitute facility. Since healthcare market conditions change and
frequently are subject to regulatory and financing environments, adjustments
 

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need to be considered. These adjustments also consider the operating differences
such as services and demographics.
 
Cost Approach: This valuation approach estimates the value of the tangible
assets only. Value is represented by the market value of the land plus the
depreciated reproduction cost of all improvements and equipment.
 
In general, the Income and Sales Comparison Approaches are considered the best
representation of value because they cover both tangible and intangible assets,
consider the operating characteristics of the business and have the most
significant influence on attracting potential investors.
 
The appraised values submitted by the three appraisers shall be ranked from
highest value to middle value to lowest value, the appraised value (highest or
lowest) which is furthest from the middle appraised value shall be discarded,
and the remaining two appraised values shall be averaged to arrive at the Fair
Market Value.
 
13.2.4  Tenant shall pay, or reimburse Landlord for, all costs and expenses in
connection with the appraisals.
 
13.3  Closing. Any closing pursuant to, and the consequences to Tenant of
failing to close after exercising its rights under §13.1 shall be in accordance
with the terms set forth in the Offer or Modified Offer and in the Transaction
Documents executed pursuant to the terms of this Article 13.
 
ARTICLE 14:   NEGATIVE COVENANTS
 
Until the Obligor Group Obligations shall have been performed in full, Tenant
and Guarantor covenant and agree that Tenant (and Guarantor where applicable)
shall not do any of the following without the prior written consent of Landlord:
 
14.1  No Debt. Tenant shall not create, incur, assume, or permit to exist any
indebtedness with respect to the Leased Property other than [i] trade debt
incurred in the ordinary course of business; [ii] indebtedness for Facility
working capital purposes; and [iii] indebtedness that is secured by any
Permitted Lien.
 
14.2  No Liens. Tenant shall not create, incur, or permit to exist any lien,
charge, encumbrance, easement or restriction upon the Leased Property, except
for Permitted Liens.
 
14.3  No Guaranties. Except for the Obligor Group Obligations, Tenant shall not
create, incur, assume, or permit to exist any guarantee of any loan or other
indebtedness with respect to the Leased Property except for the endorsement of
negotiable instruments for collection in the ordinary course of business.
 
14.4  No Transfer. Tenant shall not sell, lease, sublease, mortgage, convey,
assign or otherwise transfer any legal or equitable interest in the
 

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Leased Property or any part thereof, except for transfers made in connection
with any Permitted Lien, the Interim Agreements or leases to the residents of
the Leased Property or commercial leases with respect to a portion of the leased
Property comprising in the aggregate less than 2,500 square feet provided such
commercial leases shall be for services that are an integral part of the
Facility.
 
14.5  No Dissolution. Tenant shall not dissolve, liquidate, merge, consolidate
or terminate its existence or sell, other than in a sale/leaseback or
sale/manage back transaction, assign, lease, or otherwise transfer (whether in
one transaction or in a series of transactions) all or substantially all of its
assets (whether now owned or hereafter acquired) unless, in the case of a merger
or consolidation by Tenant, the surviving entity in such merger has a net worth
immediately after the merger or consolidation at least equal to that of the
Tenant immediately prior thereto.
 
14.6  Subordination of Payments to Affiliates.
 
(a)  Except as otherwise provided in §14.6(b) below, after the occurrence of an
Event of Default and until such Event of Default is cured or waived in writing,
Tenant and Guarantor shall not make any payments or distributions (including,
without limitation, salary, bonuses, fees, principal, interest, dividends,
liquidating distributions, management fees, cash flow distributions or lease
payments to Guarantor, any Affiliate, or any shareholder, member or partner of
Tenant or any Affiliate.
 
(b)  Notwithstanding the provisions of §14.6(a) or any other provision to the
contrary contained in this Lease, [1] whether or not there is outstanding an
Event of Default, the following shall be expressly permitted: [A] salaries paid
to employees of the Facilities or employees of Tenant in the ordinary course of
business; [B] equity contributions and inter-company loans from Tenant to its
direct and indirect subsidiaries made in the ordinary course of business;
[C] payment made by Individual Guarantor to Tenant under the Cash Flow Agreement
provided that any such payment will be held in trust by Tenant only for the
purposes of paying Rent to Landlord and other expenses incurred by Tenant in
connection with the performance of its obligations under this Lease; and
[D] with respect to the preferred stock of Tenant issued to Saratoga, PIK
dividends; and [2] so long as there is no Event of Default under §8.1(a) of this
Lease, Tenant may pay cash dividends to Saratoga or to any other preferred
shareholder of Tenant who is not an Affiliate of Tenant.
 
14.7  Change of Location or Name. Tenant shall not, without providing Landlord
with 30 days prior notice thereof, change any of the following: [i] the location
of the principal place of business or chief executive office of Tenant, or any
office where any of Tenant’s books and records are maintained; [ii] the name
under which Tenant conducts any of its business or operations; or
[iii] reorganize or otherwise change its Organization State.
 

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ARTICLE 15:   AFFIRMATIVE COVENANTS
 
15.1  Perform Obligations. Tenant shall perform all of its obligations under
this Lease, all material obligations under the Government Authorizations, the
Permitted Exceptions, and all Legal Requirements. If applicable, Tenant shall
take all necessary action to obtain all Government Authorizations required for
the operation of the Facility as soon as possible after the Effective Date.
 
15.2  Proceedings to Enjoin or Prevent Construction. If any proceedings are
filed seeking to enjoin or otherwise prevent or declare invalid or unlawful
Tenant’s construction, occupancy, maintenance, or operation of the Facility or
any portion thereof, Tenant will cause such proceedings to be vigorously
contested in good faith, and in the event of an adverse ruling or decision,
prosecute all allowable appeals therefrom, and will, without limiting the
generality of the foregoing, resist the entry or seek the stay of any temporary
or permanent injunction that may be entered, and use its best commercially
reasonable efforts to bring about a favorable and speedy disposition of all such
proceedings and any other proceedings.
 
15.3  Documents and Information.
 
15.3.1  Furnish Documents. Tenant shall periodically during the term of the
Lease deliver to Landlord the Annual Financial Statements, Periodic Financial
Statements, Annual Company Budget and all other documents, reports, schedules
and copies described on Exhibit E within the specified time periods. With each
delivery of Annual Financial Statements and Periodic Financial Statements (other
than the monthly Facility Financial Statement) to Landlord, Tenant shall also
deliver to Landlord a certificate signed by the Chief Financial Officer or
managing member (as applicable) of Tenant, an Annual Facility Financial Report
or Quarterly Facility Financial Report, as applicable, and a Quarterly Facility
Accounts Receivable Aging Report all in the form of Exhibit F. In addition,
Tenant shall deliver to Landlord the applicable Annual Facility Financial Report
and the applicable Quarterly Facility Accounts Receivable Aging Report (based
upon internal financial statements) within 60 days after the end of each fiscal
year. After the occurrence of an Event of Default and receipt of Landlord’s
written request, Tenant shall deliver to Landlord an updated Annual Company
Budget (based on a 12-month rolling forward period) within 10 Business Days
after receipt of Landlord’s request.
 
15.3.2  Furnish Information. Tenant shall [i] promptly supply Landlord with such
information concerning its financial condition, affairs and property, as
Landlord may reasonably request from time to time hereafter; [ii] promptly
notify Landlord in writing of any condition or event that constitutes a breach
or event of default of any term, condition, warranty, representation, or
provisions of this Lease or any other agreement, and of any material adverse
change in its financial condition; [iii] maintain a standard and modern system
of accounting; [iv] permit Landlord or any of its agents or representatives to
 

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have access to and to examine all of its books and records regarding the
financial condition of the Facility at any time or times hereafter during
business hours and after reasonable oral or written notice; and [v] permit
Landlord to copy and make abstracts from any and all of said books and records
subject to any limitations imposed by State or federal law with respect to the
confidentiality of patient and employee records.
 
15.3.3  Further Assurances and Information. Tenant shall, on request of Landlord
from time to time, execute, deliver, and furnish documents as may be necessary
to fully consummate the transactions contemplated under this Lease. Within
15 days after a request from Landlord, Tenant shall provide to Landlord such
additional information regarding Tenant, Tenant’s financial condition, or the
Facility as Landlord, or any existing or proposed creditor of Landlord, or any
auditor or underwriter of Landlord, may reasonably require from time to time,
including, without limitation, a current Tenant’s Certificate and Facility
Financial Report in the form of Exhibit F. From and after and during the
continuance of an Event of Default, Landlord shall have the right to require
Tenant to provide to Landlord, at Tenant’s expense, an appraisal prepared by an
MAI appraiser setting forth the current fair market value of the Leased
Property.
 
15.3.4  Material Communications. Tenant shall transmit to Landlord, within five
days after receipt thereof, any material communication affecting a Facility,
this Lease, the Legal Requirements or the Government Authorizations, and Tenant
will promptly respond to Landlord’s inquiry with respect to such information.
Tenant shall notify Landlord in writing within five days after Tenant has
knowledge of any potential, threatened or existing litigation or proceeding
against, or investigation of, Tenant or the Facility that would reasonably be
expected to adversely affect the right to operate the Facility or Landlord’s
title to the Facility or Tenant’s interest therein.
 
15.3.5  Requirements for Financial Statements. Tenant shall meet the following
requirements in connection with the preparation of the financial statements:
[i] all audited financial statements shall be prepared in accordance with
general accepted accounting principles consistently applied; [ii] all unaudited
financial statements shall be prepared in a manner substantially consistent with
prior audited and unaudited financial statements submitted to Landlord;
[iii] all financial statements shall fairly present the financial condition and
performance for the relevant period in all material respects; [iv] the audited
financial statements shall include all notes to the financial statements and a
complete schedule of contingent liabilities and transactions with Affiliates;
and [v] the audited financial statements shall contain an unqualified opinion.
 
15.4  Compliance With Laws. Tenant shall comply in all material respects with
all Legal Requirements and keep all Government Authorizations in full force and
effect. Subject to Tenant’s right to contest the same in accordance with the
terms of this Lease, Tenant shall pay when due all taxes and governmental
charges of every kind and nature that are assessed or imposed upon Tenant at any
time during the term of the Lease, including, without limitation, all income,
franchise, capital stock, property, sales and use, business, intangible,
employee withholding, and all taxes and charges relating to Tenant’s business
and operations at the Leased Property. Tenant shall be solely responsible for
 

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compliance with all Legal Requirements, including the ADA, and Landlord shall
have no responsibility for such compliance.
 
15.5  Broker’s Commission. Tenant shall indemnify Landlord from claims of
brokers arising by the execution hereof or the consummation of the transactions
contemplated hereby and from expenses incurred by Landlord in connection with
any such claims (including reasonable attorneys’ fees).
 
15.6  Existence and Change in Ownership. Except as otherwise specifically
provided herein or in §14.5, Tenant shall maintain its existence throughout the
term of this Lease. Any change in the equity ownership of Tenant, directly or
indirectly, that results in a change in Control (as defined in the definition of
Affiliate in §1.4 hereof) of such entity shall require Landlord’s prior written
consent.
 
15.7  Financial Covenants. The defined terms used in this section are defined in
§15.7.1. The method of valuing assets shall be consistent with the Financial
Statements. The following financial covenants shall be met throughout the term
of this Lease:
 
15.7.1  Definitions.
 
(a)  “Facility Cash Flow” means the net income of Tenant arising from the
Facility as reflected on the Facility Financial Statement plus [i] the amount of
the provision for depreciation and amortization; plus [ii] the amount of the
provision for management fees; plus [iii] the amount of the provision for income
taxes; plus [iv] the amount of the provision for Base Rent payments and interest
and equipment lease payments, if any relating to the Facility; minus [v] an
imputed management fee equal to 5% of gross revenues (net of contractual
allowances); and minus [vi] an imputed replacement reserve of $300 per licensed
unit at the Facility, per year.
 
(b)  “Facility Coverage Ratio” is the ratio of [i] Facility Cash Flow for each
applicable period; to [ii] the Base Rent payments and all debt service and
equipment lease payments relating to the Facility for the applicable period.
 
15.7.2  Coverage Ratio. Tenant shall maintain for each fiscal quarter a Facility
Coverage Ratio for the Facility of not less than 1.00 to 1.00 for the 1st Lease
Year, 1.10 to 1.00 for the 2nd Lease Year, 1.20 to 1.00 for the 3rd Lease Year
and 1.25 to 1.00 for the 4th Lease Year and each Lease Year thereafter.
 
