Back to 10-Q [qtr1200710-q.htm]

LOAN AGREEMENT
 
 
THIS LOAN AGREEMENT (this “Agreement”) is made as of March 26, 2007, by and
among EMERI-SKY SC LLC, a Delaware limited liability company, EMERIVILL SC LLC,
a Delaware limited liability company, and EMERIPARK SC LLC, a Delaware limited
liability company (together, collectively, with their respective successors and
assigns, “Borrowers” or “Borrower”, and, individually, a “Borrower”), and
CAPMARK BANK, a Utah industrial bank (together with its successors and assigns,
“Lender”).
 
RECITALS
 
A. Borrower has requested that Lender make a loan to each Borrower, in the
aggregate principal sum of $23,600,000.00.
 
B. Lender has agreed to make such loans on the terms and conditions hereinafter
set forth.
 
AGREEMENT
 
NOW, THEREFORE, it is hereby agreed as follows:
 
ARTICLE I  
 
DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.
 
1.1  As used in this Agreement, the following terms shall have the following
meanings unless the context hereof shall otherwise indicate:
 
“Accounts” has the meaning given to that term in the Mortgage.
 
“Actual Management Fees” means actual management fees paid or incurred in
connection with operation of the Facilities.
 
“Affiliate” means, with respect to any Person, (a) each Person that controls, is
controlled by or is under common control with such Person, (b) each Person that,
directly or indirectly, owns or controls, whether beneficially or as a trustee,
guardian or other fiduciary, any of the Stock of such Person, and (c) each of
such Person’s officers, directors, members, joint venturers and partners.
 
“Assignment of Leases and Rents” means that certain Assignment of Leases and
Rents of even date herewith by each Borrower in favor of Lender.
 
“Assignment of Licenses” means that certain Assignment of Licenses, Permits and
Contracts of even date herewith to and for the benefit of Lender.
 
“Assumed Management Fees” means assumed management fees of five percent (5%) of
net patient revenues of the Facilities (after Medicaid and Medicare contractual
adjustments).
 

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“Business Day” means a day, other than Saturday or Sunday and legal holidays,
when Lender is open for business.
 
“Closing Date” means the date on which all or any part of the Loan is disbursed
by Lender to or for the benefit of Borrower.
 
“Commitment Letter” means the commitment letter issued by Lender to Borrowers
dated March 26, 2007.
 
“Cross-Collateralization Agreement” means the Cross-Collateralization,
Cross-Default and Mortgage Modification Agreement of even date herewith by and
between each Borrower and Lender.
 
“Debt Service Coverage Ratio” means a ratio in which the numerator is the sum of
“net pre-tax income” from usual operations of all the Facilities as set forth in
the financial statements provided to Lender (without deduction for management
fees or management expenses paid or incurred), calculated based upon the
preceding twelve (12) months (or such lesser period of time as shall have
elapsed following the closing of the Loans), plus Loan interest expense or
Facility lease expense to the extent deducted in determining net income and
non-cash expenses or allowances for depreciation and amortization of the
Facilities for such period, less either Assumed Management Fees or Actual
Management Fees (based upon the covenant to which such definition relates) for
such period and the denominator is calculated by using the then current
principal balance due under all the Notes, applying the then current interest
rate under the Notes (which shall not exceed the maximum rate of interest under
the Interest Rate Agreement), calculating such principal and interest payments
for the applicable period, assuming a twenty-five (25) year amortization of the
Notes. In calculating “net pre-tax income,” Extraordinary Income and
Extraordinary Expenses shall be excluded.
 
“Default” means the occurrence or existence of any event which, but for the
giving of notice or expiration of time or both, would constitute an Event of
Default.
 
“Default Rate” has the meaning given to that term in the Note.
 
“Environmental Permit” means any permit, license, or other authorization issued
under any Hazardous Materials Law with respect to any activities or businesses
conducted on or in relation to the Land and/or the Improvements.
 
“Equipment” has the meaning given to that term in the Mortgage.
 
“Event of Default” means any “Event of Default” as defined in Article VII
hereof.
 
“Extraordinary Income and Extraordinary Expenses” means material items of a
character significantly different from the typical or customary business
activities of Borrower which would not be expected to recur frequently and which
would not be considered as recurring factors in any evaluation of the ordinary
operating processes of Borrower’s business, and which would be treated as
extraordinary income or extraordinary expenses under GAAP.
 

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“Exhibit” means an Exhibit to this Agreement, unless the context refers to
another document, and each such Exhibit shall be deemed a part of this Agreement
to the same extent as if it were set forth in its entirety wherever reference is
made thereto.
 
“Facilities” means the three (3) facilities known as (i) Skylyn Place, a
256-unit rental Continuing Care Retirement Community located at 1705 Skylyn
Drive, Spartanburg, SC; (ii) Countryside Village, a 146-unit rental Continuing
Care Retirement Community located at 706 Pelzer Highway, Easley, SC; and (iii)
Countryside Park, a 48-unit Assisted Living Facility located at 125 Zion School
Road, Easley, SC, located on the Land, as they may now or hereafter exist,
together with any other general or specialized care facilities, if any
(including any Alzheimer’s care unit, subacute nursing and/or assisted living
facility), now or hereafter operated on the Land.

“GAAP” means, as in effect from time to time, generally accepted accounting
principles consistently applied as promulgated by the American Institute of
Certified Public Accountants.
 
“Governmental Authority” means any nation or government, any state or other
political subdivision thereof, and any Person exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to such
government.
 
“Guarantor” means Emeritus Corporation, a Washington corporation.
 
“Guaranty Agreement” means that certain Guaranty of even date herewith from
Guarantor to and for the benefit of Lender.
 
“Hazardous Materials” means petroleum and petroleum products and compounds
containing them, including gasoline, diesel fuel and oil; explosives; flammable
materials; radioactive materials; polychlorinated biphenyls (“PCBs”) and
compounds containing them; lead and lead-based paint; asbestos or
asbestos-containing materials in any form that is or could become friable;
underground storage tanks, whether empty or containing any substance; any
substance the presence of which on the Land and/or the Improvements is
prohibited by any federal, state or local authority; any substance that requires
special handling; and any other material or substance now or in the future
defined as a “hazardous substance,” “hazardous material,” “hazardous waste,”
“toxic substance,” “toxic pollutant,” “contaminant,” or “pollutant” within the
meaning of any Hazardous Materials Law.
 
“Hazardous Materials Laws” means all federal, state, and local laws, ordinances
and regulations and standards, rules, policies and other governmental
requirements, administrative rulings and court judgments and decrees in effect
now or in the future and including all amendments, that relate to Hazardous
Materials and apply to Borrower or to the Land and/or the Improvements.
Hazardous Materials Laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601,
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the
Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, and their state analogs.
 

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“Improvements” means all buildings, structures and improvements of every nature
whatsoever now or hereafter situated on the Land, including but not limited to,
all gas and electric fixtures, radiators, heaters, engines and machinery,
boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting
and other floor coverings, water heaters, awnings and storm sashes, and cleaning
apparatuses which are or shall be attached to the Land or said buildings,
structures or improvements.
 
“Indebtedness” means any (a) obligations for borrowed money, (b) obligations,
payment for which is being deferred by more than ninety (90) days, representing
the deferred purchase price of property other than accounts payable arising in
connection with the purchase of inventory customary in the trade and in the
ordinary course of Borrower’s business, (c) obligations, whether or not assumed,
secured by Liens or payable out of the proceeds or production from the Accounts
and/or property now or hereafter owned or acquired, and (d) the amount of any
other obligation (including obligations under financing leases) which would be
shown as a liability on a balance sheet prepared in accordance with GAAP.
 
“Inventory” has the meaning given to that term in the Mortgage.
 
“Land” means the land described in Exhibit “A” attached hereto and made a part
hereof.
 
“Leases” has the meaning given to that term in the Mortgage.
 
“Lien” means any voluntary or involuntary mortgage, security deed, deed of
trust, lien, pledge, assignment, security interest, title retention agreement,
financing lease, levy, execution, seizure, judgment, attachment, garnishment,
charge, lien or other encumbrance of any kind, including those contemplated by
or permitted in this Agreement and the other Loan Documents.
 
“Loan” or “Loans” means the Loans in the aggregate principal sum of
$23,600,000.00 made by Lender to Borrowers as of the date hereof.
 
“Loan Documents” means, collectively, the Commitment Letter, this Agreement, the
Note, the Mortgage, the Assignment of Leases and Rents, the Assignment of
Licenses, the Guaranty Agreement, the Assignment of Management Agreement and the
Subordination Agreement, together with any and all other documents executed by
any Borrower, Guarantor or others, evidencing, securing or otherwise relating to
the Loan.
 
“Loan Obligations” means the aggregate of all principal and interest owing from
time to time under the Notes and all expenses, charges and other amounts from
time to time owing under the Notes, this Agreement or the other Loan Documents
and all covenants, agreements and other obligations from time to time owing to,
or for the benefit of, Lender pursuant to the Loan Documents.
 
“Managed Care Plans” means any health maintenance organization, preferred
provider organization, individual practice association, competitive medical
plan, or similar arrangement, entity, organization, or Person.
 

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“Management Agreement” means that certain Management Agreement dated March 26,
2007, between Manager and Borrower, obligating Manager to operate and manage the
Facilities.
 
“Manager” means Emeritus Corporation, and any successor manager of the
Facilities approved by Lender in writing.
 
“Maturity Date” means April 1, 2010.
 
“Medicaid” means that certain program of medical assistance, funded jointly by
the federal government and the States, for impoverished individuals who are
aged, blind and/or disabled, and/or members of families with dependent children,
which program is more fully described in Title XIX of the Social Security Act
(42 U.S.C. §§ 1396 et seq.) and the regulations promulgated thereunder.
 
“Medicare” means that certain federal program providing health insurance for
eligible elderly and other individuals, under which physicians, hospitals,
skilled nursing homes, home health care and other providers are reimbursed for
certain covered services they provide to the beneficiaries of such program,
which program is more fully described in Title XVIII of the Social Security Act
(42 U.S.C. §§ 1395 et seq.) and the regulations promulgated thereunder.
 
“Mortgage” means collectively those three (3) certain Mortgages and Security
Agreements of even date herewith, one from each Borrower in favor of Lender,
encumbering the real estate located in Pickens and Spartanburg Counties, South
Carolina, as modified by the Cross-Collateralization Agreement, which is more
particularly described in Exhibit “A” hereto, and upon which the Facilities are
located.
 
“Mortgaged Property” has the meaning given to that term in the Mortgage.
 
“Note” or “Notes” means the three (3) Promissory Notes of even date herewith in
the aggregate principal amount of the Loan payable by Borrowers to the order of
Lender.
 
“OFAC List” means the list of specially designated nationals and blocked persons
subject to financial sanctions that is maintained by the U.S. Treasury
Department, Office of Foreign Assets Control and any other similar list
maintained by the U.S. Treasury Department, Office of Foreign Assets Control
pursuant to any Requirements of Law, including, without limitation, trade
embargo, economic sanctions, or other prohibitions imposed by Executive Order of
the President of the United States. The OFAC List currently is accessible
through the internet website www.treas.gov/ofac/t11sdn.pdf.
 
“O&M Program” means a written program of operations and maintenance established
or approved in writing by Lender relating to any Hazardous Materials in, on or
under the Land and/or the Improvements.
 
“Permits” means all licenses, permits and certificates used or necessary in
connection with the construction, ownership, operation, use or occupancy of the
Mortgaged Property and/or the Facility, including, without limitation, business
licenses, state health department licenses, food service licenses, licenses to
conduct business, certificates of need and
 

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all such other permits, licenses and rights, obtained from any governmental,
quasi-governmental or private person or entity whatsoever concerning ownership,
operation, use or occupancy.
 
“Permitted Encumbrances” has the meaning given to that term in Section 5.2
hereof.
 
“Person” means an individual, partnership, limited partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or other
entity of whatever nature.
 
“Proceeds” has the meaning given to that term in the Mortgage.
 
“Reimbursement Contracts” means all third-party reimbursement contracts relating
to the Facility which are now or hereafter in effect with respect to residents
or patients qualifying for coverage under the same, including Medicare and
Medicaid, Managed Care Plans and private insurance agreements, and any successor
program or other similar reimbursement program and/or private insurance
agreements, now or hereafter existing.
 
“Rents” has the meaning given to that term in the Mortgage.
 
“Requirements of Law” means (a) the organizational documents of an entity, and
(b) any law, regulation, ordinance, code, decree, treaty, ruling or
determination of an arbitrator, court or other Governmental Authority, or any
Executive Order issued by the President of the United States, in each case
applicable to or binding upon such Person or to which such Person, any of its
property or the conduct of its business is subject including, without
limitation, laws, ordinances and regulations pertaining to the zoning, occupancy
and subdivision of real property.
 
“Single Asset Entity” means a Person which owns no interest or property other
than the Mortgaged Property and the real and personal property securing the Loan
or interests in Borrower.
 
“Single Purpose Entity” means a Person which complies with the requirements of
Section 5.4.
 
“Stock” means all shares, options, warrants, general or limited partnership
interests, membership interests, participations or other equivalents (regardless
of how designated) in a corporation, limited liability company, partnership or
any equivalent entity, whether voting or nonvoting, including, without
limitation, common stock, preferred stock, or any other “equity security” (as
such term is defined in Rule 3a11-1 of the General Rules and Regulations
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended).
 
“Subordination Agreement” means that certain Subordination of Management
Agreement of even date herewith by and among Borrower, Manager, and Lender.
 