15.8  Facility Licensure and Certification.
 
15.8.1  Notice of Inspections. Tenant shall [i] give written notice to Landlord
within five days after an inspection of the Facility with respect to health care
licensure or certification has occurred; and [ii] deliver to Landlord copies of
each of the reports, notices, correspondence and all other items and documents
listed under item no. 18 of Exhibit E within five days after receipt thereof.
Tenant acknowledges that it has reviewed Exhibit E and agrees to the foregoing
obligation.
 

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15.8.2  Material Deficiencies. If Tenant receives a Facility survey or
inspection report with material deficiencies that threatens a loss of licensure
or, if applicable, certification of the Facility or the imposition of a ban on
admissions to the Facility (the “Material Deficiencies”) or notice of failure to
comply with a previously submitted plan of correction or an HIPDB adverse action
report related to any Material Deficiencies, Tenant shall cure all of the
Material Deficiencies and implement all corrective actions with respect thereto
by the date required by the regulatory authority and shall deliver evidence of
same to Landlord.
 
15.9  Transfer of License and Facility Operations. If this Lease is terminated
due to expiration of the Term, pursuant to an Event of Default or for any reason
other than Tenant’s purchase of the Leased Property, or if Tenant vacates the
Leased Property (or any part thereof) without termination of this Lease (other
than during periods of repair or reconstruction after damage, destruction or a
Taking), the following provisions shall be immediately effective:
 
15.9.1  Licensure. Tenant shall execute, deliver and file all documents and
statements reasonably requested by Landlord to effect the transfer of the
Facility license and Government Authorizations to a replacement operator
designated by Landlord (“Replacement Operator”), subject to any required
approval of governmental regulatory authorities, and Tenant shall provide to
Landlord all information and records required by Landlord in connection with the
transfer of the license and Government Authorizations.
 
15.9.2  Facility Operations. In order to facilitate a responsible and efficient
transfer of the operations of the Facility, Tenant shall, if and to the extent
requested by Landlord and subject to all applicable law, [i] deliver to Landlord
the most recent updated reports, notices, schedules and documents listed under
item nos. 17 and 18 of Exhibit E; [ii] assuming Tenant has not already vacated
the Leased Property, continue and maintain the operation of the Facility in the
ordinary course of business, including using its commercially reasonable efforts
to retain the residents at the Facility to the fullest extent practicable and
consistent with applicable laws and regulations, until transfer of the Facility
operations to the Replacement Operator is completed; [iii] enter into such
management agreements, operations transfer agreements and other types of
agreements that may be reasonably requested by Landlord or the Replacement
Operator, provided, however, in no event shall Tenant be required to permit the
Replacement Operator to operate the Leased Property under their licenses unless
they receive confirmation that doing so will not violate applicable Legal
Requirements and they get appropriate indemnities from the Replacement Operator
in form and substance reasonably acceptable to Tenant; and [iv] provide
reasonable access during normal business hours and on reasonable advance notice
for Landlord and its agents to show the Facility to potential replacement
operators. Tenant consents to the distribution by Landlord to potential
replacement operators of Facility financial statements, licensure reports,
financial and property due diligence materials and other documents, materials
and information relating to the Facility. The provisions of this section do not
create or establish any rights in Tenant or any third party and Landlord
reserves all rights and remedies relating to termination of this Lease.
 

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15.10  Bed Operating Rights. Tenant acknowledges and agrees that the rights to
operate the beds located at the Facility as set forth on Exhibit C under the law
of the Facility State [i] affect the value of the Leased Property, and [ii] the
grant of this Lease is conditioned upon the existence of such rights. Tenant
shall not relocate any licensed bed to any other location and shall not transfer
any bed operating rights to any other party without the prior written consent of
Landlord.
 
15.11  Power of Attorney. Effective upon [i] the occurrence and during the
continuance of an Event of Default, or [ii] termination of this Lease for any
reason other than Tenant’s purchase of the Leased Property, to the extent
permitted by law, Tenant hereby irrevocably and unconditionally appoints
Landlord, or Landlord’s authorized officer, agent, employee or designee, as
Tenant’s true and lawful attorney-in-fact, to act for Tenant in Tenant’s name,
place, and stead, to execute, deliver and file all applications and any and all
other necessary documents and statements to effect the issuance, transfer,
reinstatement, renewal and/or extension of the Facility license and all
Governmental Authorizations issued to Tenant or applied for by Tenant in
connection with Tenant’s operation of the Facility, to permit any designee of
Landlord or any other transferee to operate the Facility under the Governmental
Authorizations, and to do any and all other acts incidental to any of the
foregoing, but only in the event Tenant fails to take such actions or execute
such documents after a request from Landlord. Tenant irrevocably and
unconditionally grants to Landlord as its attorney-in-fact full power and
authority to do and perform every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and is
irrevocable prior to Tenant’s purchase of the Leased Property. Landlord shall
provide Tenant with copies of any documents filed and/or with a summary of any
action taken pursuant to this power of attorney.
 
15.12  Compliance with Loan Documents. Tenant and Guarantor acknowledge that
[i] Landlord is acquiring the Leased Property subject to the Mortgage;
[ii] Landlord and HCN will assume the obligations set forth in the Mortgage and
Loan Documents; and [iii] Landlord and HCN would not have assumed the
obligations set forth in the Mortgage or the Loan Documents without Tenant and
Guarantor’s agreement to comply with the terms and conditions set forth in the
Loan Documents as hereinafter set forth. Tenant and Guarantor have each reviewed
the Loan Documents and are familiar with the terms and conditions thereof.
Tenant and Guarantor agree to comply with the terms and conditions set forth in
the Loan Documents to the extent such terms and conditions apply to Tenant or
Guarantor, or the operation of the Facility including, but not limited to,
satisfying all insurance requirements, maintaining required reserves and escrow
accounts, making payments due thereunder and as applicable, other than regularly
scheduled payments of principal and interest, and granting reasonable access to
the Leased Property to the Lenders as set forth in the Loan Documents. Neither
Tenant nor Guarantor shall, in connection with either Tenant’s or Guarantor’s
compliance with the terms and conditions of the Loan Documents and the operation
of the Facility, create or permit any third party (other than Landlord for which
neither Tenant nor Guarantor assumes any responsibility hereunder) to create any
condition that
 

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would cause an Event of Default, as defined in any such Loan Documents. Tenant’s
or Guarantor’s failure to comply with the Loan Documents to the extent such
terms and conditions apply to Tenant or Guarantor, or the operation of the
Facility and to cure same within any applicable cure period provided for in the
Loan Documents shall be an Event of Default under this Lease.
 
15.12.1  In the event of a Landlord Default, as hereinafter defined, Landlord
shall indemnify, defend and hold harmless Tenant and Guarantor from and against
any and all demands, claims, causes of action, fines, penalties, damages
(including consequential damages), losses, liabilities (including strict
liability), judgments and expenses (including, without limitation, reasonable
attorneys’ fees, court costs and the costs described in §8.7) to the extent
incurred by Tenant as a result of the Landlord Default including, but not
limited to, as a result of the foreclosure by Lender with respect to any of the
collateral provided by Tenant or Guarantor under the Loan Documents or the
taking of any other action by the Lender against Tenant or Guarantor under the
terms of the Loan Documents. Landlord Default shall mean an Event of Default
under the Loan Document caused solely by the acts or omissions of Landlord or
HCN and is not an Event of Default under a Loan Document arising due to Tenant’s
or Guarantor’s failure to comply with the terms and conditions of a Loan
Document as agreed to by Tenant and Guarantor pursuant to §15.12 (“Landlord
Defaults”).
 
15.12.2  Upon the occurrence of an Event of Default under the Loan Documents
caused by Tenant (“Tenant Default”), Tenant or Guarantor, as applicable pursuant
to the Guaranty, shall indemnify, defend and hold harmless Landlord and HCN from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including consequential damages), losses, liabilities (including strict
liability), judgments and expenses (including, without limitation, reasonable
attorneys’ fees, court costs and the costs described in §8.7) to the extent
incurred by Landlord or HCN solely as a result of the Tenant Default including,
but not limited to, as a result of the foreclosure by Lender with respect to any
of the collateral provided by Landlord or HCN under the Loan Documents or the
taking of any other action by the Lender against Landlord or HCN under the terms
of the Loan Documents; provided, however, Tenant and/or Guarantor shall have no
obligation or duty to indemnify, defend and hold harmless Landlord and HCN from
and against any claim by either arising from the payment of any principal,
interest or default interest amount due under the Note to Lender.
 
15.12.3  Landlord shall, within five Business Days after receipt thereof from
Lender, deliver to Tenant all notices received by Landlord from Lender. Tenant
shall, within five Business Days after receipt thereof from Lender, deliver to
Landlord all notices received by Tenant from Lender. Landlord further
acknowledges and agrees that Tenant shall not be in default of its obligations
under this §15.12 in the event Tenant fails to fulfill the obligations imposed
under a Loan Document as and when due solely as a result of the failure of
Landlord to remit any such Lender notice within the time period specified
herein, the same shall be deemed to be a Landlord Default.
 

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ARTICLE 16:   ALTERATIONS, CAPITAL IMPROVEMENTS, AND SIGNS
 
16.1  Prohibition on Alterations and Improvements. Except for Permitted
Alterations (as hereinafter defined), Tenant shall not make any structural or
nonstructural changes, alterations, additions and/or improvements (hereinafter
collectively referred to as “Alterations”) to the Leased Property.
 
16.2  Approval of Alterations. If Tenant desires to perform any Permitted
Alterations, Tenant shall deliver to Landlord plans, specifications, drawings,
and such other information as may be reasonably requested by Landlord
(collectively the “Plans and Specifications”) showing in reasonable detail the
scope and nature of the Alterations that Tenant desires to perform. It is the
intent of the parties hereto that the level of detail shall be comparable to
that which is referred to in the architectural profession as “design development
drawings” as opposed to working or biddable drawings. Landlord agrees not to
unreasonably delay its review of the Plans and Specifications. Within 30 days
after receipt of an invoice, Tenant shall reimburse Landlord for all costs and
expenses incurred by Landlord in reviewing and, if required, approving or
disapproving the Plans and Specifications, inspecting the Leased Property, and
otherwise monitoring compliance with the terms of this Article 16. Tenant shall
comply with the requirements of §16.4 in making any Permitted Alterations.
 
16.3  Permitted Alterations. Permitted Alterations means any one of the
following: [i] Alterations approved by Landlord; [ii] Alterations required under
§7.2; [iii] Alterations affecting the structure of the Leased Property and
having a total cost of less than $250,000.00 individually or in the aggregate;
[iv] repairs, rebuilding and restoration required or undertaken pursuant to §9.4
or [v] non-structural Alterations such as painting, landscaping, wallpapering,
installing new floor coverings, etc. without regard to the cost thereof.
 
16.4  Requirements for Permitted Alterations. Tenant shall comply with all of
the following requirements in connection with any Permitted Alterations:
 
(a)  The Permitted Alterations shall be made in accordance with the approved
Plans and Specifications.
 
(b)  The Permitted Alterations and the installation thereof shall comply with
all applicable legal requirements and insurance requirements.
 
(c)  The Permitted Alterations shall be done in a good and workmanlike manner,
shall not impair the value or the structural integrity of the Leased Property,
and shall be free and clear of all mechanic’s liens.
 
(d)  For any Permitted Alterations having a total cost of $100,000.00 or more,
Tenant shall deliver to Landlord a payment and performance bond, with a surety
 

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acceptable to Landlord, in an amount equal to the estimated cost of the
Permitted Alterations, guaranteeing the completion of the work free and clear of
liens and in accordance with the approved Plans and Specifications, and naming
Landlord and any mortgagee of Landlord as joint obligees on such bond.
 
(e)  Tenant shall, at Tenant’s expense, obtain a builder’s completed value risk
policy of insurance insuring against all risks of physical loss, including
collapse and transit coverage, in a nonreporting form, covering the total value
of the work performed, and equipment, supplies, and materials, and insuring
initial occupancy. Landlord and any mortgagee of Landlord shall be additional
insureds of such policy. The form and substance of such policy shall be
reasonably acceptable to Landlord.
 
(f)  Tenant shall pay the premiums required to increase the amount of the
insurance coverages required by Article 4 to reflect the increased value of the
Improvements resulting from installation of the Permitted Alterations, and shall
deliver to Landlord a certificate evidencing the increase in coverage.
 
(g)  Tenant shall, not later than 60 days after completion of the Permitted
Alterations, deliver to Landlord a revised “as-built” survey of the Facility if
the Permitted Alterations altered the Land or “footprint” of the Improvements
and an “as-built” set of Plans and Specifications for the Permitted Alterations
in form and substance reasonably satisfactory to Landlord.
 
(h)  Tenant shall, not later than 30 days after Landlord sends an invoice,
reimburse Landlord for any reasonable costs and expenses, including attorneys’
fees and architects’ and engineers’ fees, incurred in connection with reviewing
and approving the Permitted Alterations and ensuring Tenant’s compliance with
the requirements of this section. The daily fee for Landlord’s consulting
engineer is $750.00.
 
16.5  Ownership and Removal of Permitted Alterations. The Permitted Alterations
shall become a part of the Leased Property, owned by Landlord, and leased to
Tenant subject to the terms and conditions of this Lease. Tenant shall not be
required or permitted to remove any Permitted Alterations.
 
16.6  Minimum Qualified Capital Expenditures. During each calendar year of the
Term, Tenant shall expend at least $450.00 per unit for Qualified Capital
Expenditures to improve the Facilities (provided that as to any Facility with
respect to which a certificate of occupancy was not issued prior to the end of
the first calendar year, the minimum Qualified Capital Expenditures required by
this section shall be waived until the calendar year immediately following the
year in which such certificate of occupancy is issued). Thereafter throughout
the Term, Tenant shall expend such amount each calendar year, increased annually
in proportion to increases in the CPI. Within 60 days after the end of each
fiscal year, Tenant shall deliver to Landlord a certificate in the form of
Exhibit N listing the Qualified Capital Expenditures made in the prior year. If
the entire minimum amount was not expended in such year, the certificate will
include certification that the balance of the current minimum amount has been
deposited in a reserve account to be used
 

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solely for Qualified Capital Expenditures for the Facilities. At least annually,
at the request of Landlord, Landlord and Tenant shall review capital
expenditures budgets and agree on modifications, if any, required by changed
circumstances and the changed conditions of the Leased Property. Notwithstanding
the foregoing, Tenant shall be deemed to have satisfied the requirements of this
§16.6 by providing Landlord with written documentation that it has expended an
average of $450.00 per unit per year calculated on a three year rolling average.
 
16.7  Signs. Tenant may, at its own expense, erect and maintain identification
signs at the Leased Property, provided such signs comply with all laws,
ordinances, and regulations. Upon the termination or expiration of this Lease
(other than as a result of the exercise by Tenant of its purchase rights),
Tenant shall, within 30 days after notice from Landlord, remove the signs and
restore the Leased Property to its original condition.
 
ARTICLE 17:   RESERVED
 
ARTICLE 18:   ASSIGNMENT AND SALE OF LEASED PROPERTY
 
18.1  Prohibition on Assignment and Subletting. Tenant acknowledges that
Landlord has entered into this Lease in reliance on the personal services and
business expertise of Tenant. Tenant may not assign, sublet, mortgage,
hypothecate, pledge, grant a right of first refusal or transfer any interest in
this Lease, or in the Leased Property, in whole or in part, without the prior
written consent of Landlord, which Landlord may withhold in its sole and
absolute discretion. The following transactions will be deemed an assignment or
sublease requiring Landlord’s prior written consent: [i] an assignment by
operation of law; [ii] an imposition (whether or not consensual) of a lien,
mortgage, or encumbrance upon Tenant’s interest in the Lease other than
Permitted Liens; [iii] except as otherwise permitted by §§14.4 and 18.3, an
arrangement (including, but not limited to, management agreements, concessions,
licenses, and easements) which allows the use or occupancy of all or part of the
Leased Property by anyone other than Tenant; and [iv] a material change of
ownership of Tenant other than changes resulting from the trading of Tenant’s
stock on a national stock exchange as permitted under §14.5. Landlord’s consent
to any assignment, right of first refusal or sublease will not release Tenant
(or any guarantor) from its payment and performance obligations under this
Lease, but rather Tenant, any guarantor, and Tenant’s assignee or sublessee will
be jointly and severally liable for such payment and performance. An assignment,
right of first refusal or sublease without the prior written consent of Landlord
will be void at Landlord’s option. Landlord’s consent to one assignment, right
of first refusal or sublease will not waive the requirement of its consent to
any subsequent assignment or sublease. Notwithstanding the foregoing, Tenant may
enter into the Interim Agreements required to comply with licensure requirements
until such time as the license to operate the Facility is issued in Tenant’s
name, as applicable.
 
18.2  Requests for Landlord’s Consent to Assignment, Sublease or Management
Agreement. If Tenant is required to obtain Landlord’s consent to a specific
assignment, sublease, or management agreement, Tenant shall give Landlord
[i] the name and address of the proposed assignee, subtenant or manager; [ii] a
copy of the proposed assignment, sublease or
 

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management agreement; [iii] reasonably satisfactory information about the
nature, business and business history of the proposed assignee, subtenant, or
manager and its proposed use of the Leased Property; and [iv] banking,
financial, and other credit information, and references about the proposed
assignee, subtenant or manager sufficient to enable Landlord to determine the
financial responsibility and character of the proposed assignee, subtenant or
manager. Any assignment, sublease or management agreement shall contain
provisions to the effect that [a] such assignment, sublease or management
agreement is subject and subordinate to all of the terms and provisions of this
Lease and to the rights of Landlord and that the assignee, subtenant or manager
shall comply with all applicable provisions of this Lease; [b] such assignment,
sublease or management agreement may not be modified without the prior written
consent of Landlord not to be unreasonably withheld or delayed; [c] if this
Lease shall terminate before the expiration of such assignment, sublease or
management agreement, the assignee, subtenant or manager thereunder will, solely
at Landlord’s option and only upon the express written notice of attornment from
Landlord, attorn to Landlord and waive any right the assignee, subtenant or
manager may have to terminate the assignment, sublease or management agreement
or surrender possession thereunder as a result of the termination of this Lease;
and [d] if the assignee, subtenant or manager receives a written notice from
Landlord stating that Tenant is in default under this Lease, the assignee,
subtenant or manager shall thereafter pay all rentals or payments under the
assignment, sublease or management agreement directly to Landlord until such
default has been cured. Any attempt or offer by an assignee, subtenant or
manager to attorn to Landlord shall not be binding or effective without the
express written consent of Landlord. Tenant hereby collaterally assigns to
Landlord, as security for the performance of its obligations hereunder, all of
Tenant’s right, title, and interest in and to any assignment, sublease or
management agreement now or hereafter existing for all or part of the Leased
Property. Tenant shall, at the request of Landlord, execute such other
instruments or documents as Landlord may request to evidence this collateral
assignment. If Landlord, in its sole and absolute discretion, consents to such
assignment, sublease, or management agreement, such consent shall not be
effective until [i] a fully executed copy of the instrument of assignment,
sublease or management agreement has been delivered to Landlord; [ii] in the
case of an assignment, Landlord has received a written instrument in which the
assignee has assumed and agreed to perform all of Tenant’s obligations under the
Lease; and [iii] Tenant has paid to Landlord a fee in the amount equal to the
lesser of Landlord’s actual out-of-pocket costs and expenses and $2,500.00
(applies only to consent requests after the Closing); and [iv] Landlord has
received reimbursement from Tenant or the assignee for all attorneys’ fees and
expenses and all other reasonable out-of-pocket expenses incurred in connection
with determining whether to give its consent, giving its consent and all matters
relating to the assignment (applies only to consent requests after the Closing).
 
18.3  Agreements with Residents. Notwithstanding §18.1, Tenant may enter into an
occupancy agreement with residents of the Leased Property without the prior
written consent of Landlord provided that, except as otherwise specifically
provided in this §18.3, [i] the agreement does not provide for lifecare
services; [ii] the agreement does not contain any type of rate lock provision or
rate guaranty for more than one calendar year; [iii] the agreement does not
provide for any rent reduction or waiver other than for an introductory period
not to exceed six months; [iv] Tenant may not collect rent for more than one
month in advance, other than one month of rent collected to be held as security
for the performance of the resident’s obligation to Tenant; and [v] all
residents of the Leased Property are accurately shown in accounting records for
the Facility. Without the prior written
 

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consent of Landlord, Tenant shall not materially change the form of resident
occupancy agreement that was submitted to Landlord prior to the Effective Date
except such changes required under applicable law or except in accordance with
local market and existing practices of Tenant.
 
18.4  Sale of Leased Property. If Landlord or any subsequent owner of the Leased
Property sells the Leased Property, its liability for the performance of its
agreements in this Lease will end on the date of the sale of the Leased
Property, and Tenant will look solely to the purchaser for the performance of
those agreements. For purposes of this section, any holder of a mortgage or
security agreement which affects the Leased Property at any time, and any
landlord under any lease to which this Lease is subordinate at any time, will be
a subsequent owner of the Leased Property when it succeeds to the interest of
Landlord or any subsequent owner of the Leased Property.
 
18.5  Assignment by Landlord. Landlord may transfer, assign, mortgage,
collaterally assign, or otherwise dispose of Landlord’s interest in this Lease
or the Leased Property; provided, however, that unless written notice is
provided to Tenant regarding the foregoing, Tenant shall continue to deal with
HCN as agent hereunder.
 
ARTICLE 19:   HOLDOVER AND SURRENDER
 
19.1  Holding Over. If Tenant, with or without the express or implied consent of
Landlord, continues to hold and occupy the Leased Property (or any part thereof)
after the expiration of the Term or earlier termination of this Lease (other
than pursuant to Tenant’s purchase of the Leased Property), such holding over
beyond the Term and the acceptance or collection of Rent in the amount specified
below by Landlord shall operate and be construed as creating a tenancy from
month to month and not for any other term whatsoever. Said month-to-month
tenancy may be terminated by Landlord by giving Tenant either [a] five days
written notice or [b] such longer period of time as may be required by law, and
at any time thereafter Landlord may re-enter and take possession of the Leased
Property. If without Landlord’s consent or at Landlord’s request, Tenant
continues after the expiration of the Term or earlier termination of this Lease
to hold and occupy the Leased Property whether as a month-to-month tenant or a
tenant at sufferance or otherwise, Tenant shall pay Rent for each month in an
amount equal to the sum of [i] one and one-half (1½) times the Base Rent payable
during the month in which such expiration or termination occurs, plus [ii] all
Additional Rent accruing during the month, plus [iii] any and all other sums
payable by Tenant pursuant to this Lease. During any continued tenancy after the
expiration of the Term or earlier termination of this Lease, Tenant shall be
obligated to perform and observe all of the terms, covenants and conditions of
this Lease, but shall have no rights hereunder other than the right, to the
extent given by applicable law, to continue its occupancy and use of the Leased
Property until the tenancy is terminated. Nothing contained herein shall
constitute the consent, express or implied, of Landlord to the holding over of
Tenant after the expiration or earlier termination of this Lease.
 
19.2  Surrender. Except for [i] Permitted Alterations; [ii] normal and
reasonable wear and tear (subject to the obligation of Tenant to maintain the
 

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Leased Property in good order and repair during the Term); and [iii] damage and
destruction not required to be repaired by Tenant, Tenant shall surrender and
deliver up the Leased Property at the expiration or termination of the Term in
as good order and condition as of the Commencement Date. The provisions of this
§19.2 shall not apply in the event of the termination of the Lease upon the
exercise by Tenant of the rights set forth in Article 13.
 
19.3  Indemnity. If Tenant fails to surrender the entire Leased Property or any
part thereof upon the expiration or termination of this Lease in a timely manner
and in accordance with the provisions of this Lease, in addition to any other
liabilities to Landlord accruing therefrom, Tenant shall defend, indemnify and
hold Landlord, its principals, officers, directors, agents, and employees
harmless from loss or liability resulting from such failure, including, without
limiting the generality of the foregoing, loss of rental with respect to any new
lease in which the rental payable thereunder exceeds the Rent collected by
Landlord pursuant to this Lease during Tenant’s holdover and any claims by any
proposed new tenant founded on Tenant’s failure to surrender the Leased
Property. The provisions of this Article 19 shall survive the expiration or
termination of this Lease. The provisions of this §19.3 shall not apply in the
event of the termination of this Lease upon the exercise by Tenant of the rights
set forth in Article 13.
 
ARTICLE 20:   [RESERVED]
 
ARTICLE 21:   QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT AND ESTOPPEL
CERTIFICATES
 
21.1  Quiet Enjoyment. So long as Tenant performs all of its obligations under
this Lease, Tenant’s possession of the Leased Property will not be disturbed by
Landlord or any party claiming by, through or under Landlord.
 