1.2  Singular terms shall include the plural forms and vice versa, as
applicable, of the terms defined.
 
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1.3  Each term contained in this Agreement and defined in the Uniform Commercial
Code (the “UCC”) in effect from time to time in the state in which the Land is
located shall have the meaning given to such term in the UCC, unless the context
otherwise indicates, and shall include, without limitation, the meaning set
forth in this Agreement.
 
1.4  All accounting terms used in this Agreement shall be construed in
accordance with GAAP, except as otherwise specified.
 
1.5  All references to other documents or instruments shall be deemed to refer
to such documents or instruments as they may hereafter be extended, renewed,
modified, or amended and all replacements and substitutions therefor.
 
1.6  All references herein to “Medicaid” and “Medicare” shall be deemed to
include any successor program thereto.
 
ARTICLE II  
 
TERMS OF THE LOAN
 
2.1  The Loan. Borrowers have agreed to borrow the Loan from Lender, and Lender
has agreed to make the Loan to Borrowers, subject to Borrowers’ compliance with
and observance of the terms, conditions, covenants, and provisions of this
Agreement and the other Loan Documents, and Borrowers have made the covenants,
representations, and warranties herein and therein as a material inducement to
Lender to make the Loans.
 
2.2  Security for the Loans. The Loans will be evidenced, secured and guaranteed
by the Loan Documents.
 
2.3  Limitation on Interest. All agreements between Borrowers and Lender,
whether now existing or hereafter arising and whether written or oral, are
hereby limited so that in no contingency, whether by reason of acceleration of
the maturity of any indebtedness governed hereby or otherwise, shall the
interest contracted for, charged or received by Lender exceed the maximum amount
permissible under applicable law. If, from any circumstance whatsoever, interest
would otherwise be payable to Lender in excess of the maximum lawful amount, the
interest payable to Lender shall be reduced to the maximum amount permitted
under applicable law; and, if from any circumstance the Lender shall ever
receive anything of value deemed interest by applicable law in excess of the
maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal of the Loan and not to the payment of
interest, or, if such excessive interest exceeds the unpaid balance of principal
of the Loan, such excess shall be refunded to Borrower. All interest paid or
agreed to be paid to Lender shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread throughout the full period until
payment in full of the principal of the Loan (including the period of any
renewal or extension thereof) so that interest thereon for such full period
shall not exceed the maximum amount permitted by applicable law. This paragraph
shall control all agreements between Borrower and Lender.
 

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ARTICLE III  
 
BORROWER’S REPRESENTATIONS AND WARRANTIES
 
To induce Lender to enter into this Agreement, and to make the Loan to
Borrowers, each Borrower represents and warrants to Lender as follows:
 
3.1  Existence, Power and Qualification. Borrower is a duly organized and
validly existing Delaware limited liability company, has the power to own its
properties and to carry on its business as is now being conducted, and is duly
qualified to do business and is in good standing in every jurisdiction in which
the character of the properties owned by it or in which the transaction of its
business makes its qualification necessary.
 
3.2  Power and Authority. Borrower has full power and authority to borrow the
indebtedness evidenced by the Note and to incur the Loan Obligations provided
for herein, all of which have been authorized by all proper and necessary
action. All consents, approvals authorizations, orders or filings of or with any
court or governmental agency or body, if any, required for the execution,
delivery and performance of the Loan Documents by Borrower have been obtained or
made.
 
3.3  Single Purpose Entity. Borrower is a Single Purpose Entity.
 
3.4  Pending Matters.
 
(a)  Operations; Financial Condition. No action or investigation is pending or,
to the best of Borrower’s knowledge, threatened before or by any court or
administrative agency which might result in any material adverse change in the
financial condition, operations or prospects of Borrower or any lower
reimbursement rate under the Reimbursement Contracts. Borrower is not in
violation of any agreement, the violation of which might reasonably be expected
to have a material adverse effect on its business or assets, and Borrower is not
in violation of any order, judgment, or decree of any court, or any statute or
governmental regulation to which it is subject.
 
(b)  Land and Improvements. There are no proceedings pending, or, to the best of
Borrower’s knowledge, threatened, to acquire through the exercise of any power
of condemnation, eminent domain or similar proceeding any part of the Land, the
Improvements or any interest therein, or to enjoin or similarly prevent or
restrict the use of the Land or the operation of the Facility in any manner.
None of the Improvements is subject to any unrepaired casualty or other damage.
 
3.5  Financial Statements Accurate. All financial statements heretofore or
hereafter provided by Borrower are and will be true and complete in all material
respects as of their respective dates and fairly present the financial condition
of Borrower, and there are no material liabilities, direct or indirect, fixed or
contingent, as of the respective dates of such statements which are not
reflected therein or in the notes thereto or in a written certificate delivered
with such statements. The financial statements of Borrower have been prepared in
accordance with GAAP. There has been no material adverse change in the financial
condition, operations, or prospects of Borrower since the dates of such
statements except as fully disclosed in writing with the delivery of such
statements. All financial statements of the operations of the Facility
 

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heretofore or hereafter provided to Lender are and will be true and complete in
all material respects as of their respective dates.
 
3.6  Compliance with Facility Laws. The Facility is duly licensed under the
applicable laws of the state where the Land is located and is currently operated
as the type of facility identified in the definition of “Facilities”. Borrower
is the lawful owner of all Permits for the Facility, including, without
limitation, the Certificate of Need, if applicable, which (a) are in full force
and effect, (b) constitute all of the permits, licenses and certificates
required for the use, operation and occupancy thereof, (c) have not been pledged
as collateral for any other loan or Indebtedness, (d) are held free from any
restriction or any encumbrance which would materially adversely affect the use
or operation of the Facility and (e) are not provisional, probationary or
materially restricted in any way. Borrower and Manager as well as the operation
of the Facility are in compliance in all material respects with the applicable
provisions of all laws, rules, regulations and published interpretations to
which the Facility is subject. No waivers of any laws, rules, regulations, or
requirements (including, but not limited to, minimum foot requirements per unit)
are required for the Facility to operate at the foregoing licensed unit
capacity. All Reimbursement Contracts are in full force and effect with respect
to the Facility, and Borrower and Manager are in good standing with all the
respective agencies governing such applicable Facility licenses, program
certification and Reimbursement Contracts. Borrower and Manager are current in
the payment of all so-called provider specific taxes or other assessments with
respect to such Reimbursement Contracts. Borrower will maintain the Certificate
of Need, if applicable, and/or any required Permits in full force and effect. In
the event Lender acquires the Facility through foreclosure or otherwise, neither
Lender nor a subsequent manager, a subsequent lessee or any subsequent purchaser
(through foreclosure or otherwise) must obtain a Certificate of Need prior to
applying for and receiving a license to operate the Facility and certification
to receive Medicare and Medicaid payments (and its successor programs) for
patients having coverage thereunder provided that no service or unit complement
is changed.
 
3.7  Maintain Unit Capacity. Neither Borrower nor Manager has granted to any
third party the right to reduce the number of licensed units in the Facility or
to apply for approval to transfer the right to any or all of the licensed
Facility units to any other location.
 
3.8  Medicare and Medicaid Compliance. The Facility is in compliance with all
requirements for participation in Medicare and Medicaid, including without
limitation, the Medicare and Medicaid Patient Protection Act of 1987. The
Facility is in conformance in all material respects with all insurance,
reimbursement and cost reporting requirements and has a current provider
agreement which is in full force and effect under Medicare and Medicaid.
 
3.9  Third Party Payors. There is no threatened or pending revocation,
suspension, termination, probation, restriction, limitation, or nonrenewal
affecting Borrower, Manager or the Facility or any participation or provider
agreement with any third-party payor, including Medicare, Medicaid, Blue Cross
and/or Blue Shield, and any other private commercial insurance managed care and
employee assistance program (such programs, the “Third-Party Payors’ Programs”)
to which Borrower or Manager presently is subject. All Medicare (if any),
Medicaid (if any) and private insurance cost reports and financial reports
submitted by Borrower or Manager are and will be materially accurate and
complete and have not been and will not be
 

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misleading in any material respects. No cost reports for the Facility remain
“open” or unsettled except as otherwise disclosed.
 
3.10  Governmental Proceedings and Notices. Neither Borrower nor Guarantor nor
Manager nor the Facility is currently the subject of any proceeding by any
governmental agency, and no notice of any violation has been received from any
federal, state or local government or quasi-governmental body or agency or any
administrative or investigative body that would, directly or indirectly, or with
the passage of time:
 
(a)  have a material adverse impact on Borrower’s or Manager’s ability to accept
and/or retain residents or result in the imposition of a fine, a sanction, a
lower rate certification or a lower reimbursement rate for services rendered to
eligible residents;
 
(b)  modify, limit or annul or result in the transfer, suspension, revocation or
imposition of probationary use of any of the Permits; or
 
(c)  affect Borrower’s continued participation in the Medicare or Medicaid
programs or any other Third-Party Payors’ Programs, or any successor programs
thereto, at current rate certifications.
 
3.11  Physical Plant Standards. The Facility and the use thereof comply in all
material respects with all applicable local, state and federal building codes,
fire codes, health care, nursing/assisted living/senior housing facility (as
applicable) and other similar regulatory requirements (the “Physical Plant
Standards”), and no waivers of Physical Plant Standards exist at the Facility.
 
3.12  Pledge of Receivables. Borrower has not pledged its Accounts as collateral
security for any loan or Indebtedness other than, if applicable, the Loan.
 
3.13  Payment of Taxes and Property Impositions. Borrower has filed all federal,
state, and local tax returns which it is required to file and has paid, or made
adequate provision for the payment of, all taxes and assessments which are shown
pursuant to such returns or are required to be shown thereon, including, without
limitation, provider taxes which are due and owing as of the date hereof. All
such returns are complete and accurate in all respects. Borrower has paid or
made adequate provision for the payment of all applicable water and sewer
charges, ground rents (if applicable) and Taxes (as defined in the Mortgage)
with respect to the Land and/or the Improvements which are due and owing as of
the date hereof.
 
3.14  Title to Mortgaged Property. Borrower has good and marketable title to all
of the Mortgaged Property, subject to no lien, mortgage, pledge, encroachment,
zoning violation, or encumbrance, except Permitted Encumbrances which do not
materially interfere with the security intended to be provided by the Mortgage
or the current use or operation of the Land and the Improvements or the current
ability of the Facility to generate net operating income sufficient to service
the Loan. All Improvements situated on the Land are situated wholly within the
boundaries of the Land.
 
3.15  Priority of Mortgage. The Mortgage constitutes a valid first lien against
the real and personal property described therein, prior to all other liens or
encumbrances, including those
 

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which may hereafter accrue, excepting only Permitted Encumbrances which do not
and will not materially and adversely affect (a) the ability of Borrower to pay
in full the principal of and interest on the Note when due, (b) the security
(and its value) intended to be provided by the Mortgage or (c) the current use
of the Land and the Improvements.
 
3.16  Location of Chief Executive Offices. The location of Borrower’s chief
executive office(s) are set forth on Exhibit “B” hereto. Borrower has no places
of business other than the locations of the Facilities listed on Exhibit “B”.
 
3.17  Disclosure. All information furnished or to be furnished by Borrower to
Lender in connection with the Loan or any of the Loan Documents is, or will be
at the time the same is furnished, accurate and correct in all material respects
and complete insofar as completeness may be necessary to provide Lender with
true and accurate knowledge of the subject matter.
 
3.18  Trade Names. Neither Borrower nor the Facility has changed its name, been
known by any other name, or been a party to a merger, reorganization or similar
transaction within the last five (5) years.
 
3.19  ERISA. As of the date hereof and throughout the term of this Agreement,
 
(a)  Borrower is not an “employee benefit plan,” as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
subject to Title I of ERISA, and none of the assets of Borrower constitute “plan
assets” (within the meaning of Department of Labor Regulation Section
2510.3-101) of one or more such plans, and
 
(b)  Borrower is not a “governmental plan” within the meaning of Section 3(32)
of ERISA, and transactions by or with Borrower are not be subject to state
statutes regulating investments of, and fiduciary obligations with respect to,
governmental plans.
 
The execution and delivery of the Loan Documents and the borrowing of
indebtedness hereunder do not constitute a non-exempt prohibited transaction
under Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986,
as amended (the “Code”).
 
3.20  Ownership. The ownership interests of the Persons comprising Borrower and
each of the respective interests in Borrower are correctly and accurately set
forth on Exhibit “C” hereto.
 
3.21  Compliance With Applicable Laws. The Facility and its operations and the
Land and Improvements comply in all material respects with all covenants and
restrictions of record and applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act and the
regulations thereunder, and all laws, ordinances, rules and regulations relating
to zoning, setback requirements and building codes and there are no waivers of
any building codes currently in existence for the Facility.
 
3.22  Solvency. Borrower is solvent for purposes of 11 U.S.C. § 548, and the
borrowing of the Loan will not render Borrower insolvent for purposes of 11
U.S.C. § 548.
 
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3.23  Management Agreement. The Management Agreement is in full force and
effect, and there are no defaults (either monetarily or non-monetarily) by
Manager or Borrower thereunder.
 
3.24  Other Indebtedness. Borrower has no outstanding Indebtedness, secured or
unsecured, direct or contingent (including any guaranties), other than (a) the
Loan, and (b) indebtedness which represents trade payables or accrued expenses
incurred in the ordinary course of business of owning and operating the
Mortgaged Property; no other debt incurred by Borrower after the date hereof
will be secured (senior, subordinate or pari passu) by the Mortgaged Property.
 
3.25  Other Obligations. Borrower has no material financial obligation under any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which Borrower is a party or by which Borrower or the Mortgaged
Property is otherwise bound, other than obligations incurred in the ordinary
course of the operation of the Mortgaged Property and other than obligations
under the Mortgage and the other Loan Documents.
 