21.2  Subordination. Subject to the terms and conditions of this section, this
Lease and Tenant’s rights under this Lease are subordinate to any ground lease
or underlying lease, first mortgage, first deed of trust, or other first lien
against the Leased Property, together with any renewal, consolidation,
extension, modification or replacement thereof, which now or at any subsequent
time affects the Leased Property or any interest of Landlord in the Leased
Property, except to the extent that any such instrument expressly provides that
this Lease is superior. The foregoing subordination provision is expressly
conditioned upon any lessor or mortgagee being obligated and bound to recognize
Tenant as the tenant under this Lease, and such lessor or mortgagee shall have
no right to disturb Tenant’s possession, use and occupancy of the Leased
Property or Tenant’s enjoyment of its rights under this Lease unless and until
an Event of Default occurs hereunder. Any foreclosure action or proceeding by
any mortgagee with respect to the Leased Property shall not affect Tenant’s
rights under this Lease and shall not terminate this Lease unless and until an
Event of Default occurs hereunder. The foregoing provisions will be
self-operative, and no further instrument will be required in order to effect
them. However, Tenant shall execute, acknowledge and deliver to Landlord, at any
time and from time to time upon demand by Landlord, such documents as may be
requested by Landlord or any mortgagee or any holder of any mortgage or other
instrument described in this section, to confirm or effect any such
subordination, provided
 

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that any such document shall include a nondisturbance provision as set forth in
this section satisfactory to Tenant. Any mortgagee of the Leased Property shall
be deemed to be bound by the nondisturbance provision set forth in this section.
If Tenant fails or refuses to execute, acknowledge, and deliver any such
document within 20 days after written demand, Landlord may execute acknowledge
and deliver any such document on behalf of Tenant as Tenant’s attorney-in-fact.
Tenant hereby constitutes and irrevocably appoints Landlord, its successors and
assigns, as Tenant’s attorney-in-fact to execute, acknowledge, and deliver on
behalf of Tenant any documents described in this section. This power of attorney
is coupled with an interest and is irrevocable.
 
21.3  Attornment. If any holder of any mortgage, indenture, deed of trust, or
other similar instrument described in §21.2 succeeds to Landlord’s interest in
the Leased Property, Tenant will pay to such holder all Rent subsequently
payable under this Lease. Tenant shall, upon request of anyone succeeding to the
interest of Landlord, automatically become the tenant of, and attorn to, such
successor in interest without changing this Lease. The successor in interest
will not be bound by [i] any payment of Rent for more than one month in advance
unless actually received by such successor; [ii] any amendment or modification
of this Lease thereafter made without its consent as provided in this Lease;
[iii] any claim against Landlord arising prior to the date on which the
successor succeeded to Landlord’s interest; or [iv] any claim or offset of Rent
against Landlord. Upon request by Landlord or such successor in interest and
without cost to Landlord or such successor in interest, Tenant will execute,
acknowledge and deliver an instrument or instruments confirming the attornment.
If Tenant fails or refuses to execute, acknowledge, and deliver any such
instrument within 20 days after written demand, then Landlord or such successor
in interest will be entitled to execute, acknowledge, and deliver any document
on behalf of Tenant as Tenant’s attorney-in-fact. Tenant hereby constitutes and
irrevocably appoints Landlord, its successors and assigns, as Tenant’s
attorney-in-fact to execute, acknowledge, and deliver on behalf of Tenant any
such document. This power of attorney is coupled with an interest and is
irrevocable.
 
21.4  Estoppel Certificates. At the request of Landlord or any mortgagee or
purchaser of the Leased Property, Tenant shall execute, acknowledge, and deliver
an estoppel certificate, in recordable form, in favor of Landlord or any
mortgagee or purchaser of the Leased Property certifying (to the extent true)
the following: [i] that the Lease is unmodified and in full force and effect, or
if there have been modifications that the same is in full force and effect as
modified and stating the modifications; [ii] the date to which Rent and other
charges have been paid; [iii] whether Tenant or Landlord is in default or
whether there is any fact or condition known to Landlord or Tenant which, with
notice or lapse of time, or both, would constitute a default, and specifying any
existing default, if any; [iv] that Tenant has accepted and occupies the Leased
Property; [v] that Tenant has no defenses, setoffs, deductions, credits, or
counterclaims against Landlord, if that be the case, or specifying such that
exist; and [vi] such other information as may reasonably be requested by
Landlord or any mortgagee or purchaser. Any purchaser or mortgagee may rely on
this estoppel certificate. If Tenant fails to deliver the estoppel certificates
to Landlord within 10 days after the request of Landlord, then Tenant shall be
deemed to have certified that [a] the Lease is in full force and effect and has
not been modified, or that the Lease has been modified as set forth in the
certificate delivered to Tenant; [b] Tenant has not prepaid any Rent or other
charges except for the current month; [c] Tenant has accepted and occupies the
Leased Property; [d] neither Tenant
 

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nor Landlord is in default nor is there any fact or condition which, with notice
or lapse of time, or both, would constitute a default; and [e] Tenant has no
defenses, setoffs, deductions, credits, or counterclaims against Landlord.
Tenant hereby irrevocably appoints Landlord as Tenant’s attorney-in-fact to
execute, acknowledge, and deliver on Tenant’s behalf any estoppel certificate to
which Tenant does not object within 10 days after Landlord sends the certificate
to Tenant. This power of attorney is coupled with an interest and is
irrevocable.
 
ARTICLE 22:   REPRESENTATIONS AND WARRANTIES
 
Tenant and Guarantor, respectively as applicable, hereby makes the following
representations and warranties, as of the Effective Date, to Landlord and
acknowledge that Landlord is granting the Lease in reliance upon such
representations and warranties. The following representations and warranties
shall survive the Closing and, except to the extent made as of a specific date,
shall continue in full force and effect until the Obligor Group Obligations have
been performed in full.
 
22.1  Organization and Good Standing. Tenant is a corporation, duly organized,
validly existing and in good standing under the laws of the State of Washington.
Tenant is qualified to do business in and is in good standing under the laws of
the Facility State.
 
22.2  Power and Authority. Tenant has the power and authority to execute,
deliver and perform this Lease. Tenant has taken all requisite action necessary
to authorize the execution, delivery and performance of its obligations under
this Lease.
 
22.3  Enforceability. This Lease constitutes a legal, valid, and binding
obligation of Tenant, enforceable in accordance with its terms, except as such
enforceability may be limited by creditors rights laws and general principles of
equity.
 
22.4  Government Authorizations. The Facility is in material compliance with all
Legal Requirements. All Government Authorizations are in full force and effect
where the failure to so maintain them would have a material adverse effect on
the Facility. Except as otherwise noted in Exhibit G, Tenant or subtenant under
the Interim Agreements holds all Government Authorizations necessary for the
operation of the Facility in accordance with the Facility Uses. No prior notice
to or approval from any licensure authority is required in connection with the
Lease or the transfer of the fee interest in the Leased Property to Landlord
other than those notices which have been given or approvals which have been
obtained prior to the Commencement Date.
 
22.5  Financial Statements. Tenant has furnished Landlord with true, correct and
complete copies of the Financial Statements described on Exhibit E. The
Financial Statements fairly present the financial position of Tenant, Guarantor
and the Facility, as applicable, as of the respective dates and the results of
operations for the periods then ended in conformance with generally accepted
accounting principles applied on a basis consistent with prior periods. The
Financial Statements and other information furnished to
 

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Landlord are true, complete and correct and, as of the Effective Date, no
material adverse change has occurred since the furnishing of such statements and
information. As of the Effective Date, the Financial Statements and other
information do not contain any untrue statement or omission of a material fact
and are not misleading in any material respect. Tenant and Guarantor are
solvent, and no bankruptcy, insolvency, or similar proceeding is pending or
contemplated by or, to the knowledge of Tenant, against Tenant or Guarantor.
 
22.6  Condition of Facility. To the best of Tenant’s knowledge and except as
otherwise disclosed in writing by Tenant to Landlord prior to the Effective
Date, all of the mechanical and electrical systems, heating and air-conditioning
systems, plumbing, water and sewer systems, and all other items of mechanical
equipment or appliances are in good working order, condition and repair, are of
sufficient size and capacity to service the Facility for the Facility Uses and
conform with all applicable ordinances and regulations, and with all building,
zoning, fire, safety, and other codes, laws and orders. The Improvements,
including the roof and foundation, are structurally sound and free from leaks
and other defects.
 
22.7  Compliance with Laws. To the best of Tenant’s knowledge, there is no
violation of, or noncompliance with, [i] any laws, orders, rules or regulations,
ordinances or codes of any kind or nature whatsoever relating to the Facility or
the ownership or operation thereof (including, without limitation, building,
fire, health, occupational safety and health, zoning and land use, planning and
environmental laws, orders, rules and regulations); [ii] any covenants,
conditions, restrictions or agreements affecting or relating to the ownership,
use or occupancy of the Facility; or [iii] any order, writ, regulation or decree
relating to any matter referred to in [i] or [ii] above.
 
22.8  No Litigation. As of the Effective Date and except as disclosed on
Exhibit H, [i] there are no actions or suits, or any proceedings or
investigations by any governmental agency or regulatory body pending against
Tenant with respect to its operation at the Facility or against the Facility;
[ii] no HIPDB adverse action reports have been issued to Tenant, Guarantor with
respect to the operations at the Facility or to the Facility; [iii] Tenant has
not received notice of any threatened actions, suits, proceedings or
investigations against Tenant or with respect to its operations at the Facility
or against the Facility at law or in equity, or before any governmental board,
agency or authority which, if determined adversely to Tenant or Guarantor, would
materially and adversely affect the Facility or title to the Facility (or any
part thereof), the right to operate the Facility as presently operated, or the
financial condition of Tenant or Guarantor; [iv] there are no unsatisfied or
outstanding judgments against Tenant with respect to its operations at the
Facility or against the Facility; [v] there is no labor dispute materially and
adversely affecting the operation or business conducted by Tenant at the
Facility; and [vi] Tenant does not have knowledge of any facts or circumstances
which might reasonably form the basis for any such action, suit, or proceeding.
 
22.9  Consents. The execution, delivery and performance of this Lease will not
require any consent, approval, authorization, order, or declaration of, or any
filing or registration with, any court, any federal, state, or local
governmental or regulatory authority, or any other person or entity, the absence
of which would materially impair the ability
 

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of Tenant to operate the Facility for the Facility Uses except for the
post-acquisition filing for licensure of the Facility.
 
22.10  No Violation. The execution, delivery and performance of this Lease
[i] do not and will not conflict with, and do not and will not result in a
breach of Tenant’s Organizational Documents; [ii] do not and will not conflict
with, and do not and will not result in a breach of, and do not and will not
constitute a default under (or an event which, with or without notice or lapse
of time, or both, would constitute a default under), any of the terms,
conditions or provisions of any agreement or other instrument or obligation to
which Tenant is a party or by which its assets are bound; and [iii] do not and
will not violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Tenant or the Facility.
 
22.11  Reports and Statements. All reports, statements, certificates and other
data furnished by or on behalf of Tenant or Guarantor to Landlord in connection
with this Lease, and all representations and warranties made herein or in any
certificate or other instrument delivered in connection herewith and therewith,
are true and correct in all material respects and do not omit to state any
material fact or circumstance necessary to make the statements contained herein
or therein, in light of the circumstances under which they are made, not
misleading as of the date of such report, statement, certificate or other data.
The copies of all agreements and instruments submitted to Landlord, including,
without limitation, all agreements relating to management of the Facility and
Tenant’s working capital are true, correct and complete copies in all material
respects and include all material amendments and modifications of such
agreements.
 
22.12  ERISA. All plans (as defined in §4021(a) of the Employee Retirement
Income Security Act of 1974, as amended or supplemented from time to time
(“ERISA”)) for which Tenant is an “employer” or a “substantial employer” (as
defined in §§3(5) and 4001(a)(2) of ERISA, respectively) are in compliance with
ERISA and the regulations and published interpretations thereunder. To the
extent Tenant maintains a qualified defined benefit pension plan: [i] there
exists no accumulated funding deficiency; [ii] no reportable event and no
prohibited transaction has occurred; [iii] no lien has been filed or threatened
to be filed by the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA; and [iv] Tenant has not been deemed to be a
substantial employer.
 
22.13  Chief Executive Office. Tenant maintains its chief executive office and
its books and records at Tenant’s address set forth in the introductory
paragraph of this Lease. Tenant does not conduct any business or operations of
the Facility other than at Tenant’s chief executive office and at the Facility.
 
22.14  Other Name or Entities. Except as disclosed herein, none of Tenant’s
business is conducted through any subsidiary, unincorporated association or
other entity and Tenant has not, within the six years preceding the date of this
Lease [i] changed its name, [ii] used any name other than the name stated at the
beginning of this Lease, or [iii] merged or consolidated with any corporation or
other business.
 