3.26  Fraudulent Conveyances. Borrower (a) has not entered into this Agreement
or any of the other Loan Documents with the actual intent to hinder, delay, or
defraud any creditor and (b) has received reasonably equivalent value in
exchange for its obligations under the Loan Documents. Giving effect to the
transactions contemplated by the Loan Documents, the fair saleable value of
Borrower’s assets exceeds and will, immediately following the execution and
delivery of the Loan Documents, be greater than Borrower’s probable liabilities,
including the maximum amount of its contingent liabilities or its debts as such
debts become absolute and mature. Borrower’s assets do not and, immediately
following the execution and delivery of the Loan Documents will not, constitute
unreasonably small capital to carry out its business as conducted or as proposed
to be conducted. Borrower does not intend to, and does not believe that it will,
incur debts and liabilities (including, without limitation, contingent
liabilities and other commitments) beyond its ability to pay such debts as they
mature (taking into account the timing and amounts to be payable on or in
respect of obligations of Borrower).
 
3.27  No Change in Facts or Circumstances. All information in any application
for the Loan submitted to Lender (the “Loan Application”) and in all financial
statements, rent rolls, reports, certificates and other documents submitted in
connection with the Loan Application are complete and accurate in all material
respects. There has been no material adverse change in any fact or circumstance
that would make any such information incomplete or inaccurate.
 
3.28  Fraud and Abuse.
 
(a) Anti-Kickback Law. After consultation with counsel concerning the federal
anti-kickback law (42 U.S.C.A. SEC. 1320a-7b(b)), neither Borrower nor its agent
have offered or given any remuneration or thing of value to any person to
encourage referral to the facility nor has Borrower or its agent solicited or
received any remuneration or thing of value in exchange for Borrower’s agreement
to make referrals or to purchase goods or services for the Facility.
 

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(b) Relationships. No physician or other healthcare practitioner has an
ownership interest in, or financial relationship with, the Borrower, Manager or
the Facility.
 
(c) Required Adjustments. All cost report periods for all Facility payors have
been closed and settled, and all required adjustments have been fully paid
and/or implemented.
 
3.29  No Illegal Activity as Source of Funds. No portion of the Mortgaged
Property has been or will be purchased, improved, equipped or furnished with
proceeds of any illegal activity.
 
3.30  Compliance with Anti-Terrorism, Embargo, Sanctions and Anti-Money
Laundering Laws. Borrower, and to the best of Borrower's knowledge, after having
made diligent inquiry, (a) each Person owning an interest of 20% or more in a
Borrower and in the Single Purpose Entity that is the managing member of
Borrower, (b) Guarantor, (c) Manager, and (d) each tenant at the Property: (i)
is not currently identified on OFAC List, and (ii) is not a Person with whom a
citizen of the United States is prohibited to engage in transactions by any
trade embargo, economic sanction, or other prohibition of United States law,
regulation, or Executive Order of the President of the United States. Borrower
has implemented procedures, and will consistently apply those procedures
throughout the term of the Loan, to ensure the foregoing representations and
warranties remain true and correct during the term of the Loan.
 
3.31  Compliance Program. To the extent required, Borrower has adopted and is
adhering to a compliance program meeting the guidelines published by the Office
of the Inspector General on March 16, 2000, at 65 Fed. Reg. 14289.
 
ARTICLE IV  
 
AFFIRMATIVE COVENANTS OF BORROWERS
 
Each Borrower agrees with and covenants unto Lender that until the Loan
Obligations have been paid in full, each Borrower shall:
 
4.1  Payment of Loan/Performance of Loan Obligations. Duly and punctually pay or
cause to be paid the principal and interest of the Note in accordance with its
terms and duly and punctually pay and perform or cause to be paid or performed
all Loan Obligations hereunder and under the other Loan Documents.
 
4.2  Maintenance of Existence. Maintain its existence as a limited liability
company in good standing under the laws of the jurisdiction of its organization
or formation, and, in each jurisdiction in which the character of the property
owned by it or in which the transaction of its business makes qualification
necessary, maintain good standing and qualification to do business.
 
4.3  Maintenance of Single Purpose Asset Status. Maintain its existence as a
Single Purpose Asset Entity.
 
4.4  Accrual and Payment of Taxes. During each fiscal year, make accurate
provision for the payment in full of all current tax liabilities of all kinds
including, without limitation, federal and state income taxes, franchise taxes,
payroll taxes, provider taxes (to the extent necessary to participate in and
receive maximum funding pursuant to Reimbursement Contracts), Taxes (as defined
in the Mortgage), all required withholding of income taxes of employees, all
 

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required old age and unemployment contributions, and all required payments to
employee benefit plans, and pay the same when they become due.
 
4.5  Insurance. Maintain, at its expense, the following insurance coverages and
policies with respect to the Mortgaged Property and the Facility, which
coverages and policies must be acceptable to Lender’s insurance consultant in
its sole discretion:
 
(a)  Comprehensive “all risk” or “special” cause of loss insurance, including
coverage for windstorms and hail, in an amount equal to 100% of the full
replacement cost of the Facility, which replacement cost shall be determined by
the “Insurable Value” or “Cost Approach to Value” reflected in the most recent
Lender approved appraisal for the Facility, without deduction for depreciation.
Such insurance shall also include (i) agreed insurance amount endorsement
waiving all co-insurance provisions, and (ii) an “Ordinance or Law Coverage”
endorsement if the Facility or the use thereof shall constitute a legal
non-conforming structure or use.
 
(b)  Commercial general liability insurance against claims for sexual harassment
abuse of residents and/or patients, personal injury, bodily injury, death or
property damage, in or about the Facility to be on a so-called “occurrence”
basis for at least $1,000,000.00 per occurrence and $3,000,000.00 in the
aggregate with a $10,000,000.00 umbrella coverage.
 
(c)  Professional liability insurance against claims for personal injury, bodily
injury or death, in or about the Facility to be on a so-called “occurrence”
basis for at least $1,000,000.00 per occurrence and $5,000,000.00 in the
aggregate.
 
(d)  Business interruption income insurance for the Facility in an amount equal
to 100% of the net income plus carrying costs and extraordinary expenses of the
Facility for a period of eighteen (18) months as projected by Lender, containing
a 180-day extended period of indemnity endorsement.
 
(e)  Flood Hazard insurance if any portion of the Improvements is located in a
“flood zone area,” as identified in the Federal Register by the Federal
Emergency Management Agency as a 100-year flood zone or “special flood hazard
area” and in which flood insurance is available. In lieu thereof, Lender will
accept proof, satisfactory to it in its sole discretion, that the Improvements
are not within the boundaries of a designated area.
 
(f)  Workers’ compensation insurance, if applicable and required by state law,
subject to applicable state statutory limits, and employer’s liability insurance
with a limit of $1,000,000.00 per accident and per disease per employee with
respect to the Facility.
 
(g)  Comprehensive boiler and machinery insurance, including property damage
coverage and time element coverage in an amount equal to 100% of the full
replacement cost, without deduction for depreciation, of the Facility housing
the machinery, if steam boilers, pipes, turbines, engines or any other pressure
vessels are in operation with respect to the Facility. Such insurance coverage
shall include a “joint loss” clause if such coverage is provided by an insurance
carrier other than that which provides the comprehensive “all risk” insurance
described above.
 
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(h)  During the period of any construction and/or renovation of capital
improvements with respect to the Facility or any new construction at the
Facility, builder’s risk insurance for any improvements under construction
and/or renovation, including, without limitation, costs of demolition and
increased cost of construction or renovation, in an amount equal the amount of
the general contract plus the value of any existing purchase money financing for
improvements and materials stored on or off the Property, including “soft cost”
coverage.
 
(i)  If the Facility is located in a seismically active area or an area prone to
geologic instability and mine subsidence, Lender may require an inspection by a
qualified structural or geological engineer satisfactory to Lender, and at
Borrower’s expense. The Facility must be structurally and geologically sound and
capable of withstanding normal seismic activity or geological movement. Lender
reserves the right to require earthquake insurance or Maximum Probable Loss
insurance on a case by case basis in amounts determined by Lender.
 
(j)  Such other insurance coverages as may be deemed necessary at any time
during the term of the Loan and as shall be provided within such time periods as
Lender may determine, in each case, in its commercially reasonable discretion.
 
All insurance policies shall have a term of not less than one year and shall be
in the form and amount and with deductibles as, from time to time, shall be
acceptable to Lender in its sole discretion. All such policies shall provide for
loss payable solely to Lender and shall contain a standard “non-contributory
mortgagee” endorsement or its equivalent relating, among other things, to
recovery by Lender notwithstanding the negligent or willful acts or omissions of
Borrower and notwithstanding (i) occupancy or use of the Facility for purposes
more hazardous than those permitted by the terms of such policy, (ii) any
foreclosure or other action taken by Lender pursuant to the Mortgage upon the
occurrence of an Event of Default thereunder, or (iii) any change in title or
ownership of the Facility.
 
All insurance policies must be written by an admitted carrier licensed in the
State in which the Facility is located and such insurance carrier must have a
long-term senior debt rating of at least “A” by Standard and Poor’s Rating
Service; provided, that if the initial principal balance of the Loan is in
excess of $25,000,000.00, such insurance carrier must have a long-term senior
debt rating of at least “AA” by Standard & Poor’s Rating Service.
 
All liability insurance policies (including, but not limited to, general
liability, professional liability and any applicable blanket and/or umbrella
policies) must name Capmark Bank and its successors and/or assigns” as
additional insureds, and all property insurance policies must name Capmark Bank
and its successors and/or assigns” as the named mortgage holder entitled to all
insurance proceeds. Lender shall have the right, without Borrower’s consent, by
notice to the insurance company, to change the additional insured and named
mortgagee endorsements in connection with any sale of the Loan. Notwithstanding
anything contained herein, Borrower shall be entitled to all insurance proceeds
covered by and disbursed under the above-referenced comprehensive all risk
insurance policy provided such proceeds do not exceed $25,000.00 per occurrence.
 
All insurance policies for the above-required insurance must provide for thirty
(30) days prior written notice of cancellation to Lender.
 

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Policies or binders, together with evidence of the above required insurance on
ACORD Form 27 or its equivalent, must be submitted to Lender prior to setting
the interest rate on the Loan.
 
With respect to insurance policies which require payment of premiums annually,
not less than thirty (30) days prior to the expiration dates of the insurance
policies obtained pursuant to this Agreement, Borrower shall pay such amount,
except to the extent Lender is escrowing sums therefor pursuant to the Loan
Documents. Not less than thirty (30) days prior to the expiration dates of the
insurance policies obtained pursuant to this Agreement, originals or certified
copies of renewals of such policies (or certificates evidencing such renewals)
bearing notations evidencing the payment of premiums or accompanied by other
evidence satisfactory to Lender of such payment, which premiums shall not be
paid by Borrower through or by any financing arrangement, shall be delivered by
Borrower to Lender at the address set forth in Section 8.7 hereof. Borrower
shall not carry separate insurance, concurrent in kind or form or contributing
in the event of loss, with any insurance required under this Section 4.5. If the
limits of any policy required hereunder are reduced or eliminated due to a
covered loss, Borrower shall pay the additional premium, if any, in order to
have the original limits of insurance reinstated, or Borrower shall purchase new
insurance in the same type and amount that existed immediately prior to the
loss.
 
If Borrower fails to maintain and deliver to Lender the original policies or
certificates of insurance required by this Agreement, Lender may, at its option,
procure such insurance and Borrower shall pay or, as the case may be, reimburse
Lender for, all premiums thereon promptly, upon demand by Lender, with interest
thereon at the Default Rate from the date paid by Lender to the date of
repayment and such sum shall constitute a part of the Loan Obligations.
 
The insurance required by this Agreement may, at the option of Borrower, be
effected by blanket and/or umbrella policies issued to Borrower or to an
Affiliate of Borrower covering the Facility and the properties of such
Affiliate; provided that, in each case, the policies otherwise comply with the
provisions of this Agreement and allocate to the Facility, from time to time,
the coverage specified by this Agreement, without possibility of reduction or
coinsurance by reason of, or damage to, any other property (real or personal)
named therein. If the insurance required by this Agreement shall be effected by
any such blanket or umbrella policies, Borrower shall furnish to Lender original
policies or certified copies thereof, with schedules attached thereto showing
the amount of the insurance provided under such policies which is applicable to
the Facility.
 
Neither Lender nor its agents or employees shall be liable for any loss or
damage insured by the insurance policies required to be maintained under this
Agreement; it being understood that (a) Borrower shall look solely to its
insurance company for the recovery of such loss or damage, (b) such insurance
company shall have no rights of subrogation against Lender, its agents or
employees, and (c) Borrower shall use its best efforts to procure from such
insurance company a waiver of subrogation rights against Lender. If, however,
such insurance policies do not provide for a waiver of subrogation rights
against Lender (whether because such a waiver is unavailable or otherwise), then
Borrower hereby agrees, to the extent permitted by law and to the extent not
prohibited by such insurance policies, to waive its rights of recovery, if any,
against Lender, its agents and employees, whether resulting from any damage to
the Facility, any
 

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liability claim in connection with the Facility or otherwise. If any such
insurance policy shall prohibit Borrower from waiving such claims, then Borrower
must obtain from such insurance company a waiver of subrogation rights against
Lender.
 
Borrower appoints Lender as Borrower’s attorney-in-fact, which appointment shall
be deemed irrevocable and coupled with an interest, to cause the issuance of an
endorsement of any insurance policy to bring Borrower into compliance herewith
and, as limited above, at Lender’s sole option, to make any claim for, receive
payment for, and execute and endorse any documents, checks or other instruments
in payment for loss, theft, or damage covered under any such insurance policy;
provided, however, that in no event will Lender be liable for failure to collect
any amounts payable under any insurance policy.
 