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22.15  Parties in Possession. Except as disclosed on Exhibit B and except for
the parties to the Interim Agreements or the Leases and Contracts identified on
Exhibit I, there are no parties in possession of any Leased Property or any
portion thereof as managers, lessees, tenants at sufferance, or trespassers.
 
22.16  Access. Except as otherwise disclosed in writing by Tenant to Landlord
prior to the Effective Date, access to the Land is directly from a dedicated
public right-of-way without any easement. To the knowledge of Tenant, there is
no fact or condition which would result in the termination or reduction of the
current access to and from the Land to such right-of-way.
 
22.17  Utilities. There are available at the Land gas, municipal water, and
sanitary sewer lines, storm sewers, electrical and telephone services in
operating condition which are adequate for the operation of the Facility at a
reasonable cost. Except as otherwise disclosed in writing by Tenant to Landlord
prior to the Effective Date, the Land has direct access to utility lines located
in a dedicated public right-of-way without any easement. As of the Effective
Date, there is no pending or, to the knowledge of Tenant, threatened
governmental or third party proceeding which would impair or result in the
termination of such utility availability.
 
22.18  Condemnation and Assessments. As of the Effective Date, Tenant has not
received notice of, and there are no pending or, to the best of Tenant’s
knowledge, threatened, condemnation, assessment (except as otherwise disclosed
in writing by Tenant to Landlord prior to the Effective Date), or similar
proceedings affecting or relating to the Facility, or any portion thereof, or
any utilities, sewers, roadways or other public improvements serving the
Facility.
 
22.19  Zoning. As of the Effective Date, except as disclosed on Exhibit G,
[i] the use and operation of the Facility for the Facility Uses is a permitted
use under the applicable zoning code; [ii] except as disclosed on Exhibit G
hereto, no special use permits, conditional use permits, variances, or
exceptions have been granted or are needed for such use of the Facility;
[iii] the Land is not located in any special districts such as historical
districts or overlay districts; and [iv] the Facility has been constructed in
accordance with and complies with all zoning laws in effect at the time of its
construction, including, but not limited to, dimensional, parking, setback,
screening, landscaping, sign and curb cut requirements or the Facility obtained
required waivers or variances from such requirements.
 
22.20  Environmental Matters. During the period of Tenant’s ownership or
possession of the Leased Property and, to the best of Tenant’s knowledge after
diligent inquiry, for the period prior to Tenant’s ownership or possession of
the Leased Property, [i] the Leased Property is in compliance with all
Environmental Laws; [ii] there were no releases or threatened releases of
Hazardous Materials on, from, or under the Leased Property, except in compliance
with all Environmental Laws; [iii] no Hazardous Materials have been, are or will
be used, generated, stored, or disposed of at the Leased Property, except in
compliance with all Environmental Laws; [iv] asbestos has not been and will not
be used in the
 

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construction of any Improvements; [v] no permit is or has been required from the
Environmental Protection Agency or any similar agency or department of any state
or local government for the use or maintenance of any Improvements;
[vi] underground storage tanks on or under the Land, if any, have been and
currently are being operated in compliance with all applicable Environmental
Laws; [vii] any closure, abandonment in place or removal of an underground
storage tank on or from the Land was performed in compliance with applicable
Environmental Laws and any such tank had no release contaminating the Leased
Property or, if there had been a release, the release was remediated in
compliance with applicable Environmental Laws to the satisfaction of regulatory
authorities; [viii] no summons, citation or inquiry has been made by any such
environmental unit, body or agency or a third party demanding any right of
recovery for payment or reimbursement for costs incurred under CERCLA or any
other Environmental Laws and the Land is not subject to the lien of any such
agency; and [ix] to the best of Tenant’s knowledge, the environmental assessment
of the Facility (and all follow-up reports, supplements and amendments) that was
delivered to Landlord by Tenant in connection with the closing of this Lease is
true, complete and accurate. “Disposal” and “release” shall have the meanings
set forth in CERCLA.
 
22.21  Leases and Contracts. As of the Effective Date and except as disclosed on
Exhibit I, there are no leases or contracts (including, but not limited to,
insurance contracts, maintenance contracts, construction contracts, employee
benefit plans, employment contracts, equipment leases, security agreements,
architect agreements, and management contracts) to which Tenant or Guarantor is
a party relating to any part of the ownership, operation, possession,
construction, management or administration of the Land or the Facility.
 
22.22  No Default. As of the Effective Date, [i] there is no existing Event of
Default under this Lease; and [ii] no event has occurred which, with the giving
of notice or the passage of time, or both, would constitute or result in such an
Event of Default.
 
22.23  Tax Status. If Tenant is a limited liability company, it is taxable as a
partnership under the Internal Revenue Code and all applicable facility state
tax laws.
 
ARTICLE 23:   [RESERVED] 
 
ARTICLE 24:   SECURITY INTEREST
 
24.1  Collateral. Tenant hereby grants to each Landlord and HCN (if not a
Landlord) (individually and collectively called “Secured Party”) a security
interest in the following described property located at, or arising out of or in
connection with the use and operation of, the Leased Property, whether now owned
or hereafter acquired by Tenant (the “Collateral”), to secure the payment and
performance of the Obligor Group Obligations:
 

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(a)  All machinery, furniture, equipment, trade fixtures, appliances, inventory
and all other goods (as “equipment”, “inventory” and “goods” are defined for
purposes of Article 9 (“Article 9”) of the Uniform Commercial Code as adopted in
Virginia) and any leasehold interest of Tenant in any of the foregoing,
including, without limitation, those items which are to become fixtures or which
are building supplies and materials to be incorporated into any improvement or
fixture.
 
(b)  All accounts, contract rights, general intangibles, instruments, documents,
and chattel paper [as “accounts”, “contract rights”, “general intangibles”,
“instruments”, “documents” and “chattel paper” are defined for purposes of
Article 9] now or hereafter arising.
 
(c)  All franchises, permits, licenses, operating rights, certifications,
approvals, consents, authorizations and other general intangibles, including,
without limitation, certificates of need, state health care facility licenses,
and Medicare and Medicaid provider agreements, to the extent permitted by law.
 
(d)  Unless expressly prohibited by the terms thereof, all contracts,
agreements, contract rights and materials relating to the design, construction,
operation or management of any improvements, including, but not limited to,
plans, specifications, drawings, blueprints, models, mock-ups, brochures,
flyers, advertising and promotional materials and mailing lists.
 
(e)  All subleases, occupancy agreements, license agreements and concession
agreements, written or unwritten, of any nature, now or hereafter entered into,
and all right, title and interest of Tenant thereunder, and including, without
limitation, Tenant’s right, if any, to cash or securities deposited thereunder
whether or not the same was deposited to secure performance by the subtenants,
occupants, licensees and concessionaires of their obligations thereunder,
including the right to receive and collect the rents, revenues, and other
charges thereunder.
 
(f)  All ledger sheets, files, records, computer programs, tapes, other
electronic data processing materials, and other documentation.
 
(g)  The products and proceeds of the preceding listed property, including,
without limitation, cash and non-cash proceeds, proceeds of proceeds, and
insurance proceeds.
 
24.2  Additional Documents. At the request of Landlord, Tenant shall execute
additional security agreements, financing statements, and such other documents
as may be requested by Landlord to maintain and perfect such security interest
in the Collateral. Tenant hereby irrevocably appoints Landlord, its successors
and assigns, as Tenant’s attorney-in-fact to execute, acknowledge, deliver and
file such documents on behalf of Tenant. This power of attorney is coupled with
an interest and is irrevocable. Tenant authorizes Landlord to file financing
statements describing the Collateral to perfect and maintain the security
interest granted hereunder without the signature or any further authorization of
Tenant.
 

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24.3  Notice of Sale. With respect to any sale or other disposition of any of
the Collateral after the occurrence of an Event of Default, Landlord, Tenant
agrees that the giving of five days’ notice by Landlord, sent by overnight
delivery, postage prepaid, to Tenant’s notice address designating the time and
place of any public sale or the time after which any private sale or other
intended disposition of such Collateral is to be made, shall be deemed to be
reasonable notice thereof and Tenant waives any other notice with respect
thereto.
 
24.4  Recharacterization. Landlord and Tenant intend this Lease to be a true
lease. However, if despite the parties’ intent, it is determined or adjudged by
a court for any reason that this Lease is not a true lease or if this Lease is
recharacterized as a financing arrangement, then this Lease shall be considered
a secured financing agreement and Landlord’s title to the Leased Property shall
constitute a perfected first priority lien in Landlord’s favor on the Leased
Property to secure the payment and performance of all the Obligor Group
Obligations.
 
24.5  Subordination Landlord acknowledges and agrees that the liens and rights
granted to Landlord under this Article 24 are and shall be subordinate to any
liens and rights granted by Tenant in favor of Lender with respect to the
Collateral.
 
ARTICLE 25:   MISCELLANEOUS
 
25.1  Notices. Landlord and Tenant hereby agree that all notices, demands,
requests, and consents (hereinafter “notices”) required to be given pursuant to
the terms of this Lease shall be in writing, shall be addressed to the addresses
set forth in the introductory paragraph of this Lease, and shall be served by
[i] personal delivery; [ii] certified mail, return receipt requested, postage
prepaid; or [iii] nationally recognized overnight courier. Notwithstanding the
foregoing, any notice received by Landlord from Lender may be sent to Tenant,
Attn: Director of Real Estate Finance, by facsimile at 206/301-4500 and deemed
sent upon receipt of successful transmission. Notwithstanding the foregoing, any
notice received by Tenant from Lender may be sent to Landlord, Attn: Erin C.
Ibele, by facsimile at 419/247-2826 and deemed sent upon receipt of successful
transmission. All notices shall be deemed to be given upon the earlier of actual
receipt or three Business Days after mailing, or one Business Day after deposit
with the overnight courier. Any notices meeting the requirements of this section
shall be effective, regardless of whether or not actually received. Landlord or
Tenant may change its notice address at any time by giving the other party
notice of such change.
 
25.2  Advertisement of Leased Property. In the event Tenant fails to exercise
its option to renew within the time period set forth in §12.1 or in the event,
the parties hereto have not executed a renewal Lease within 80 days prior to the
expiration of the Initial Term, or Tenant has not exercised its Right of First
Opportunity, then Landlord or its agent shall have the right to enter the Leased
Property at all reasonable times for the purpose of exhibiting the Leased
Property to others and to place upon
 

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the Leased Property for and during the period commencing 80 days prior to the
expiration of this Lease, “for sale” or “for rent” notices or signs.
 
25.3  Entire Agreement. This Lease contains the entire agreement between
Landlord and Tenant with respect to the subject matter hereof. No
representations, warranties, and agreements have been made by Landlord except as
set forth in this Lease. No oral agreements or understandings between Landlord
and Tenant shall survive execution of this Lease.
 
25.4  Severability. If any term or provision of this Lease is held or deemed by
Landlord to be invalid or unenforceable, such holding shall not affect the
remainder of this Lease and the same shall remain in full force and effect,
unless such holding substantially deprives Tenant of the use of the Leased
Property or Landlord of the rents herein reserved, in which event this Lease
shall forthwith terminate as if by expiration of the Term.
 
25.5  Captions and Headings. The captions and headings are inserted only as a
matter of convenience and for reference and in no way define, limit or describe
the scope of this Lease or the intent of any provision hereof.
 
25.6  Governing Law. This Lease shall be governed by and construed in accordance
with the laws of the Commonwealth of Virginia, except as to matters under
applicable procedural conflicts of laws rules which require the application of
laws of another state, in which case the laws or conflicts of laws rules, as the
case may be, of such state shall govern to the extent required.
 
25.7  Memorandum of Lease. Tenant shall not record this Lease. Tenant shall,
however, record a memorandum of lease approved by Landlord upon Landlord’s
request.
 
25.8  Waiver. No waiver by Landlord of any condition or covenant herein
contained, or of any breach of any such condition or covenant, shall be held or
taken to be a waiver of any subsequent breach of such covenant or condition, or
to permit or excuse its continuance or any future breach thereof or of any
condition or covenant, nor shall the acceptance of Rent by Landlord at any time
when Tenant is in default in the performance or observance of any condition or
covenant herein be construed as a waiver of such default, or of Landlord’s right
to terminate this Lease or exercise any other remedy granted herein on account
of such existing default.
 
25.9  Binding Effect. This Lease will be binding upon and inure to the benefit
of the heirs, successors, personal representatives, and permitted assigns of
Landlord and Tenant.
 