4.6  Proceeds of Insurance or Condemnation. If, after damage to or destruction
of or condemnation of the Mortgaged Property (or any part thereof), the net
Proceeds of insurance or condemnation (after payment of Lender’s reasonable
costs and expenses in connection with the administration thereof) are:
 
(a)  less than Two Hundred Fifty Thousand and 00/l00 Dollars ($250,000.00),
Lender shall deliver such proceeds to Borrower to be applied within thirty (30)
days thereafter to the repair, restoration and replacement by Borrower of the
Improvements, Equipment and Inventory damaged, destroyed or taken,
 
or
 
(b)  Two Hundred Fifty Thousand and 00/l00 Dollars ($250,000.00) or more and
Lender agrees, at its option, to make such net Proceeds available to Borrower,
Lender shall make such net Proceeds available to Borrower on the following
terms:
 
(i)  The aggregate amount of all such Proceeds shall not exceed the aggregate
amount of all such Loan Obligations;
 
(ii)  At the time of such loss or damage and at all times thereafter while
Lender is holding any portion of such Proceeds, there shall exist no Default or
Event of Default;
 
(iii)  The Improvements, Equipment, and Inventory to which loss or damage has
resulted shall be capable of being restored to its preexisting condition and
utility in all material respects with a value equal to or greater than that
which existed prior to such loss or damage and such restoration shall be capable
of being completed prior to the earlier to occur of (i) the expiration of
business interruption insurance as determined by an independent inspector or
(ii) the Maturity Date;
 
(iv)  Within thirty (30) days from the date of such loss or damage Borrower
shall have given Lender a written notice electing to have the Proceeds applied
for such purpose;
 
(v)  Within sixty (60) days following the date of notice under the preceding
subparagraph (iv) and prior to any Proceeds being disbursed to Borrower,
Borrower shall have provided to Lender all of the following:
 
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(A)  complete plans and specifications for restoration, repair and replacement
of the Improvements, Equipment and Inventory damaged to the condition, utility
and value required by (iii) above,
 
(B)  if loss or damage exceeds Fifty Thousand Dollars ($50,000), fixed-price or
guaranteed maximum cost bonded construction contracts for completion of the
repair and restoration work in accordance with such plans and specifications,
 
(C)  builder’s risk insurance for the full cost of construction with Lender
named under a standard mortgagee loss-payable clause
 
(D)  such additional funds as in Lender’s reasonable opinion are necessary to
complete such repair, restoration and replacement, and
 
(E)  copies of all permits and licenses necessary to complete the work in
accordance with the plans and specifications;
 
(vi)  Lender may, at Borrower’s expense, retain an independent inspector to
review and approve plans and specifications and completed construction and to
approve all requests for disbursement, which approvals shall be conditions
precedent to release of Proceeds as work progresses;
 
(vii)  No portion of such Proceeds shall be made available by Lender for
architectural reviews or for any other purposes which are not directly
attributable to the cost of repairing, restoring or replacing the Improvements,
Equipment and Inventory to which a loss or damage has occurred unless the same
are covered by such insurance;
 
(viii)  Borrower shall diligently pursue such work and shall complete such work
prior to the earlier to occur of the expiration of business interruption
insurance or the Maturity Date;
 
(ix)  Each disbursement by Lender of such Proceeds and deposits shall be funded
subject to conditions and in accordance with disbursement procedures which a
commercial construction lender would typically establish in the exercise of
sound banking practices and shall be made only upon receipt of disbursement
requests on an AIA G702/703 form (or similar form approved by Lender) signed and
certified by Borrower and, if required by Lender, its architect and general
contractor with appropriate invoices and lien waivers as required by Lender; and
 
(x)  Lender shall have a first lien on and security interest in all building
materials and completed repair and restoration work and in all fixtures and
equipment acquired with such Proceeds, and Borrower shall execute and deliver
such mortgages, deeds of trust, security agreements, financing statements and
other instruments as Lender shall request to create, evidence, or perfect such
lien and security interest.
 
In the event and to the extent that such Proceeds are not required to be used
for the repair, restoration and replacement of the Improvements, Equipment and
Inventory to which a loss or damage has occurred, or, if the conditions set
forth herein for such application are otherwise not
 

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satisfied, then Lender shall be entitled without notice to or consent from
Borrower to apply such Proceeds, or the balance thereof, at Lender’s option
either (a) to the full or partial payment or prepayment of the Loan Obligations
(without premium) in the manner aforesaid or (b) to the repair, restoration
and/or replacement of all or any part of such Improvements, Equipment and
Inventory to which a loss or damage has occurred. Any excess Proceeds after such
application by Lender shall be paid to Borrower.
 
4.7  Financial and Other Information. Provide Lender, and cause Guarantor and/or
Manager to provide to Lender, at its address set forth in Section 8.7 and at
Capmark Bank, 2801 Highway 280 South, Suite 305, Birmingham, Alabama 35223, the
following financial statements and information on a continuing basis during the
term of the Loan:
 
(a)  Within one hundred twenty (120) days after the end of each fiscal year of
Borrower, unaudited financial statements prepared in accordance with GAAP by a
nationally recognized accounting firm or independent certified public accounting
firm acceptable to the Lender, which statements shall include a balance sheet
and a statement of income and expenses for the year then ended.
 
(b)  Within one hundred twenty (120) days after the end of each fiscal year of
Guarantor, audited financial statements prepared in accordance with GAAP by a
nationally recognized accounting firm or independent certified public accounting
firm acceptable to the Lender, which statements shall include a balance sheet
and a statement of income and expenses for the year then ended. In lieu of its
obligations hereunder, Guarantor may submit to Lender, upon its filing thereof,
a copy of its Form 10-K as filed with the United States Securities and Exchange
Commission.
 
(c)  Within forty-five (45) days after the end of each of the first three (3)
fiscal quarters, and within one hundred-twenty (120) days after the end of the
fourth fiscal quarter of each Facility, unaudited interim financial statements
of the operations of each Facility, certified as true and correct in all
material respects by a financial officer of Borrower, prepared in accordance
with GAAP, which statements shall include a balance sheet, statement of income
and expenses and occupancy information for the quarter then ended. Such
statements of the Facility shall be accompanied by the Summary of Financial
Statements and Census Data attached hereto as Exhibit “D”.
 
(d)  Within sixty (60) days after the end of each of the first three (3) fiscal
quarters of Guarantor, financial statements of Guarantor, including a balance
sheet and a statement of income and expenses for the quarter then ended, which
shall be satisfied by providing a copy of Form 8-K as filed by Guarantor with
the United States Securities and Exchange Commission.
 
(e)  If requested by Lender, within thirty (30) days after the filing deadline,
as may be extended from time to time, copies of all federal, state and local tax
returns of Borrower and Guarantor, together with all supporting documentation
and required schedules.
 
(f)  If and to the extent applicable, within twenty (20) days after filing or
receipt, all Medicaid cost reports and any amendments thereto filed with respect
to the Facility and all responses, audit reports, or other inquiries with
respect to such cost reports.
 
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(g)  If and to the extent applicable, within twenty (20) days after receipt,
copies of all licensure and certification survey reports and statements of
deficiencies (with plans of correction attached thereto).
 
(h)  If and to the extent applicable, within ten (10) days after receipt, a copy
of the “Medicaid Rate Calculation Worksheet” (or the equivalent thereof) from
the applicable agency.
 
(i)  If and to the extent applicable, within ten (10) days of receipt, a
statement of the number of resident days for which the Facility has received the
Medicare default rate for any applicable period. For purposes herein, “default
rate” shall have the meaning ascribed to it in that certain applicable Medicare
rate notification letter prepared in connection with any review or survey of the
Facility.
 
(j)  Within three (3) days after receipt, any and all notices (regardless of
form) from any and all licensing and/or certifying agencies, including but not
limited to, that the Facility’s license is being downgraded to a substandard
category, revoked or suspended, or that action is pending or being considered to
downgrade to a substandard category, revoke or suspend the Facility’s license or
certification.
 
(k)  If requested by Lender, evidence of payment by Borrower or Manager of any
applicable provider bed taxes or similar taxes.
 
(l)  If requested by Lender, within forty-five (45) days after the end of each
June and December, and more frequently if requested by Lender, an aged accounts
receivable report for each Facility in sufficient detail to show amounts due
from each class of resident-mix, if applicable (i.e., private, Medicare,
Medicaid and V.A.), by the account age classifications of 30 days, 60 days, 90
days, 120 days, and over 120 days.
 
Lender reserves the right to require that the annual and/or quarterly financial
statements of Borrower and Guarantor be audited and prepared by a nationally
recognized accounting firm or independent certified public accounting firm
acceptable to Lender, at their respective sole cost and expense, if (i) an Event
of Default exists, (ii) if required by internal policy or by any investor in any
securities backed in whole or in part by the Loan or any rating agency rating
such securities, or (iii) if Lender has reasonable grounds to believe that the
unaudited financial statements do not accurately represent the financial
condition of Borrower or Guarantor, as the case may be.
 
Lender further reserves the right to require such other financial information of
Borrower, Guarantor, Manager and/or each Facility, at such other times
(including monthly or more frequently) as it shall deem necessary. All financial
statements must be in the form and detail as Lender shall from time to time
request.
 
4.8  Compliance Certificate. At the time of furnishing the quarterly operating
statements required under Section 4.7 herein, furnish to Lender a compliance
certificate in the form attached hereto as Exhibit “E” executed by a financial
officer of Borrower.
 
4.9  Books and Records. Keep and maintain at all times at the Facility or
Manager’s offices, and upon Lender’s request make available at the Facility,
complete and accurate books
 

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of account and records (including copies of supporting bills and invoices)
adequate to reflect correctly the results of the operation of the Facility, and
copies of all written contracts, leases (if any), and other instruments which
affect the Mortgaged Property, which books, records, contracts, leases (if any)
and other instruments shall be subject to examination and inspection at any
reasonable time by Lender (upon reasonable advance notice, which for such
purposes only may be given orally, except in the case of an emergency or
following an Event of Default, in which case no advance notice shall be
required); provided, however, that if an Event of Default has occurred and is
continuing, Borrower shall deliver to Lender upon written demand all books,
records, contracts, leases (if any) and other instruments relating to the
Facility or its operation and Borrower authorizes Lender to obtain a credit
report on Borrower at any time.
 
4.10  Payment of Indebtedness. Duly and punctually pay or cause to be paid all
other Indebtedness now owing or hereafter incurred by Borrower in accordance
with the terms of such Indebtedness, except such Indebtedness owing to those
other than Lender which is being contested in good faith and with respect to
which any execution against properties of Borrower has been effectively stayed
and for which reserves and collateral for the payment and security thereof have
been established in sufficient amounts as determined by Lender in its sole
commercially reasonable discretion.
 
4.11  Records of Accounts. Maintain all records, including records pertaining to
the Accounts of Borrower, at the principal place of business of Borrower as set
forth in this Agreement.
 
4.12  Conduct of Business. Conduct, or cause Manager to conduct, the operation
of the Facility at all times in a manner consistent with the level of operation
of the Facility as of the date hereof, including without limitation, the
following:
 
(a)  to maintain the standard of care for the residents of the Facility at all
times at a level necessary to ensure quality care for the residents of the
Facility in accordance with customary and prudent industry standards;
 
(b)  to operate the Facility in a prudent manner and in compliance with
applicable laws and regulations relating thereto and cause all Permits,
Reimbursement Contracts (if any), and any other agreements necessary for the use
and operation of the Facility or, if applicable, as may be necessary for
participation in the Medicaid, Medicare, or other applicable reimbursement
programs (if any) to remain in effect without reduction in the number of
licensed units authorized for use in the Medicaid, Medicare, or other applicable
reimbursement programs;
 
(c)  to maintain sufficient Inventory and Equipment of types and quantities at
the Facility to enable Borrower to perform operations of the Facility
adequately;
 
(d)  to keep all Improvements and Equipment located on or used or useful in
connection with the Facility in good repair, working order and condition,
reasonable wear and tear excepted, and from time to time make all needed and
proper repairs, renewals, replacements, additions, and improvements thereto to
keep the same in good operating condition;
 
(e)  to maintain sufficient cash in the operating accounts of the Facility in
order to satisfy the working capital needs of the Facility; and
 
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(f)  to keep all required Permits current and in full force and effect.
 
4.13  Periodic Surveys. Furnish or cause Manager to furnish to Lender, within
twenty (20) days of receipt, a copy of any Medicare, Medicaid, or other
licensing agency survey or report and any statement of deficiencies and/or any
other report indicating that any action is pending or being considered to
downgrade the Facility to a substandard category, and within the time period
required by the particular agency for furnishing a plan of correction also
furnish or cause to be furnished to Lender a copy of the plan of correction
generated from such survey or report for the Facility, and correct or cause to
be corrected any deficiency, the curing of which is a condition of continued
licensure or for full participation in Medicaid, Medicare or other reimbursement
program pursuant to any Reimbursement Contract for existing residents or for new
residents to be admitted with Medicaid or Medicare coverage, by the date
required for cure by such agency (plus extensions granted by such agency).
 
4.14  Debt Service Coverage Requirements.
 
(a)  Maintain (commencing with the closing of the Loan) and within forty-five
(45) days after the end of each fiscal quarter of Borrower, provide evidence to
Lender of the achievement of, the following Debt Service Coverage Ratios until
the Loans are paid in full:
 
(i)  a Debt Service Coverage Ratio, after deduction of Actual Management Fees,
of not less than 1.10 to 1.0;
 
(ii)  a Debt Service Coverage Ratio after deduction of Assumed Management Fees,
of not less than 1.15 to 1.0 for the trailing three (3) months ending June 30,
2008;
 
(iii)  a Debt Service Coverage Ratio after deduction of Assumed Management Fees,
of not less than 1.20 to 1.0 for the trailing three (3) months ending September
30, 2008; and
 
(iv)  a Debt Service Coverage Ratio after deduction of Assumed Management Fees
of not less than 1.25 to 1.0 for all remaining quarters during the term of the
Loan commencing with the quarter ending on December 31, 2008, and continuing
thereafter until the Loans are paid in full.
 