25.10  No Offer. Landlord’s submission of this Lease to Tenant is not an offer
to lease the Leased Property, or an agreement by Landlord to reserve the Leased
Property for Tenant. Landlord will not be bound to Tenant until Tenant has duly
executed and delivered duplicate original leases to Landlord, and Landlord has
duly executed and delivered one of these duplicate original leases to Tenant.
 

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25.11  Modification. This Lease may only be modified by a writing signed by both
Landlord and Tenant. All references to this Lease, whether in this Lease or in
any other document or instrument, shall be deemed to incorporate all amendments,
modifications and renewals of this Lease, made after the date hereof. If Tenant
requests Landlord’s consent to any change in ownership, merger or consolidation
of Tenant, any assumption of the Lease, or any modification of the Lease, Tenant
shall provide Landlord all relevant information and documents sufficient to
enable Landlord to evaluate the request. In connection with any such request,
Tenant shall pay to Landlord a fee in the amount equal to the lesser of
$2,500.00 and Landlord’s actual reasonable attorney’s fees and expenses and
other reasonable out-of-pocket expenses incurred in connection with Landlord’s
evaluation of Tenant’s request, the preparation of any documents and amendments,
the subsequent amendment of any documents between Landlord and its collateral
pool lenders (if applicable), and all related matters.
 
25.12  Landlord’s Modification. Tenant acknowledges that, provided Lender
consents or the Lender has been paid in full, Landlord may mortgage the Leased
Property or use the Leased Property as collateral for collateralized mortgage
obligations or Real Estate Mortgage Investment Companies (REMICS). If any
mortgage lender of Landlord desires any modification of this Lease, Tenant
agrees to consider such modification in good faith and to execute an amendment
of this Lease if Tenant finds such modification acceptable. Landlord shall not
do anything in connection with its financing of the Leased Property which would
limit the rights granted Tenant hereunder.
 
25.13  No Merger. The surrender of this Lease by Tenant or the cancellation of
this Lease by agreement of Tenant and Landlord or the termination of this Lease
on account of Tenant’s default will not work a merger, and will, at Landlord’s
option, terminate any subleases or operate as an assignment to Landlord of any
subleases. Landlord’s option under this paragraph will be exercised by notice to
Tenant and all known subtenants of the Leased Property.
 
25.14  Laches. No delay or omission by either party hereto to exercise any right
or power accruing upon any noncompliance or default by the other party with
respect to any of the terms hereof shall impair any such right or power or be
construed to be a waiver thereof.
 
25.15  Limitation on Tenant’s Recourse. Tenant’s sole recourse against Landlord,
and any successor to the interest of Landlord in the Leased Property, is to the
interest of Landlord, and any such successor, in the Leased Property. Tenant
will not have any right to satisfy any judgment which it may have against
Landlord, or any such successor, from any other assets of Landlord, or any such
successor. In this section, the terms “Landlord” and “successor” include the
shareholders, venturers, and partners of “Landlord” and “successor” and the
officers, directors, and employees of the same. The provisions of this section
are not intended to limit Tenant’s right to seek injunctive relief or specific
performance.
 

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25.16  Construction of Lease. This Lease has been prepared by Landlord and its
professional advisors and reviewed by Tenant and its professional advisors.
Landlord, Tenant, and their advisors believe that this Lease is the product of
all their efforts, that it expresses their agreement, and agree that it shall
not be interpreted in favor of either Landlord or Tenant or against either
Landlord or Tenant merely because of their efforts in preparing it.
 
25.17  Counterparts. This Lease may be executed in multiple counterparts, each
of which shall be deemed an original hereof.
 
25.18  Landlord’s Consent. Whenever Landlord’s consent is required under this
Lease, such consent shall be in writing and shall not be unreasonably withheld
or delayed.
 
25.19  Custody of Escrow Funds. Any funds paid to Landlord in escrow hereunder
may be held by Landlord or, at Landlord’s election, by a financial institution,
the deposits or accounts of which are insured or guaranteed by a federal or
state agency. The funds shall not be deemed to be held in trust, may be
commingled with the general funds of Landlord or such other institution, and
shall not bear interest.
 
25.20  Landlord’s Status as a REIT. Tenant acknowledges that Landlord (or a
Landlord Affiliate) has elected and may hereafter elect to be taxed as a real
estate investment trust (“REIT”) under the Internal Revenue Code.
 
25.21  Exhibits. All of the exhibits referenced in this Lease are attached
hereto and incorporated herein.
 
25.22  WAIVER OF JURY TRIAL. LANDLORD AND TENANT WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THEM AGAINST THE OTHER ON
ALL MATTERS ARISING OUT OF THIS LEASE OR THE USE AND OCCUPANCY OF THE LEASED
PROPERTY (EXCEPT CLAIMS FOR PERSONAL INJURY OR PROPERTY DAMAGE). IF LANDLORD
COMMENCES ANY SUMMARY PROCEEDING FOR NONPAYMENT OF RENT, TENANT WILL NOT
INTERPOSE, AND WAIVES THE RIGHT TO INTERPOSE, ANY COUNTERCLAIM IN ANY SUCH
PROCEEDING.
 
25.23  CONSENT TO JURISDICTION. TENANT HEREBY IRREVOCABLY SUBMITS AND CONSENTS
TO THE NONEXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT HAVING
JURISDICTION OVER LUCAS COUNTY, OHIO OR ANY COUNTY IN WHICH A FACILITY IS
LOCATED FOR ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING
FROM OR RELATED TO [I] THE COMMITMENT; [II] THIS LEASE; OR [III] ANY DOCUMENT
EXECUTED BY TENANT IN CONNECTION WITH THIS LEASE. TENANT HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT TENANT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. TENANT
 

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AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT
OR IN ANY OTHER MANNER PROVIDED BY LAW.
 
TENANT AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST LANDLORD
OR ANY DIRECTOR, OFFICER, EMPLOYEE, AGENT OR PROPERTY OF LANDLORD, CONCERNING
ANY MATTER ARISING OUT OF OR RELATING TO THE COMMITMENT, THIS LEASE OR ANY
RELATED DOCUMENT IN ANY COURT OTHER THAN A STATE OR FEDERAL COURT HAVING
JURISDICTION OVER LUCAS COUNTY, OHIO UNLESS SUCH COURT LACKS IN PERSONAM OR
SUBJECT MATTER JURISDICTION IN WHICH CASE TENANT SHALL HAVE THE RIGHT TO
INSTITUTE SUCH ACTION OR PROCEEDING BEFORE ANY COURT HAVING SUCH JURISDICTION.
 
TENANT HEREBY CONSENTS TO SERVICE OF PROCESS BY LANDLORD IN ANY MANNER AND IN
ANY JURISDICTION PERMITTED BY LAW. NOTHING HEREIN SHALL AFFECT OR IMPAIR
LANDLORD’S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW, OR
LANDLORD’S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST TENANT OR THE
PROPERTY OF TENANT IN THE COURTS OF ANY OTHER JURISDICTION.
 
25.24  Attorney’s Fees and Expenses. Tenant shall pay to Landlord all reasonable
costs and expenses incurred by Landlord in administering this Lease and the
security for this Lease, enforcing or preserving Landlord’s rights under this
Lease and the security for this Lease, and in all matters of collection, whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, including, but not limited to, [a] reasonable attorney’s and
paralegal’s fees and disbursements; [b] the fees and expenses of any litigation,
administrative, bankruptcy, insolvency, receivership and any other similar
proceeding; [c] court costs; [d] the expenses of Landlord, its employees,
agents, attorneys and witnesses in preparing for litigation, administrative,
bankruptcy, insolvency and other proceedings and for lodging, travel, and
attendance at meetings, hearings, depositions, and trials; and [e] consulting
and witness fees and expenses incurred by Landlord in connection with any
litigation or other proceeding; provided, however, Landlord’s internal
bookkeeping and routine lease servicing costs are not payable by Tenant.
 
25.25  Survival. The following provisions shall survive termination of the
Lease: Article 8 (Defaults and Remedies); Article 9 (Damage and Destruction);
Article 10 (Condemnation); §15.9 (Transfer of License and Facility Operations);
§15.10 (Bed Operating Rights); §18.2 (Assignment or Sublease); Article 19
(Holdover and Surrender); Article 24 (Security Interest) and §25.25 (Survival).
 
25.26  Time. Time is of the essence in the performance of this Lease.
 
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
 

66

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the parties hereto have executed this Lease or caused the
same to be executed by their respective duly authorized officers as of the date
first set forth above.
 
Signed and acknowledged in the presence of:
 
 
 
 
 
Signature /s/ Rita J. Rogge 
 
Print Name Rita J. Rogge
 
 
 
Signature /s/Kathleen A. Sullivan
 
Print Name Kathleen A. Sullivan
HCRI WILBURN GARDENS PROPERTIES, LLC
 
By: Health Care REIT, Inc.
Its: Sole Member
 
By:/s/ Erin C. Ibele
 
Title: Vice President and Corporate Secretary
 
 
 
Signature /s/Tara Anderson
 
Print Name Tara Anderson
 
 
 
Signature /s/ A. Conti
 
Print Name A. Conti
EMERITUS CORPORATION
 
By: /s/William M. Shorten
 
Title: Director of Real Estate Finance
 
Tax I.D. No.: 91-1605464

67

--------------------------------------------------------------------------------

STATE OF OHIO  )
) SS:
COUNTY OF LUCAS )
 
The foregoing instrument was acknowledged before me this _12__ day of April,
2005 by __Erin C. Ibele__________________, the Vice President and Corporate
Secretary_________________________ of Health Care REIT, Inc., a Delaware
corporation, the sole member of HCRI Wilburn Gardens Properties, LLC, a Delaware
limited liability company, on behalf of the company.
 
/s/ Rita J. Rogge
Notary Public
 
My Commission Expires: 8/26/05 [SEAL]
 
STATE OF WASHINGTON )
) SS:
COUNTY OF KING )
 
The foregoing instrument was acknowledged before me this _31__ day of March,
2005 by ___William M. Shorten_____, the Director of Real Estate Finance of
Emeritus Corporation, a Washington corporation, on behalf of the corporation.
 
/s/ Rani U. Souza
Notary Public
 
My Commission Expires:11/19/08 [SEAL]

THIS INSTRUMENT PREPARED BY:

Oksana M. Ludd, Esq.
Shumaker, Loop & Kendrick, LLP
1000 Jackson Street
Toledo, Ohio 43624-1573

68

--------------------------------------------------------------------------------

ADDENDUM TO LEASE AGREEMENT

This Addendum to Lease Agreement (“Addendum”) is hereby made a part of the Lease
Agreement entered into as of March 31, 2005 by and between HCRI Wilburn Gardens
Properties, LLC, a Delaware limited liability company (“Landlord”), and Emeritus
Corporation, a Washington corporation (“Tenant”). Health Care REIT, Inc., a
Delaware corporation (“HCN”), joins in this Addendum for the sole purpose of
consenting to the terms and provisions of §§2, 3 and 4 hereof. Unless otherwise
noted or defined, capitalized terms shall have the meaning set forth in the
Lease.
 
RECITALS:
 
A.  Under the terms of the Loan Documents, the purchase of the Land by Landlord
and the assumption of the Loan by Landlord, is subject to the prior consent of
Fannie Mae as the current holder of that certain Multifamily Note (the “Note”),
dated as of February 26, 2002, in the original principal amount of $8,500,000.00
made by Fredericksburg Assisted L.L.C. to Lender.
 
B.  Fannie Mae has agreed to consent provided Landlord, Tenant and Fannie Mae
enter into a certain Subordination, Assignment and Security Agreement of even
date (“Subordination Agreement”).
 
C.  As of the date hereof, the Subordination Agreement does not contain certain
nondisturbance provisions as requested by Tenant. Tenant and Landlord agree to
proceed with this transaction and sign the Subordination Agreement in its
current form, provided the parties hereto enter into this Addendum.
 
In consideration of the foregoing and the mutual covenants and promises set
forth in this Addendum and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
 
1.  Negotiation of Subordination Agreement. As a condition precedent to the
exercise by Tenant of the rights set forth in §§2 and 3 hereof, Tenant shall use
commercially reasonable best efforts to reach an agreement with Fannie Mae to
amend the Subordination Agreement to include customary reasonable non
disturbance provisions for the benefit of Tenant within the first one hundred
and eighty (180) days after the date hereof; provided that if any event occurs
prior to the one hundred and eightieth day after the date hereof that would
allow for the exercise of Tenant’s rights if it occurred after that period, and
up to that date Tenant has used its commercially reasonable best efforts to
reach an agreement with Fannie Mae, as above, then the condition precedent to
the exercise of Tenant’s rights under §§2 and 3 hereof shall be deemed satisfied
and Tenant will be free to exercise such rights.
 
2.  Loan Breach. Landlord and HCN agree to promptly and timely provide Tenant
with a copy of any written notice received by either from Fannie Mae regarding
any breach of the terms of, default or an event which with the passage of time
would result in an Event of Default under the Loan Documents (“Loan Breach”)
that has not yet become an “Event of Default”, as
 

--------------------------------------------------------------------------------

such term is defined in the Subordination Agreement (hereinafter referred to as
a “Loan Event of Default”). Upon receipt of the same, Tenant shall have the
right, but not the obligation, to cure any Loan Breach, with such right to
include the right to make any payment of any amount of principal and interest or
otherwise as necessary to effect such cure directly to Fannie Mae or its
designee. Tenant shall provide Landlord with written notice and reasonable
evidence of the cure of the Loan Breach and the amount paid by Tenant to cure
such Loan Breach, and thereupon to the extent that any funds expended by Tenant
for such cure are not amounts that Tenant is otherwise obligated to pay in the
due course of and pursuant to the terms of the Lease, Tenant shall be entitled
to a setoff or credit of any such amount paid by Tenant to Fannie Mae to cure
any such Loan Breach against Base Rent or any other sum due and owing to
(i) Landlord under the Lease; and/or (ii) HCN under either Master Lease, as
hereinafter defined. “Master Lease” shall mean the Amended and Restated Master
Lease Agreement dated September 30, 2003, by and between HCN and certain HCN
affiliates and Tenant and/or the Master Lease Agreement dated September 30, 2004
by and between HCN and certain HCN affiliates and Tenant. Landlord and HCN agree
and acknowledge that the foregoing right of setoff and credit is granted to the
Tenant notwithstanding any prohibitions, if any, on setoff or credit under the
Master Lease, and to the extent that the Master Lease has a term or condition
prohibiting a Tenant setoff or credit against sums due and owing Landlord,
Landlord Affiliate or HCN hereunder, such term is hereby amended and the
foregoing (and set forth below) Tenant right to setoff and credit is
incorporated therein, solely for the limited purposes of the exercise of such
right as set forth in this Addendum at §§2 and 3 hereof.
 
3.  Setoff for Loan Event of Default. If (a) a court of competent jurisdiction
determines or (b) the parties hereto mutually agree, that a Loan Event of
Default has occurred and as a result of such Loan Event of Default the Lender
exercises any of its rights and remedies under the Subordination Agreement or
otherwise, directly against the Tenant or the UCC Collateral (as such term is
defined in the Subordination Agreement), then Tenant shall have a right of
setoff for or credit of Allowable Damages, as hereinafter defined, against Base
Rent or any other sums due and owing to Landlord under the Lease and/or HCN
under either Master Lease, as the same now exist, are amended or come into
being. For purposes of this paragraph, if the Loan Event of Default arises
solely as a result of a Landlord Event of Default under the Loan, then
“Allowable Damages” shall mean (i) actual reasonable out of pocket expenses
arising solely as a result of the termination of the Lease by Fannie Mae;
(ii) the present value of the leasehold interest of Tenant in the Lease as of
the date of the termination of the Lease by Fannie Mae and any unamortized lease
acquisition or leasehold improvement costs; (iii) to the extent that Lender has
exercised its right to collect payments of rent from residents at the Facility,
the value of resident deposits and UCC Collateral owned by Tenant; and (iv) any
payments made by Tenant in excess of amounts due under the Lease. For purposes
of this paragraph, if the Loan Event of Default arises solely as a result of a
Tenant Event of Default under the Loan, then “Allowable Damages” shall mean any
damages, losses, costs or expenses of Tenant that are the result of the
assessment of any amounts of principal, interest or default interest under the
Note against the Tenant or the UCC Collateral.
 
4.  Termination of Addendum. This Addendum shall automatically terminate if
Tenant has not satisfied the condition precedent set forth in §1 hereof or at
such time as the parties hereto enter into a revised Subordination Agreement
with Fannie Mae that is acceptable to all parties, whichever occurs first.
Notwithstanding the automatic termination, the parties hereto
 

--------------------------------------------------------------------------------

agree to execute an amendment to the Lease and any other documentation
reasonably requested to document the termination of this Addendum.
 
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
 

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the parties have executed this Addendum as of the date first
above written.
 

 
HCRI WILBURN GARDENS PROPERTIES, LLC
 
By: Health Care REIT, Inc., its sole member
 
By:/s/ Erin C. Ibele (Seal)
Name:Erin C. Ibele
Title:Vice President and Corporate Secretary
Date:
     
HEALTH CARE REIT, INC.
 
 
By /s/ Erin C. Ibele (Seal)
Name:Erin C. Ibele
Title:Vice President and Corporate Secretary
Date:
     
EMERITUS CORPORATION
 
By:/s/ William M. Shorten(Seal)
Name:William M. Shorten
Title:Director of Real Estate Fianance
Date:

 

 

--------------------------------------------------------------------------------

SCHEDULE 1: INITIAL RENT SCHEDULE
 
EMERITUS CORPORATION - FREDERICKSBURG, VA
HEALTH CARE REIT, INC.
 
EFFECTIVE DATE
03/31/05
         
INITIAL TERM COMMENCEMENT DATE
04/01/05
         
INITIAL TERM
15
Yrs
       
INITIAL TERM EXPIRATION DATE
03/31/20
         
INITIAL INVESTMENT AMOUNT
21,000,000
                       
RATE OF RETURN
N/A
         
(365/360 BASIS)
N/A
         
INITIAL RATE OF RETURN
8.60%
                       
INCREASER
As defined within the Master Lease Agreement
     
LEASE YEAR
DATES
ACTUAL CPI
INCREASER (BP)
BEGINNING RENT RATE OF RETURN (ROUNDED)
PERCENTAGE RATE SHORTFALL
ADJUSTED RENT RATE OF RETURN (ROUNDED)
MONTHLY RENT AMOUNT
ANNUAL RENT AMOUNT
FROM
TO
                     
03/31/05
03/31/05
N/A
N/A
8.60%
N/A
N/A
4,947.95
4,947.95
1
04/01/05
03/31/06
TBD
N/A
8.60%
N/A
N/A
150,500.00
1,806,000.00
2
04/01/06
03/31/07
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
3
04/01/07
03/31/08
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
4
04/01/08
03/31/09
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
5
04/01/09
03/31/10
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
6
04/01/10
03/31/11
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
7
04/01/11
03/31/12
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
8
04/01/12
03/31/13
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
9
04/01/13
03/31/14
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
10
04/01/14
03/31/15
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
11
04/01/15
03/31/16
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
12
04/01/16
03/31/17
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
13
04/01/17
03/31/18
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
14
04/01/18
03/31/19
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00
15
04/01/19
03/31/20
TBD
TBD
8.60%
Unknown
Unknown
150,500.00
1,806,000.00

 

 

 

--------------------------------------------------------------------------------

EXHIBIT A: LEGAL DESCRIPTION
 
Facility Name: Wilburn Gardens

ALL OF THAT certain tract or parcel of land situate, lying and being in the
Chancellor District of Spotsylvania County, Virginia, a short distance West of
Bragg Road (State Secondary Route #639), fronting 457.36 feet on the West of
Meekins Drive and containing 4.2844 acres, more or less, as shown on a plat
thereof made October 2, 1984 and revised July 23, 1985, by Sullivan, Donahoe &
Ingalls, a copy of which plat is recorded with Deed in Deed Book 656 at
Page 434, among the land records of Spotsylvania County, Virginia.
 

 

 

--------------------------------------------------------------------------------

EXHIBIT B: PERMITTED EXCEPTIONS
 
Facility Name: Wilburn Gardens

1.  
Taxes and assessments not yet due and payable.

 

2.  
Rights or claims of parties in possession, as residents only, with no purchase
options and no rights of first refusal.

 

3.  
Easement(s) granted to GTE South Incorporated recorded in Deed Book 1527,
Page 47, among the Land Records of Spotsylvania County, Virginia.

 

4.  
Easement(s) granted to Virginia Electric and Power Company recorded in Deed
Book 1641, Page 457; in Deed Book 611, Page 322; in Deed Book 602, Page 595; in
Deed Book 159, Page 36; and in Deed Book 138, Page 397, among the Land Records
of Spotsylvania County, Virginia.

 

5.  
Easement(s) granted to Natural Gas Service Company, recorded in Deed Book 182,
Page 354, among the Land Records of Spotsylvania County, Virginia.

 

6.  
Terms, provisions, conditions, easements and all matters as set forth in Deed
And Easement Agreement recorded in Deed Book 656 at Page 424, as assigned by
instrument recorded in Deed Book 1503 at Page 8, among the Land Records of
Spotsylvania County, Virginia.

 

7.  
Ten foot (10’) slope, drain and utility easement; twenty foot (20’) wide drain
easement; and drain easement, all as shown on plat recorded in Deed Book 635,
Page 118, among the Land Records of Spotsylvania County, Virginia.

 

8.  
Twenty foot (20’) sanitary sewer and storm drain easement; twelve foot (12’)
sanitary sewer easement and drain easement, all as shown on plat recorded in
Deed Book 656, Page 436, among the Land Records of Spotsylvania County,
Virginia.

 

9.  
Deed of Trust from Fredericksburg Assisted L.L.C., a Washington limited
liability company, to James W. DeBoer, Trustee(s), dated February 26, 2002 and
recorded in Deed Book 2126, Page 572, as amended by Amended and Restated
Multifamily Deed of Trust, Assignment of Rents and Security Agreement recorded
in Deed Book 2133, Page 219 in the Clerk’s Office of the Circuit Court of
Spotsylvania County, Virginia, SECURING Collateral Mortgage Capital, LLC an
indebtedness in the original principal sum of $8,500,000.00, as assigned to
FANNIE MAE by Assignment recorded in Deed Book 2139, Page 213, as amended by
that Second Amended and Restated Multifamily Deed of Trust, Assignment of Rents
and Security Agreement recorded in Deed Book 2139, Page 218 and assigned to
FANNIE MAE by that Assignment of Second Amended and Restated Multifamily Deed of
Trust, Assignment of Rents and Security Agreement recorded in Deed Book 2139,
Page 274 and as assumed by HCRI Wilburn Gardens Properties, LLC and Health Care
REIT, Inc.

 

--------------------------------------------------------------------------------

 

10.  
Financing Statement from Fredericksburg Assisted L.L.C., as Debtor, to FANNIE
MAE as Secured Party, filed March, 2002 as Financing Statement No. 137 and as
assigned to HCRI Wilburn Gardens Properties, LLC and Health Care REIT, Inc.

 

11.  
Memorandum of Lease by and between Landlord and Tenant.

 

12.  
Survey prepared by Edison L. Sullivan of Sullivan, Donahoe & Ingalls, dated
January 17, 2000, designated Job No. 00SP0018 discloses the following:

 

a.  
Access to the rear of the property is by way of Wills Way, a private drive,
without the benefit of a recorded easement or agreement.

 

 

 

--------------------------------------------------------------------------------

EXHIBIT C: FACILITY INFORMATION
 
Facility Name
Street Address
County
Facility Type (per license)
Beds/Units
Investment Amount
Wilburn Gardens
3500 Meekins Drive
Fredericksburg, VA 22407
County: Independent City
Boarding Home
195 licensed beds
___ operating beds
99 units
$21,000,000

 

 

--------------------------------------------------------------------------------

EXHIBIT D: LANDLORD’S PERSONAL PROPERTY
 
[Tenant to provide]
 

 

 

--------------------------------------------------------------------------------

EXHIBIT E: DOCUMENTS TO BE DELIVERED

Tenant shall deliver each of the following documents to Landlord no later than
the date specified for each document:
 
1.  Annual Financial Statement of Tenant (audited) - within 90 days after the
end of each fiscal year.
 
2.  Annual Company Budget not later than fiscal year end.
 
3.  Quarterly Variance Report for the Facility, including occupancy, census,
capital expenditures and operating revenues and expenses by line item with a
detailed explanation of the cause of all material variances from the Annual
Company Budget (i.e., more than 10% for that line item) and a description of
Tenant’s plans for eliminating all material variances - within 45 days after the
end of each quarter.
 
4.  Quarterly Update to Annual Company Budget (on a 12-month rolling forward
period) - within 45 days after the end of each quarter.
 
5.  Quarterly Healthcare Integrity and Protection Data Bank (HIPDB) Report
(dated not earlier than the end of the quarter) - within 45 days after the end
of each quarter.
 