If Borrower fails to achieve or provide evidence of achievement of the Debt
Service Coverage Ratio, Borrower may deposit with Lender, at Borrower’s option
within fifteen (15) days of such failure, additional cash or other liquid
collateral in an amount which, when added to the first number of the debt
service coverage calculation, would have resulted in the noncomplying debt
service requirement having been satisfied. If after Borrower has deposited such
additional cash or liquid collateral, Borrower again fails to achieve or provide
evidence of the achievement of the Debt Service Coverage Ratio requirements set
forth above and such failure continues for two (2) consecutive quarters,
Borrower may deposit with Lender, at Borrower’s option within fifteen (15) days
of such failure, additional cash or other liquid collateral (with credit for
amounts currently being held by Lender pursuant to the foregoing sentence), in
an amount which, if the same had been applied on the first (1st) day of the
first quarter for which such noncompliance of the debt service coverage
requirement occurred to reduce the outstanding principal indebtedness
 

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of the Loan, would have resulted in the noncomplying debt service coverage
requirement having been satisfied. Any additional cash or liquid collateral
deposited by Borrower hereunder in order to achieve the required Debt Service
Coverage Ratio and cure any existing default with respect thereto will be held
by Lender in a standard custodial account and shall constitute additional
collateral for the Loan Obligations and an “Account” as defined in this
Agreement, and, upon the occurrence of an Event of Default, may be applied by
Lender, in such order and manner as Lender may elect, to the reduction of the
Loan Obligations. Borrower shall not be entitled to any interest earned on such
additional collateral. Provided that there is no outstanding Default or Event of
Default, such additional collateral which has not been applied to the Loan
Obligations will be released by Lender at such time as Borrower provides Lender
with evidence that the required debt service coverage requirements outlined
above have been achieved and maintained (without regard to any cash deposited
pursuant to this Section 4.14) for two (2) consecutive fiscal quarters.
 
4.15  Occupancy. Maintain or cause to be maintained at all times, a daily
average annual aggregate occupancy for the Facilities, as tested quarterly (on
the basis of a calendar year), commencing on June 30, 2007, of eighty percent
(80%) or more (based on the number of units available at the Facilities, with
the minimum number of units available at the Facilities remaining at or in
excess of the units stated in the defined term “Facilities”).
 
4.16  Capital Expenditures. Maintain, and/or cause Manager to maintain, Facility
in good condition and make minimum capital expenditures for each Facility in
each fiscal year, in an amount equal to the $300 per unit (or the appropriate
prorated amount for any partial fiscal year), (which capital expenditures may
include ordinary repairs and routine maintenance), commencing the first year of
the Loan term and continuing throughout the Loan term, and, within forty-five
(45) days after the end of each fiscal year, provide evidence thereof
satisfactory to Lender. In the event that Borrower shall fail to meet such
requirement or to provide such evidence, Borrower shall, upon Lender’s written
request, immediately establish and maintain a capital expenditures reserve fund
with Lender equal to the difference between the required amount per unit and the
amount per unit actually spent by Borrower. Borrower grants to Lender a lien on
and a right of setoff against all moneys in the capital expenditures reserve
fund, and Borrower shall not permit any other Lien to exist upon such fund.
Moneys on deposit in such capital expenditures reserve fund will be disbursed to
Borrower monthly upon Lender’s receipt of satisfactory evidence that Borrower
has caused to be made the required capital expenditures. Upon Borrower’s or
Manager’s failure to adequately maintain the Facility in good condition, Lender
may, but shall not be obligated to, make such capital expenditures and may apply
the moneys in the capital expenditures reserve fund for such purpose. To the
extent there are insufficient moneys in such capital expenditures reserve fund
for such purposes, all funds advanced by Lender to make such capital
expenditures shall constitute a portion of the Loan Obligations, shall be
secured by the Mortgage and shall accrue interest at the Default Rate until
paid. Upon the occurrence of an Event of Default, Lender may apply any moneys in
the capital expenditures reserve fund to the Loan Obligations, in such order and
manner as Lender may elect. For any partial fiscal year during which the Loan is
outstanding, the required expenditure amount shall be prorated by multiplying
the required amount per unit amount by a fraction, the numerator of which is the
number of days during such year for which all or part of the Loan is outstanding
and the denominator of which is the number of days in such year. During the term
of the Loan, Lender may, from time to time, engage a professional building
inspector to conduct
 

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an inspection of the Facility. If the inspector’s report indicates that repairs
or replacements are necessary over and above the $300 per unit requirement in
this Section 4.16, then Lender shall require a non-interest bearing repair
escrow fund to ensure completion of such necessary repairs or replacements. The
amount of any such repair escrow fund shall be one hundred twenty-five percent
(125%) of the estimated cost of repairs as determined by such inspector and
Lender. Lender also shall require an agreement satisfactory to Lender, in its
commercially reasonable discretion, which will provide for completion of the
repairs and the disbursement of the escrow funds. All commercially reasonable
fees and costs associated with the inspection, report and subsequent inspections
(if required) shall be paid by Borrower.
 
4.17  Management Agreement. Maintain the Management Agreement in full force and
effect and timely perform all of Borrower’s obligations thereunder and enforce
performance of all obligations of Manager thereunder and not permit the
termination, amendment or assignment of the Management Agreement unless the
prior written consent of Lender is first obtained, which consent may be in the
sole and absolute discretion of Lender. Borrower will enter into and cause
Manager to enter into the Subordination Agreement. Borrower will not enter into
any other management agreement without Lender’s prior written consent, which
consent may be in the sole and absolute discretion of Lender.
 
4.18  Updated Appraisals. For so long as the Loan remains outstanding, if any
Event of Default shall occur hereunder, or if, in Lender’s judgment, a material
depreciation in the value of the Land and/or the Improvements shall have
occurred, then in any such event, Lender, may cause the Land and Improvements to
be appraised by an appraiser selected by Lender, and in accordance with Lender’s
appraisal guidelines and procedures then in effect, and Borrower agrees to
cooperate in all respects with such appraisals and furnish to the appraisers all
requested information regarding the Land and Improvements and the Facility.
Borrower agrees to pay all reasonable costs incurred by Lender in connection
with such appraisal which costs shall be secured by the Mortgage and shall
accrue interest at the Default Rate until paid.
 
4.19  Comply with Covenants and Laws. Comply, in all material respects, with all
applicable covenants and restrictions of record and all laws, ordinances, rules
and regulations and keep the Facility and the Land and Improvements in
compliance with all applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act and
regulations promulgated thereunder, and laws, ordinances, rules and regulations
relating to zoning, health, building codes, setback requirements, Medicaid and
Medicare laws and keep the Permits for the Facility in full force and effect.
 
4.20  Taxes and Other Charges. Subject to Borrower’s right to contest the same
as set forth in Section 9(c) of the Mortgage, pay all taxes, assessments,
charges, claims for labor, supplies, rent, and other obligations which, if
unpaid, might give rise to a Lien against real or personal property of the
Borrower, except Liens to the extent permitted by this Agreement.
 
4.21  Commitment Letter. Provide all items and pay all amounts required by the
Commitment Letter. If any term of the Commitment Letter shall conflict with the
terms of this Agreement, this Agreement shall govern and control. As to any
matter contained in the Commitment Letter, and as to which no mention is made in
this Agreement or the other Loan
 

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Documents, the Commitment Letter shall continue to be in effect and shall
survive the execution of this Agreement and all other Loan Documents.
 
4.22  Certificate. Upon Lender’s written request, furnish Lender with a
certificate stating that Borrower has complied with and is in compliance with
all terms, covenants and conditions of the Loan Documents to which Borrower is a
party and that there exists no Default or Event of Default or, if such is not
the case, that one or more specified events have occurred, and that the
representations and warranties contained herein are true and correct with the
same effect as though made on the date of such certificate.
 
4.23  Notice of Fees or Penalties. Immediately notify Lender, upon Borrower’s
knowledge thereof, of the assessment by any state or, if applicable, any
Medicare, Medicaid, health or licensing agency of any fines or penalties against
Borrower, Manager, or the Facility.
 
4.24  Loan Closing Certification. Immediately notify Lender in writing, in the
event any representation or warranty contained in that certain Loan Closing
Certification of even date herewith, executed by Borrower for the benefit of
Lender, becomes untrue or there shall have been any material adverse change in
any such representation or warranty.
 
4.25 Compliance with Anti-Terrorism, Embargo, Sanctions and Anti-Money
Laundering Laws. Borrower shall comply with all Requirements of Law relating to
money laundering, anti-terrorism, trade embargos and economic sanctions, now or
hereafter in effect. Upon Lender's request from time to time during the term of
the Loan, Borrower shall certify in writing to Lender that Borrower's
representations, warranties and obligations under Sections 3.28 and 3.30 and
this Section 4.25 remain true and correct and have not been breached. Borrower
shall immediately notify Lender in writing if any of such representations,
warranties or covenants are no longer true or have been breached or if Borrower
has a reasonable basis to believe that they may no longer be true or have been
breached. In connection with such an event, Borrower shall comply with all
Requirements of Law and directives of Governmental Authorities and, at Lender's
request, provide to Lender copies of all notices, reports and other
communications exchanged with, or received from, Governmental Authorities
relating to such an event. Borrower shall also reimburse Lender any expense
incurred by Lender in evaluating the effect of such an event on the Loan and
Lender's interest in the collateral for the Loan, in obtaining any necessary
license from Governmental Authorities as may be necessary for Lender to enforce
its rights under the Loan Documents, and in complying with all Requirements of
Law applicable to Lender as the result of the existence of such an event and for
any penalties or fines imposed upon Lender as a result thereof.
 
4.26 Compliance Program. Within ninety (90) days after the date hereof, adopt,
and thereafter at all times maintain, a compliance program consisted with the
guidelines published by Office of the Inspector General at 65 Fed. Reg. 14289
(March 16, 2000), as amended from time to time. Upon Lender’s request, Borrower
shall (a) provide a copy of its written compliance program, and (b) identify its
program compliance officer.
 

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ARTICLE V  
 
NEGATIVE COVENANTS OF BORROWER
 
Until the Loan Obligations have been paid in full, no Borrower shall:
 
5.1  Assignment of Licenses and Permits. Assign or transfer any of its interest
in any Permits or Reimbursement Contracts (including rights to payment
thereunder) pertaining to the Facility, or assign, transfer, or remove or permit
any other Person to assign, transfer, or remove any records pertaining to the
Facility including, without limitation, resident records, medical and clinical
records (except for removal of such resident records as directed by the
residents owning such records), without Lender’s prior written consent, which
consent may be granted or refused in Lender’s sole discretion.
 
5.2  No Liens; Exceptions. Create, incur, assume or suffer to exist any Lien
upon or with respect to the Facility, any of its properties, rights, income or
other assets relating thereto, including, without limitation, the Mortgaged
Property whether now owned or hereafter acquired, other than the following
permitted Liens (“Permitted Encumbrances”):
 
(a)  Liens at any time existing in favor of Lender;
 
(b)  Liens, if any, permitted pursuant to the Mortgage;
 
(c)  Inchoate Liens arising by operation of law for the purchase of labor,
services, materials, equipment or supplies, provided payment shall not be
delinquent and, if such Lien is a lien upon any of the Land or Improvements,
such Lien must be fully disclosed to Lender and bonded off and removed from the
Land and Improvements within thirty (30) days of its creation, in a manner
satisfactory to Lender;
 
(d)  Liens incurred in the ordinary course of business in connection with
workers’ compensation, unemployment insurance or other forms of governmental
insurance or benefits, or to secure performance of tenders, statutory
obligations, leases and contracts (other than for money borrowed or for credit
received with respect to property acquired) entered into in the ordinary course
of business as presently conducted or to secure obligations for surety or appeal
bonds; and
 
(e)  Liens for current year’s taxes, assessments or governmental charges or
levies provided payment thereof shall not be delinquent
 
5.3  Merger, Consolidation, etc. Except as otherwise provided in the Mortgage,
consummate any merger, consolidation or similar transaction, or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions), all or substantially all of its assets (whether now or hereafter
acquired), without the prior written consent of Lender, which consent may be
granted or refused in Lender’s sole discretion.
 

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5.4  Maintain Single Purpose Entity Status.
 