6.  Quarterly Updates to Operator Profile of Tenant, including a review of the
Profile prepared by Landlord and identification of all changes to the Profile to
reflect the current situation - within 45 days after the end of each quarter.
 
7.  Periodic Financial Statement of Tenant (unaudited)  - within 45 days after
the end of each quarter.
 
8.  Monthly Facility Financial Statement(unaudited) - within 30 days after the
end of each month.
 
9.  Tenant’s Certificate and Annual or Quarterly Facility Financial Report
(Exhibit F) - with each delivery of Tenant’s financial statements.
 
10.  Annual Facility Financial Report (based upon internal financial records) -
within 60 days after the end of each fiscal year.
 
11.  Annual Financial Statement of Individual Guarantor - within 90 days after
the end of each calendar year.
 
12.  The most recent Periodic Financial Statement of Individual Guarantor - upon
request of Landlord.
 
13.  Guarantor’s certificate - with each delivery of Guarantor’s financial
statements.
 

--------------------------------------------------------------------------------

 
14.  Federal tax returns of Tenant, on a consolidated basis,  - within 15 days
after the filing of the return. If the filing date is extended, also provide a
copy of the extension application within 15 days after filing.
 
15.  If applicable, Medicaid cost reports for the Facility - within 15 days
after filing of the report with the State agency.
 
16.  State and federal health care survey and inspection reports, inspector exit
interview notes and report (if delivered to Tenant), plans of correction,
re-survey reports, evidence of annual license renewal within 30 days after
receipt by Tenant, HIPDB adverse action report, notice of any investigation,
inspection or survey by licensing authorities, notice of licensure deficiencies
or commencement of licensure revocation or decertification proceeding, notice of
admissions ban, issuance of a provisional or temporary license and all
correspondence regarding any of the foregoing for the Facility - within five
days after receipt by Tenant.
 
17.  Real estate taxes
 
(a)  Copy of invoice and check - within five days after the due date; and
 
(b)  Copy of official receipt or other satisfactory evidence of payment - within
30 days after the due date.
 
18.  Certificate of insurance renewal, current Certificate of Compliance from
insurance agent and evidence of payment of premium - at least 30 days prior to
the expiration of each policy.
 
19.  Facility information: [i] a security deposit report, including resident
name, date of move-in, security deposit, and corresponding security deposit bank
account balance, with a monthly update of any changes; [ii] a report accounting
for all resident trust funds, including corresponding trust fund deposit bank
accounts; [iii] a schedule and copies of any equipment leases and financings,
including vendor, equipment descriptions, monthly payment, rate and maturity,
with a monthly update of any changes and the required nondisturbance agreement
if the original cost of the equipment exceeds $50,000.00; [iv] a schedule of all
utility providers and utility deposits; [v] a list of all rent concessions,
including, but not limited to, free rent, rent reduction, community fee waivers,
rate locks, rate guaranties and waivers of security deposits; [vi] a copy of
each private pay resident’s occupancy agreement and the Facility’s form of
agreement; [vii] a schedule of all employee vacation and sick days; and
[viii] employee policies and procedures handbook, including employee benefits -
current and annually updated reports, schedules and copies to be delivered upon
request.
 

--------------------------------------------------------------------------------

EXHIBIT F: TENANT’S CERTIFICATE
AND FACILITY FINANCIAL REPORTS

Report Period: Commencing _______________ and ending _______________

Lease: Lease made by HCRI Wilburn Gardens Properties, LLC (“Landlord”) to
Emeritus Corporation (“Tenant”)

Tenant hereby certifies to Landlord to the best of its knowledge as follows:

1.  The attached [specify audited or unaudited and annual or quarterly, and if
consolidated, so state] financial statements of Tenant [i] have been prepared in
accordance with generally accepted accounting principles consistently applied;
[ii] have been prepared in a manner substantially consistent with prior
financial statements submitted to Landlord; and [iii] fairly present the
financial condition and performance of Tenant in all material respects.
 
2.  The attached [Annual or Quarterly] Facility Financial Report and Facility
Accounts Receivable Aging Report for the Report Period is complete, true and
accurate and has been prepared in a manner substantially consistent with prior
schedules submitted to Landlord. As set forth in the [Annual or Quarterly]
Facility Financial Report, Tenant has maintained the Facility Coverage Ratio
[*IF APPLICABLE: and the Current Ratio/Debt to Equity Ratio] for the Report
Period as required under the Lease between Tenant and Landlord.
 
3.  To the best of its knowledge, Tenant was in compliance with all of the
provisions of the Lease and all other documents executed by Tenant in connection
with the Lease at all times during the Report Period, and no default, or any
event which with the passage of time or the giving of notice or both would
constitute a default, has occurred under the Lease.
 
Executed this ___ day of _______________, _____.

Name:

Title:

--------------------------------------------------------------------------------

ANNUAL FACILITY FINANCIAL REPORT

Facility Name:

Facility Address:

Report Period:
Twelve (12) months beginning _______________ and ending _______________. All
information reported should be for this period only.

Occupancy Data
 
 
Census Data
 
 
% Resident
Days
 
% Revenues
 
 
Total Beds/Units:
 
 
_______
 
 
Medicaid:
 
 
_______%
 
 
_______%
 
 
Total Available Days:
 
 
_______
 
 
Medicare:
 
 
_______%
 
 
_______%
 
 
Total Occupied Days:
 
 
_______
 
 
Private and Other:
 
 
_______%
 
 
_______%
 
 
Occupancy Percentage:
 
 
_______%
 
 
Total:
 
 
_______%
 
 
_______%
 
         

OPERATING DATA

1. Gross Revenues$ 

2. Contractual Allowances$ 

3. Net Revenues$ 

4.  
Operating Expenses(before interest, lease/rent, depreciation,

amortization and management fees)$ 

5. Net Operating Income$ 

6. Interest Expense$ 

7. Lease/Rent Expense$ 

8. Depreciation Expense$ 

9. Amortization Expense$ 

10. Management Fees$ 

11. Management Fees (as a percent of Gross Revenues) %

12. Overhead Allocation (if applicable)$ 

13. Other (identify)$ 

14. Income Taxes$ 

15. Net Income (amount should agree with the facility’s financial statements)$ 

--------------------------------------------------------------------------------

FINANCING DATA
(Note: This data breaks out Items 6 and 7 above.)

 
Related to HCN
All Other Leases and/or Debt
Total
 
Lease Payments
 
 
_________
 
 
_________
 
 
________
 
 
Interest Payments
 
 
_________
 
 
_________
 
 
________
 
Principal Payments (if any)
 
 
_________
 
 
_________
 
 
________
 
 
 
$  
 
 
$  
 
 
$   
 

 
COVERAGE RATIO

1. Net Operating Income$______________
 
2. Less Imputed Management Fee
( _____% of gross revenues)(______________)
 
3. Less Imputed Replacement Reserve for period
($_________ per bed [or unit] per year)(______________)
 
4. Adjusted Net Operating Income$______________
 
5. Loan/Lease Payments to HCN$______________
 
6. Actual Coverage Ratio (Line 4 ¸ Line 5)______________
 
7. Minimum Coverage Ratio (per Lease Agreement)______________
 

CURRENT RATIO
[*DELETE IF NOT APPLICABLE]

1. Current Assets$______________
 
2. Current Liabilities$______________
 
3. Actual Current Ratio (Line 1 ¸ Line 2)______________
 
4. Minimum Current Ratio (per Lease Agreement)______________
 

Tenant hereby certifies that the foregoing is true and accurate.

Date:

Name:Phone Number:

Title:

--------------------------------------------------------------------------------

QUARTERLY FACILITY FINANCIAL REPORT

Facility Name:

Facility Address:

Report Period:
Three (3) months beginning _______________ and ending _______________. All
information reported should be for this period only.

Occupancy Data
 
 
Census Data
 
 
% Resident
Days
 
% Revenues
 
 
Total Beds/Units:
 
 
_______
 
 
Medicaid:
 
 
_______%
 
 
_______%
 
 
Total Available Days:
 
 
_______
 
 
Medicare:
 
 
_______%
 
 
_______%
 
 
Total Occupied Days:
 
 
_______
 
 
Private & Other:
 
 
_______%
 
 
_______%
 
 
Occupancy Percentage:
 
 
_______%
 
 
Total:
 
 
_______%
 
 
_______%
 
         

OPERATING DATA

1. Gross Revenues$ 

2. Contractual Allowances$ 

3. Net Revenues$ 

4.  
Operating Expenses (before interest, lease/rent, depreciation,

amortization and management fees)$ 

5. Net Operating Income$ 

6. Interest Expense$ 

7. Lease/Rent Expense$ 

8. Depreciation Expense$ 

9. Amortization Expense$ 

10. Management Fees$ 

11. Management Fees (as a percent of Gross Revenues) %

12. Overhead Allocation (if applicable)$ 

13. Other (identify)$ 

14. Income Taxes$ 

15. Net Income (amount should agree with the facility’s financial statements)$ 

--------------------------------------------------------------------------------

FINANCING DATA
(Note: This data breaks out Items 6 and 7 above.)

 
Related to HCN
All Other Leases and/or Debt
Total
 
Lease Payments
 
 
_________
 
 
_________
 
 
________
 
 
Interest Payments
 
 
_________
 
 
_________
 
 
________
 
Principal Payments (if any)
 
 
_________
 
 
_________
 
 
________
 
 
 
$   
 
 
$  
 
 
$   
 

 
COVERAGE RATIO

1. Net Operating Income$______________
 
2. Less Imputed Management Fee
( _____% of gross revenues)(______________)
 
3. Less Imputed Replacement Reserve for period
($_________ per bed [or unit] per year)(______________)
 
4. Adjusted Net Operating Income$______________
 
5. Loan/Lease Payments to HCN$______________
 
6. Actual Coverage Ratio (Line 4 ¸ Line 5)______________
 
7. Minimum Coverage Ratio (per Lease Agreement)______________
 

CURRENT RATIO
[*DELETE IF NOT APPLICABLE]

1. Current Assets$______________
 
2. Current Liabilities$______________
 
3. Actual Current Ratio (Line 1 ¸ Line 2)______________
 
4. Minimum Current Ratio (per Lease Agreement)______________
 

Tenant hereby certifies that the foregoing is true and accurate.

Date:

Name:Phone Number:

Title:

--------------------------------------------------------------------------------

QUARTERLY FACILITY ACCOUNTS RECEIVABLE AGING REPORT
 
Facility Name:       
 
Facility Address:       
 

Accounts Receivable Aging as of ____________ (most recent quarter ended)

 
PAYOR
 
 
0-30 DAYS%
 
 
31-60 DAYS%
 
 
61-90 DAYS%
 
 
OVER 90 DAYS%
 
 
TOTALS%
 
 
Medicaid
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
Medicare
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
Commercial Insurance
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
Other -_____________
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
TOTALS
 
 
$__________100%
 
 
$__________100%
 
 
$__________100%
 
 
$__________100%
 
 
$__________100%
 
           
 
% OF TOTALS $
 
 
___________%
 
 
___________%
 
 
___________%
 
 
___________%
 
 
100%
 

Accounts Receivable Aging as of ____________ (2nd recent quarter ended)

 
PAYOR
 
 
0-30 DAYS%
 
 
31-60 DAYS%
 
 
61-90 DAYS%
 
 
OVER 90 DAYS%
 
 
TOTALS%
 
 
Medicaid
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
Medicare
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
Commercial Insurance
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
Other -_____________
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
$______________%
 
 
TOTALS
 
 
$__________100%
 
 
$__________100%
 
 
$__________100%
 
 
$__________100%
 
 
$__________100%
 
           
 
% OF TOTALS $
 
 
___________%
 
 
___________%
 
 
___________%
 
 
___________%
 
 
100%
 

--------------------------------------------------------------------------------

EXHIBIT G: GOVERNMENT AUTHORIZATIONS
TO BE OBTAINED; ZONING PERMITS
 

 

 

--------------------------------------------------------------------------------

EXHIBIT H: PENDING LITIGATION
 

 

 

 

--------------------------------------------------------------------------------

EXHIBIT I: LIST OF LEASES AND CONTRACTS
 

1.  

 

2.  

 

 

 

--------------------------------------------------------------------------------

EXHIBIT J: WIRE TRANSFER INSTRUCTIONS
 
HEALTH CARE REIT, INC.
 
WIRE TRANSFER INSTRUCTIONS
 
Bank:
KeyBank
Cleveland, Ohio
   
ABA Number:
041001039
   
Account Name:
Health Care REIT, Inc.
   
Account Number:
353321001011
   
Notify:
Michael A. Crabtree
   
Phone:
(419) 247-2800