(a)  Engage in any business or activity other than the ownership, operation and
maintenance of the Mortgaged Property, and activities incidental thereto;
 
(b)  Acquire or own any material assets other than (i) the Mortgaged Property,
and (ii) such incidental machinery, equipment, fixtures and other personal
property as may be necessary for the operation of the Mortgaged Property;
 
(c)  Merge into or consolidate with any Person or dissolve, terminate or
liquidate in whole or in part, transfer or otherwise dispose of all or
substantially all of its assets (except as permitted in the Loan Documents) or
change its legal structure, without in each case Lender’s consent;
 
(d)  Without the prior written consent of Lender, amend, modify, terminate or
fail to comply with the provisions of its Operating Agreement or similar
organizational document, as same may be further amended or supplemented, if such
amendment, modification, termination or failure to comply would adversely affect
its status as a Single Purpose Entity or its ability to perform its obligations
hereunder, under the Note or any other document evidencing or securing the Loan;
 
(e)  Own any subsidiary or make any investment in, any Person without the
consent of Lender;
 
(f)  Commingle its funds or assets with assets of, or pledge its assets with or
for, any of its members, shareholders, Affiliates, principals or any other
Person;
 
(g)  Incur any debt, secured or unsecured, direct or contingent (including
guaranteeing any obligation), other than the Loan and trade payables incurred in
the ordinary course of business, payable within 90 days of the date incurred,
based on historical amounts;
 
(h)  Fail to maintain its records, books of account and bank accounts separate
and apart from those of its members, shareholders, principals and Affiliates,
the Affiliates of any of its members, shareholders, principals, and any other
Person;
 
(i)  Enter into any contract or agreement with any of its members, shareholders,
principals or Affiliates, or the Affiliates of any of its members, shareholders,
principals, except upon terms and conditions that are intrinsically fair and
substantially similar to those that would be available on an arms-length basis
with third parties (Lender hereby approves the terms of the Management Agreement
as it exists on the date hereof);
 
(j)  Seek its dissolution or winding up in whole, or in part;
 
(k)  Maintain its assets in such a manner that it will be costly or difficult to
segregate, ascertain or identify its individual assets from those of any of its
members, shareholders, principals and Affiliates, the Affiliates of any of its
shareholders, principals or any other Person;
 

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(l)  Hold itself out to be responsible for the debts of another Person or pay
another Person’s liabilities out of its own funds;
 
(m)  Make any loans or advances to any third party, including any of its
members, shareholders, principals or Affiliates, or the Affiliates of any of
its members, shareholders, principals;
 
(n)  Fail to have prepared and filed its own tax returns;
 
(o)  Fail either to hold itself out to the public as a legal Person separate and
distinct from any other Person or to conduct its business solely in its own
name, in order not (i) to mislead others as to the identity with which such
other party is transacting business, or (ii) to suggest that it is responsible
for the debts of any third party (including any of its members or Affiliates, or
any general partner, member, principal or Affiliate thereof); or
 
(p)  Fail to maintain adequate capital for the normal obligations reasonably
foreseeable in a business of its size and character and in light of its
contemplated business operations; or
 
(q)  Cause or permit the board of directors of its managing member to take any
action which, under the terms of any certificate of incorporation, bylaws or any
voting trust agreement with respect to any common stock, requires a vote of the
board of directors unless at the time of such action there shall be at least one
member of the board of directors who is an Independent Director.
 
5.5  Change of Business. Make any material change in the nature of its business
as it is being conducted as of the date hereof.
 
5.6  Changes in Accounting. Change its methods of accounting, unless such change
is permitted by GAAP, and provided such change does not have the effect of
curing or preventing what would otherwise be an Event of Default or Default had
such change not taken place.
 
5.7  ERISA.
 
(a)  Agree to, enter into or consummate any transaction which would render it
unable to confirm that (i) it is not an “employee benefit plan” as defined in
Section 3(32) of ERISA, which is subject to Title I of ERISA, or a “governmental
plan” within the meaning of Section 3(32) of ERISA; (ii) it is not subject to
state statutes regulating investments and fiduciary obligations with respect to
governmental plans; and (iii) less than twenty-five percent (25%) of each of its
outstanding class of equity interests are held by “benefit plan investors”
within the meaning of 29 C.F.R. § 2510.3-101(f)(2);
 
(b)  Engage in a non-exempt prohibited transaction described in Section 406 of
ERISA or Section 4975 of the Code, as such sections relate to Borrower, or in
any transaction that would cause any obligation or action taken or to be taken
hereunder (or the exercise by
 

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Lender of any of its rights under the Loan Documents) to be a non-exempt
prohibited transaction under ERISA.
 
5.8  Transactions with Affiliates. Enter into any transaction with a Person
which is an Affiliate of Borrower other than in the ordinary course of its
business and on fair and reasonable terms no less favorable to Borrower, than
those they could obtain in a comparable arms-length transaction with a Person
not an Affiliate.
 
5.9  Transfer of Ownership Interests. Except as otherwise allowable under the
Mortgage, permit a change in the percentage ownership interest of the Persons
owning the Borrower, unless the written consent of Lender is first obtained,
which consent may be granted or refused in Lender’s sole discretion.
 
5.10  Change of Use. Alter or change the use of the Facility or enter into any
management agreement for the Facility other than the Management Agreement or
enter into any operating lease for the Facility, unless Borrower first notifies
Lender and provides Lender a copy of the proposed lease agreement or management
agreement, obtains Lender’s written consent thereto, which consent may be
withheld in Lender’s sole discretion, and obtains and provides Lender with a
subordination agreement in form satisfactory to Lender, as determined by Lender
in its sole discretion, from such manager or lessee subordinating to all rights
of Lender.
 
5.11  Place of Business. Change its chief executive office or its principal
place of business without first giving Lender at least thirty (30) days prior
written notice thereof and promptly providing Lender such information and
amendatory financing statements as Lender may request in connection therewith.
 
5.12  Acquisitions. Directly or indirectly, purchase, lease, manage, own,
operate, or otherwise acquire any property or other assets (or any interest
therein) which are not used in connection with the operation of the Facility.
 
5.13  Dividends, Distributions and Redemptions. Except as hereinafter provided
or as otherwise consented to by Lender in writing, declare or pay any
distributions to its shareholders, members or partners, as applicable, or
purchase, redeem, retire, or otherwise acquire for value, any ownership
interests in Borrower now or hereafter outstanding, return any capital to its
shareholders, members or partners, as applicable, or make any distribution of
assets to its shareholders, members, or partners, as applicable.
 
ARTICLE VI  
 
ENVIRONMENTAL HAZARDS
 
6.1  Prohibited Activities and Conditions. Except for matters covered by a
written program of operations and maintenance approved in writing by Lender (an
“O&M Program”) or matters described in Section 6.2, Borrower shall not cause or
permit to exist any of the following:
 
(a)  The presence, use, generation, release, treatment, processing, storage
(including storage in above ground and underground storage tanks), handling, or
disposal of any
 

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Hazardous Materials in, on or under the Land, any Improvements, or any other
property of Borrower that is adjacent to the Land in violation of applicable
Hazardous Materials Laws;
 
(b)  The transportation of any Hazardous Materials to, from, or across the Land;
 
(c)  Any occurrence or condition on the Land or in the Improvements or any other
property of Borrower that is adjacent to the Land, which occurrence or condition
is or may be in violation of Hazardous Materials Laws;
 
(d)  Any violation of or noncompliance with the terms of any Environmental
Permit with respect to the Land, the Improvements or any property of Borrower
that is adjacent to the Land; or
 
(e)  Any Lien (whether or not such Lien has priority over the Lien created by
the Mortgage) upon the Land or any Improvements imposed pursuant to any
Hazardous Materials Laws.
 
The matters described in clauses (a) through (e) above are referred to
collectively in this Article VI as “Prohibited Activities and Conditions” and
individually as a “Prohibited Activity and Condition.”
 
6.2  Exclusions. Notwithstanding any other provision of Article VI to the
contrary, “Prohibited Activities and Conditions” shall not include the safe and
lawful use and storage of quantities of (a) pre-packaged supplies, medical
waste, cleaning materials and petroleum products customarily used in the
operation and maintenance of comparable facilities, (b) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by occupants of the Facility, and (c) petroleum products
used in the operation and maintenance of motor vehicles from time to time
located on the Land’s parking areas, so long as all of the foregoing are used,
stored, handled, transported and disposed of in compliance with Hazardous
Materials Laws.
 
6.3  Preventive Action. Borrower shall take all appropriate steps (including the
inclusion of appropriate provisions in any Leases approved by Lender which are
executed after the date of this Agreement) to prevent its employees, agents,
contractors, tenants and occupants of the Facility from causing or permitting
any Prohibited Activities and Conditions.
 
6.4  O & M Program Compliance. If an O&M Program has been established with
respect to Hazardous Materials, Borrower shall comply in a timely manner with,
and cause all employees, agents and contractors of Borrower and any other
Persons (excluding trespassers) present on the Land to comply with the O&M
Program. All costs of performance of Borrower’s obligations under any O&M
Program shall be paid by Borrower, and Lender’s out-of-pocket costs incurred in
connection with the monitoring and review of the O&M Program and Borrower’s
performance shall be paid by Borrower upon demand by Lender. Any such
out-of-pocket costs of Lender which Borrower fails to pay promptly shall become
an additional part of the Loan Obligations.
 
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6.5  Borrower’s Environmental Representations and Warranties. Borrower
represents and warrants to Lender that, except as previously disclosed by
Borrower to Lender in writing:
 
(a)  Borrower has not at any time caused or permitted any Prohibited Activities
and Conditions.
 
(b)  No Prohibited Activities and Conditions exist or have existed.
 
(c)  The Land and the Improvements do not now contain any underground storage
tanks, and, to the best of Borrower’s knowledge after reasonable and diligent
inquiry, the Land and the Improvements have not contained any underground
storage tanks in the past. If there is an underground storage tank located on
the Land or the Improvements which has been previously disclosed by Borrower to
Lender in writing, that tank complies with all requirements of Hazardous
Materials Laws.
 
(d)  Borrower has complied with all Hazardous Materials Laws, including all
requirements for notification regarding releases of Hazardous Materials,
relating to the Land. Without limiting the generality of the foregoing, Borrower
has obtained all Environmental Permits required for the operation of the Land
and the Improvements in accordance with Hazardous Materials Laws now in effect
and all such Environmental Permits are in full force and effect. During
Borrower’s ownership of the Land, and, to the best of Borrower’s knowledge after
reasonable and diligent inquiry, no event has occurred with respect to the Land
and/or Improvements that constitutes or, with the passing of time or the giving
of notice, would constitute, noncompliance with the terms of any Environmental
Permit.
 
(e)  There are no actions, suits, claims or proceedings pending or, to the best
of Borrower’s knowledge after reasonable and diligent inquiry, threatened that
involves the Land and/or the Improvements and allege, arise out of, or relate to
any Prohibited Activity and Condition.
 
(f)  Borrower has not received any written complaint, order, notice of violation
or other communication from any Governmental Authority with regard to air
emissions, water discharges, noise emissions or Hazardous Materials, or any
other environmental, health or safety matters affecting the Land, the
Improvements or any other property of Borrower that is adjacent to the Land. The
representations and warranties in this Article VI shall be continuing
representations and warranties that shall be deemed to be made by Borrower
throughout the term of the Loan evidenced by the Note and until all of the Loan
Obligations have been paid in full.
 
6.6  Notice of Certain Events. Borrower shall promptly notify Lender in writing
of any and all of the following that may occur:
 
(a)  Borrower’s discovery of any Prohibited Activity and Condition.
 
(b)  Borrower’s receipt of or knowledge of any complaint, order, notice of
violation or other communication from any Governmental Authority or other Person
with regard to present or future alleged Prohibited Activities and Conditions or
any other environmental,
 

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health or safety matters affecting the Land, the Improvements or any other
property of Borrower that is adjacent to the Land.
 
(c)  Any representation or warranty in this Article VI which becomes untrue at
any time after the date of this Agreement.
 
Any such notice given by Borrower shall not relieve Borrower of, or result in a
waiver of, any obligation under this Agreement, the Note, or any of the other
Loan Documents.
 
6.7  Costs of Inspection. Borrower shall pay promptly the costs of any
environmental inspections, tests or audits (“Environmental Inspections”)
required by Lender in connection with any foreclosure or deed in lieu of
foreclosure or, if required by Lender, as a condition of Lender’s consent to any
“Transfer” (as defined in the Mortgage), or required by Lender following a
commercially reasonable determination by Lender that Prohibited Activities and
Conditions may exist. Any such costs incurred by Lender (including the fees and
out-of-pocket costs of attorneys and technical consultants whether incurred in
connection with any judicial or administrative process or otherwise) which
Borrower fails to pay promptly shall become an additional part of the Loan
Obligations. The results of all Environmental Inspections made by Lender shall
at all times remain the property of Lender, and Lender shall have no obligation
to disclose or otherwise make available to Borrower or any other party such
results or any other information obtained by Lender in connection with its
Environmental Inspections. Lender hereby reserves the right, and Borrower hereby
expressly authorizes Lender, to make available to any party, including any
prospective bidder at a foreclosure sale of the Mortgaged Property, the results
of any Environmental Inspections made by Lender with respect to the Mortgaged
Property. Borrower consents to Lender notifying any party (either as part of a
notice of sale or otherwise) of the results of any of Lender’s Environmental
Inspections. Borrower acknowledges that Lender cannot control or otherwise
assure the truthfulness or accuracy of the results of any of its Environmental
Inspections and that the release of such results to prospective bidders at a
foreclosure sale of the Mortgaged Property may have a material and adverse
effect upon the amount which a party may bid at such sale. Borrower agrees that
Lender shall have no liability whatsoever as a result of delivering the results
of any of its Environmental Inspections to any third party, and Borrower hereby
releases and forever discharges Lender from any and all claims, damages, or
causes of action, arising out of, connected with or incidental to the results
of, the such delivery of any of Lender’s Environmental Inspections.
 
6.8  Remedial Work. If any investigation, site monitoring, containment,
clean-up, restoration or other remedial work (“Remedial Work”) is necessary to
bring Borrower into compliance with any Hazardous Materials Law or order of any
Governmental Authority that has or acquires jurisdiction over the Land, the
Improvements or the use, operation or improvement of the Land under any
Hazardous Materials Law, Borrower shall, by the earlier of (a) the applicable
deadline required by Hazardous Materials Law or (b) thirty (30) days after
notice from Lender demanding such action, begin performing the Remedial Work,
and thereafter diligently prosecute it to completion, and shall in any event
complete such work by the time required by applicable Hazardous Materials Law.
If Borrower fails to begin on a timely basis or diligently prosecute any
required Remedial Work, Lender may, at its option, cause the Remedial Work to be
completed, in which case Borrower shall reimburse Lender on demand for the cost
of doing so. Any reimbursement due from Borrower to Lender shall become part of
the Loan Obligations.
 
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6.9  Cooperation with Governmental Authorities. Borrower shall cooperate with
any inquiry by any Governmental Authority and shall comply with any governmental
or judicial order which arises from any alleged Prohibited Activity and
Condition.
 
6.10  Indemnity.
 
(a)  Borrower shall hold harmless, defend and indemnify (i) Lender, (ii) any
prior owner or holder of the Note, (iii) any Person who is or will have been
involved in the servicing of the Note, (iv) the officers, directors, partners,
agents, shareholders, employees and trustees of any of the foregoing, and (v)
the heirs, legal representatives, successors and assigns of each of the
foregoing (together, the “Indemnitees”) from and against all proceedings,
claims, damages, losses, expenses, penalties and costs (whether initiated or
sought by any Governmental Authority or private parties), including fees and out
of pocket expenses of attorneys and expert witnesses, investigatory fees, and
remediation costs, whether incurred in connection with any judicial or
administrative process or otherwise, arising directly or indirectly from any of
the following:
 
(i)  Any breach of any representation or warranty of Borrower in this Article
VI;
 
(ii)  Any failure by Borrower to perform any of its obligations under this
Article VI;
 
(iii)  The existence or alleged existence of any Prohibited Activity and
Condition;
 
(iv)  The presence or alleged presence of Hazardous Materials in, on, around or
under the Land, the Improvements or any property of Borrower that is adjacent to
the Land; or
 
(v)  The actual or alleged violation of any Hazardous Materials Law.
 
(b)  Counsel selected by Borrower to defend Indemnitees shall be subject to the
approval of those Indemnitees. Notwithstanding anything contained herein, any
Indemnitee may elect to defend any claim or legal or administrative proceeding
at Borrower’s expense. Nothing contained herein shall prevent an Indemnitee from
employing separate counsel in any such action at any time and participating in
the defense thereof at its own expense.
 
(c)  Borrower shall not, without the prior written consent of those Indemnitees
who are named as parties to a claim or legal or administrative proceeding (a
“Claim”) settle or compromise the Claim if the settlement (i) results in the
entry of any judgment that does not include as an unconditional term the
delivery by the claimant or plaintiff to Lender of a written release of those
Indemnitees, satisfactory in form and substance to Lender; or (ii) may
materially and adversely affect any Indemnitee, as determined by such Indemnitee
in its sole discretion.
 
(d)  The liability of Borrower to indemnify the Indemnitees shall not be limited
or impaired by any of the following, or by any failure of Borrower or any
guarantor to receive notice of or consideration for any of the following:
 
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(i)  Any amendment or modification of any Loan Document;
 
(ii)  Any extensions of time for performance required by any of the Loan
Documents;
 
(iii)  The accuracy or inaccuracy of any representations and warranties made by
Borrower under this Agreement or any other Loan Document;
 
(iv)  The release of Borrower or any other Person, by Lender or by operation of
law, from performance of any obligation under any of the Loan Documents;
 
(v)  The release or substitution in whole or in part of any security for the
Loan Obligations; or
 
(vi)  Lender’s failure to properly perfect any lien or security interest given
as security for the Loan Obligations; or
 
(vii)  Any provision in any of the Loan Documents limiting Lender’s recourse to
property securing the Loan or limiting the personal liability of Borrower or any
party for payment of all or any part of the Loan.
 
(e)  Borrower shall, at its own cost and expense, do all of the following:
 
(i)  Pay or satisfy any judgment or decree that may be entered against any
Indemnitee or Indemnitees in any legal or administrative proceeding incident to
any matters against which Indemnitees are entitled to be indemnified under this
Article VI;
 
(ii)  Reimburse Indemnitees for any expenses paid or incurred in connection with
any matters against which Indemnitees are entitled to be indemnified under this
Article VI; and
 
(iii)  Reimburse Indemnitees for any and all expenses, including fees and costs
of attorneys and expert witnesses, paid or incurred in connection with the
enforcement by Indemnitees of their rights under this Article VI, or in
monitoring and participating in any legal or administrative proceeding.
 
(f)  In any circumstances in which the indemnity under this Article VI applies,
Lender may employ its own legal counsel and consultants to prosecute, defend or
negotiate any claim or legal or administrative proceeding and Lender, with the
prior written consent of Borrower (which shall not be unreasonably withheld,
delayed or conditioned) may settle or compromise any action or legal or
administrative proceeding. Borrower shall reimburse Lender upon demand for all
costs and expenses incurred by Lender, including all costs of settlements
entered into in good faith, and the fees and out of pocket expenses of such
attorneys and consultants.
 
(g)  The provisions of this Article VI shall be in addition to any and all other
obligations and liabilities that Borrower may have under the applicable law or
under the other Loan Documents, and each Indemnitee shall be entitled to
indemnification under this Article VI
 

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without regard to whether Lender or that Indemnitee has exercised any rights
against the Land and/or the Improvements or any other security, pursued any
rights against any guarantor, or pursued any other rights available under the
Loan Documents or applicable law. If Borrower consists of more than one Person
or entity, the obligation of those Persons or entities to indemnify the
Indemnitees under this Article VI shall be joint and several. The obligations of
Borrower to indemnify the Indemnitees under this Article VI shall survive any
repayment or discharge of the Loan Obligations, any foreclosure proceeding, any
foreclosure sale, any delivery of any deed in lieu of foreclosure, and any
release of record of the lien of the Mortgage.
 
ARTICLE VII  
 
EVENTS OF DEFAULT AND REMEDIES
 
7.1  Events of Default. The occurrence of any one or more of the following shall
constitute an “Event of Default” hereunder:
 
(a)  The failure by Borrower to pay any installment of principal, interest, or
other payments required under any Note, any Mortgage or any other Loan Document
on the day such payment becomes due after the expiration of any applicable cure
period;
 
(b)  Any failure by Borrower to provide and maintain in full force and effect
the insurance coverage required by Section 4.5(a) - (j), inclusive, of this
Agreement;
 
(c)  The violation by Borrower of any covenant set forth in Article V hereof;
 
(d)  The failure by Borrower to deliver or cause to be delivered the financial
statements and information set forth in Section 4.7 of this Agreement within the
times required, and such failure is not cured within thirty (30) days following
Lender’s written notice to Borrower thereof;
 
(e)  The failure by Borrower or Guarantor to establish and maintain the capital
expenditures reserve fund in accordance with Section 4.16 of this Agreement;
 
(f)  The failure of Borrower properly and timely to perform or observe any
covenant or condition set forth in this Agreement (other than those specified in
this Section 7.1) or any of the other Loan Documents which failure is not cured
within any applicable cure period as set forth herein or in such other Loan
Document, or, if no cure period is specified therefor, is not cured within
thirty (30) days after notice to Borrower of such Default; provided, however,
that if such Default cannot be cured within such thirty (30) day period, such
cure period shall be extended for an additional sixty (60) days, as long as
Borrower is diligently and in good faith prosecuting said cure to completion;
 
(g)  The filing by Borrower, Guarantor or Manager of a voluntary petition, or
the adjudication of any of the aforesaid Persons, or the filing by any of the
aforesaid Persons of any petition or answer seeking or acquiescing in any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief for itself under any present or future federal, state or other
statute, law or regulation relating to bankruptcy, insolvency or other relief
for debtors, or if any of the aforesaid Persons should seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator for itself
or of all or any substantial part of its
 

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property or of any or all of the rents, revenues, issues, earnings, profits or
income thereof, or the mailing of any general assignment for the benefit of
creditors or the admission in writing by any of the aforesaid Persons of its
inability to pay its debts generally as they become due;
 
(h)  The entry by a court of competent jurisdiction of an order, judgment, or
decree approving a petition filed against Borrower, Guarantor or Manager which
petition seeks any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future federal,
state or other statute, law or regulation relating to bankruptcy, insolvency, or
other relief for debtors, which order, judgment or decree remains unvacated and
unstayed for an aggregate of sixty (60) days (whether or not consecutive) from
the date of entry thereof, or the appointment of any trustee, receiver or
liquidator of any of the aforesaid Persons or of all or any substantial part of
its properties or of any or all of the rents, revenues, issues, earnings,
profits or income thereof which appointment shall remain unvacated and unstayed
for an aggregate of sixty (60) days (whether or not consecutive);
 
(i)  Unless otherwise permitted hereunder or under any other Loan Documents, the
sale, transfer, lease, assignment, or other disposition, voluntarily or
involuntarily, of the Mortgaged Property, or any part thereof, except for
Permitted Encumbrances as described in Section 5.2 above, or any further
encumbrance of the Mortgaged Property (except for Permitted Encumbrances),
unless the prior written consent of Lender is obtained;
 
(j)  Any certificate, statement, representation, warranty or audit heretofore or
hereafter furnished by or on behalf of Borrower, Guarantor or Manager or any of
their respective officers, directors or trustees pursuant to or in connection
with this Agreement (including, without limitation, representations and
warranties contained herein or in any Loan Documents) or as an inducement to
Lender to make the Loan to Borrower, (i) proves to have been false in any
material respect at the time when the facts therein set forth were stated or
certified, or (ii) proves to have omitted any substantial contingent or
unliquidated liability or claim against Borrower, Guarantor or Manager or
(iii) on the date of execution of this Agreement there shall have been any
materially adverse change in any of the acts previously disclosed by any such
certificate, statement, representation, warranty or audit, which change shall
not have been disclosed to Lender in writing at or prior to the time of such
execution;
 
(k)  The failure of Borrower to correct or to cause Manager to correct, within
the time deadlines set by any applicable Medicare, Medicaid or licensing agency,
any deficiency which would result in the following actions by such agency with
respect to the Facility;
 
(i)  a termination of any Reimbursement Contract or any Permit; or
 
(ii)  a ban on new admissions generally or, if applicable, on admission of
patients otherwise qualifying for Medicare or Medicaid coverage;
 
(l)  The assessment against Borrower, Manager, or the Facility of any fines or
penalties by any state or any Medicare, Medicaid, health or licensing agency
having jurisdiction over such Persons or the Facility in excess of $150,000;
 
(m)  A final judgment is rendered by a court of law or equity against Borrower,
Guarantor or Manager in excess of $250,000.00, and the same remains undischarged
for a period
 

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of thirty (30) days, unless such judgment is either (i) fully covered by
collectible insurance and such insurer has within such period acknowledged such
coverage in writing, or (ii) although not fully covered by insurance,
enforcement of such judgment has been effectively stayed, such judgment is being
contested or appealed by appropriate proceedings and Borrower, Guarantor or
Manager as the case may be, has established reserves adequate for payment in the
event such Person is ultimately unsuccessful in such contest or appeal and
evidence thereof is provided to Lender; or
 
(n)  The occurrence of any material adverse change in the financial condition or
prospects of Borrower or Guarantor or Manager, or the existence of any other
condition which, in Lender’s reasonable determination, constitutes a material
impairment of any such Person’s ability to operate the Facility or of such
Person’s ability to perform their respective obligations under the Loan
Documents, which is not remedied within thirty (30) days after written notice.
 
Notwithstanding anything in this Section, all requirements of notice shall be
deemed eliminated if Lender is prevented from declaring an Event of Default by
bankruptcy or other applicable law. The cure period, if any, shall then run from
the occurrence of the event or condition of Default rather than from the date of
notice.
 
7.2  Remedies. Upon the occurrence of any one or more of the foregoing Events of
Default, Lender may, at its option:
 
(a)  Declare the entire unpaid principal of the Loan Obligations to be, and the
same shall thereupon become, immediately due and payable, without presentment,
protest or further demand or notice of any kind, all of which are hereby
expressly waived; and/or
 
(b)  Proceed to protect and enforce its rights by action at law (including,
without limitation, bringing suit to reduce any claim to judgment), suit in
equity and other appropriate proceedings including, without limitation, for
specific performance of any covenant or condition contained in this Agreement;
and/or
 
(c)  Exercise any and all rights and remedies afforded by the laws of the United
States, the states in which any of the Mortgaged Property is located or any
other appropriate jurisdiction as may be available for the collection of debts
and enforcement of covenants and conditions such as those contained in this
Agreement and the Loan Documents; and/or
 
(d)  Exercise the rights and remedies of setoff and/or banker’s lien against the
interest of Borrower in and to every account and other property of Borrower
which is in the possession of Lender or any Person who then owns a participating
interest in the Loan, to the extent of the full amount of the Loan; and/or
 
(e)  Exercise its rights and remedies pursuant to any other Loan Documents.
 
 
 
 
 
ARTICLE VIII  
 
MISCELLANEOUS
 
8.1  Waiver. No remedy conferred upon, or reserved to, Lender in this Agreement
or any of the other Loan Documents is intended to be exclusive of any other
remedy or remedies,
 

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and each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing in law or in equity.
Exercise of or omission to exercise any right of Lender shall not affect any
subsequent right of Lender to exercise the same. No course of dealing between
Borrower and Lender or any delay on Lender’s part in exercising any rights shall
operate as a waiver of any of Lender’s rights. No waiver of any Default under
this Agreement or any of the other Loan Documents shall extend to or shall
affect any subsequent or other, then existing, Default or shall impair any
rights, remedies or powers of Lender.
 
8.2  Costs and Expenses. Borrower will bear all taxes, fees and expenses
(including actual attorneys’ fees and expenses of counsel for Lender) in
connection with the Loan, the Note, the preparation of this Agreement and the
other Loan Documents (including any amendments hereafter made), and in
connection with any modifications thereto and the recording of any of the Loan
Documents. If, at any time, a Default occurs or Lender becomes a party to any
suit or proceeding in order to protect its interests or priority in any
collateral for any of the Loan Obligations or its rights under this Agreement or
any of the Loan Documents, or if Lender is made a party to any suit or
proceeding by virtue of the Loan, this Agreement or any Mortgaged Property and
as a result of any of the foregoing, Lender employs counsel to advise or provide
other representation with respect to this Agreement, or to collect the balance
of the Loan Obligations, or to take any action in or with respect to any suit or
proceeding relating to this Agreement, any of the other Loan Documents, any
Mortgaged Property, Borrower, Guarantor or Manager, or to protect, collect, or
liquidate any of the security for the Loan Obligations, or attempt to enforce
any security interest or lien granted to Lender by any of the Loan Documents,
then in any such events, all of the actual attorney’s fees arising from such
services, including attorneys’ fees for preparation of litigation and in any
appellate or bankruptcy proceedings, and any expenses, costs and charges
relating thereto shall constitute additional obligations of Borrower to Lender
payable on demand of Lender. Without limiting the foregoing, Borrower has
undertaken the obligation for payment of, and shall pay, all recording and
filing fees, revenue or documentary stamps or taxes, intangibles taxes, and
other taxes, expenses and charges payable in connection with this Agreement, any
of the Loan Documents, the Loan Obligations, or the filing of any financing
statements or other instruments required to effectuate the purposes of this
Agreement, and should Borrower fail to do so, Borrower agrees to reimburse
Lender for the amounts paid by Lender, together with penalties or interest, if
any, incurred by Lender as a result of underpayment or nonpayment. Such amounts
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall bear interest at the Default Rate (as defined in the Note)
from the date advanced until repaid.
 
8.3  Performance of Lender. At its option, upon Borrower’s failure to do so,
Lender may make any payment or do any act on Borrower’s behalf that Borrower or
others are required to do to remain in compliance with this Agreement or any of
the other Loan Documents, and Borrower agrees to reimburse Lender, on demand,
for any payment made or expense incurred by Lender pursuant to the foregoing
authorization, including, without limitation, attorneys’ fees, and until so
repaid any sums advanced by Lender shall constitute a portion of the Loan
Obligations, shall be secured by the Mortgage and shall bear interest at the
Default Rate (as defined in the Note) from the date advanced until repaid.
 
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8.4  Indemnification. Borrower shall, at its sole cost and expense, protect,
defend, indemnify and hold harmless the Indemnified Parties from and against any
and all claims, suits, liabilities (including, without limitation, strict
liabilities), actions, proceedings, obligations, debts, damages, losses, costs,
expenses, diminutions in value, fines, penalties, charges, fees, expenses,
judgments, awards, amounts paid in settlement, punitive damages, foreseeable and
unforeseeable consequential damages, of whatever kind or nature (including but
not limited to reasonable attorneys’ fees and other costs of defense) imposed
upon or incurred by or asserted against Lender by reason of (a) ownership of the
Note, the Mortgage, the Mortgaged Property or any interest therein or receipt of
any Rents, (b) any amendment to, or restructuring of, the Loan Obligations
and/or any of the Loan Documents, (c) any and all lawful action that may be
taken by Lender in connection with the enforcement of the provisions of the
Mortgage or the Note or any of the other Loan Documents, whether or not suit is
filed in connection with same, or in connection with Borrower, Guarantor,
Manager and/or any partner, joint venturer, member or shareholder thereof
becoming a party to a voluntary or involuntary federal or state bankruptcy,
insolvency or similar proceeding, (d) any accident, injury to or death of
persons or loss of or damage to property occurring in, on or about the Land, the
Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent
property or adjacent parking areas, streets or ways, (e) any use, nonuse or
condition in, on or about the Land, the Improvements or any part thereof or on
the adjoining sidewalks, curbs, adjacent property or adjacent parking areas,
streets or ways, (f) any failure on the part of Borrower, Guarantor or Manager
to perform or comply with any of the terms of this Agreement or any of the other
Loan Documents, (g) any claims by any broker, Person or entity claiming to have
participated in arranging the making of the Loan evidenced by the Note, (h) any
failure of the Land and/or Improvements to be in compliance with any applicable
laws, (i) performance of any labor or services or the furnishing of any
materials or other property with respect to the Land, the Improvements or any
part thereof, (j) the failure of any Person to file timely with the Internal
Revenue Service an accurate Form 1099-b, statement for recipients of proceeds
from real estate, broker and barter exchange transactions, which may be required
in connection with the Mortgage, or to supply a copy thereof in a timely fashion
to the recipient of the proceeds of the transaction in connection with which the
Loan is made, (k) any misrepresentation made to Lender in this Agreement or in
any of the other Loan Documents, (l) any tax on the making and/or recording of
the Mortgage, the Note or any of the other Loan Documents; (m) the violation of
any requirements of the Employee Retirement Income Security Act of 1974, as
amended, (n) any fines or penalties assessed or any corrective costs incurred by
Lender if the Facility or any part of the Land and/or Improvements is determined
to be in violation of any covenants, restrictions of record, or any applicable
laws, ordinances, rules or regulations, or (o) the enforcement by any of the
Indemnified Parties of the provisions of this Section 8.4. Any amounts payable
to Lender by reason of the application of this Section 8.4, shall become
immediately due and payable, and shall constitute a portion of the Loan
Obligations, shall be secured by the Mortgage and shall accrue interest at the
Default Rate (as defined in the Note). The obligations and liabilities of
Borrower under this Section 8.4 shall survive any termination, satisfaction,
assignment, entry of a judgment of foreclosure or exercise of a power of sale or
delivery of a deed in lieu of foreclosure of the Mortgage. For purposes of this
Section 8.4, the term “Indemnified Parties” means Lender and any Person who is
or will have been involved in the origination of the Loan, any Person who is or
will have been involved in the servicing of the Loan, any Person in whose name
the encumbrance created by the Mortgage is or will have been recorded, any
Person who may hold or acquire or will have held a
 

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full or partial interest in the Loan (including, without limitation, any
investor in any securities backed in whole or in part by the Loan) as well as
the respective directors, officers, shareholder, partners, members, employees,
agents, servants, representatives, contractors, subcontractors, affiliates,
subsidiaries, participants, successors and assigns of any and all of the
foregoing (including, without limitation, any other Person who holds or acquires
or will have held a participation or other full or partial interest in the Loan
or the Mortgaged Property, whether during the term of the Mortgage or as a part
of or following a foreclosure of the Loan and including, without limitation, any
successors by merger, consolidation or acquisition of all or a substantial
portion of Lender’s assets and business).
 
8.5  Headings. The headings of the Sections of this Agreement are for
convenience of reference only, are not to be considered a part hereof, and shall
not limit or otherwise affect any of the terms hereof.
 
8.6  Survival of Covenants. All covenants, agreements, representations and
warranties made herein and in certificates or reports delivered pursuant hereto
shall be deemed to have been material and relied on by Lender, notwithstanding
any investigation made by or on behalf of Lender, and shall survive the
execution and delivery to Lender of the Note and this Agreement.
 
8.7  Notices, etc. Any notice or other communication required or permitted to be
given by this Agreement or the other Loan Documents or by applicable law shall
be in writing and shall be deemed received (a) on the date delivered, if sent by
hand delivery (to the person or department if one is specified below) with
receipt acknowledged by the recipient thereof, (b) three (3) Business Days
following the date deposited in U.S. mail, certified or registered, with return
receipt requested, or (c) one (1) Business Day following the date deposited with
Federal Express or other national overnight carrier, and in each case addressed
as follows:
 
If to Borrower:
3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
Attention: Eric Mendelsohn,
Director of Real Estate and Business Legal Affairs

with a copy to:

David D. Buck
 
Riddell Williams P.S.
 
1001 Fourth Avenue Plaza, Ste. 4500
 
Seattle, WA 98154
 
If to Lender:
Capmark Bank
6955 Union Park Center, Suite 330
Midvale, Utah 84047
Attn: President

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with a copy to:
 
Kay K. Bains
Bradley Arant Rose & White LLP
One Federal Place
1819 5th Avenue North
Birmingham, AL 35203
Phone: 205-521-8220
Fax: 205-488-6220

Either party may change its address to another single address by notice given as
herein provided, except any change of address notice must be actually received
in order to be effective.
 
8.8  Benefits. All of the terms and provisions of this Agreement shall bind and
inure to the benefit of the parties hereto and their respective successors and
assigns. No Person other than Borrower or Lender shall be entitled to rely upon
this Agreement or be entitled to the benefits of this Agreement.
 
8.9  Participation. Borrower acknowledges that Lender may, at its option, sell
participation interests in the Loan or to other participating banks or Lender
may (but shall not be obligated to) assign its interest in the Loan to its
affiliates, or to other assignees (the “Assignee”) to be included as a pool of
properties to be financed in a proposed Real Estate Mortgage Investment Conduit
(REMIC). Borrower agrees with each present and future participant in the Loan or
Assignee of the Loan that if an Event of Default should occur, each present and
future participant or Assignee shall have all of the rights and remedies of
Lender with respect to any deposit due from Borrower. The execution by a
participant of a participation agreement with Lender, and the execution by
Borrower of this Agreement, regardless of the order of execution, shall evidence
an agreement between Borrower and said participant in accordance with the terms
of this Section. If the Loan is assigned to the Assignee, the Assignee will
engage an underwriter (the “Underwriter”), who will be responsible for the due
diligence, documentation, preparation and execution of certain documents
required in connection with the offering of interests in the REMIC. Borrower
agrees that Lender may, at its sole option and without notice to or consent of
Borrower, assign its interest in the Loan to the Assignee for inclusion in the
REMIC and, in such event, Borrower agrees to provide the Assignee with such
information as may be reasonably required by the Underwriter in connection
therewith or by an investor in any securities backed in whole or in part by the
Loan or any rating agency rating such securities. Borrower irrevocably waives
any and all right it may have under applicable law to prohibit such disclosure,
including, but not limited to, any right of privacy, and consents to the
disclosure of such information to the Underwriter, to potential investors in the
REMIC, and to such rating agencies.
 
8.10  Supersedes Prior Agreements; Counterparts. This Agreement and the
instruments referred to herein supersede and incorporate all representations,
promises and statements, oral or written, made by Lender in connection with the
Loan. This Agreement may not be varied, altered, or amended except by a written
instrument executed by an authorized officer of Lender. This Agreement may be
executed in any number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall together constitute
one and the same instrument.
 
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8.11  Loan Agreement Governs. The Loan is governed by the terms and provisions
set forth in this Loan Agreement and the other Loan Documents and in the event
of any irreconcilable conflict between the terms of the other Loan Documents and
the terms of this Loan Agreement, the terms of this Loan Agreement shall
control; provided, however, that in the event that there is any apparent
conflict between any particular term or provision which appears in both this
Loan Agreement and the other Loan Documents and it is possible and reasonable
for the terms of both this Loan Agreement and the Loan Documents to be performed
or complied with, then, notwithstanding the foregoing, both the terms of this
Loan Agreement and the other Loan Documents shall be performed and complied
with.
 
8.12  CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY,
INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF SOUTH CAROLINA AND
THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE
PERSONAL JURISDICTION IN THE STATE OF SOUTH CAROLINA FOR THE ENFORCEMENT OF ANY
AND ALL OBLIGATIONS UNDER THE LOAN DOCUMENTS EXCEPT THAT IF ANY SUCH ACTION OR
PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES
OF AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES
THERETO, SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL
BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH
CAROLINA IN WHICH ANY FACILITY IS LOCATED OR ANY SUCCESSOR FEDERAL COURT HAVING
ORIGINAL JURISDICTION.
 
8.13  WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT THAT
EITHER OR BOTH MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO
THIS AGREEMENT OR THE LOAN, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR
RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT
TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF
EITHER PARTY’S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE OR THE
CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES
WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT
OR OTHERWISE. BORROWER AGREES THAT LENDER MAY FILE A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT
OF BORROWER IRREVOCABLY TO WAIVE ITS RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT TO
LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN
BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION
BY A JUDGE SITTING WITHOUT A JURY.
 

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BORROWER:
 

 
EMERI-SKY SC LLC,
 
a Delaware limited liability company
 

 
By:
EMERITUS CORPORATION,

a Washington corporation

   
Its Manager

By: /s/ Eric Mendelsohn 
Eric Mendelsohn
Its: Director of Real Estate and Legal Affairs 

 
EMERIVILLE SC LLC,
 
a Delaware limited liability company
 

 
By:
EMERITUS CORPORATION,

a Washington corporation

   
Its Manager

By: /s/ Eric Mendelsohn 
Eric Mendelsohn
Its: Director of Real Estate and Legal Affairs 

 
EMERIPARK SC LLC,
 
a Delaware limited liability company
 

 
By:
EMERITUS CORPORATION,

a Washington corporation

   
Its Manager

By: /s/ Eric Mendelsohn 
Eric Mendelsohn
Its: Director of Real Estate and Legal Affairs 

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LENDER:
 
WITNESS: CAPMARK BANK, a Utah industrial bank

/s/ Lori K. Goobby    By: s/ Malana C. Bryant  (SEAL)

Lori K. Goobby    Name: Malana C. Bryant
[Print Name]
Title: Authorized Signer

 

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EXHIBIT “A”
 

 
LEGAL DESCRIPTION
 

 

45

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EXHIBIT “B”

BORROWER’S PRINCIPAL PLACES OF BUSINESS
AND CHIEF EXECUTIVE OFFICE

3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
 
 
ADDRESSES OF FACILITIES:
 
Skylyn Place
1705 Skylyn Drive
Spartanburg, South Carolina

Countryside Village
706 Pelzer Highway
Easley, South Carolina

 
Countryside Park
125 Zion School Road
Easley, South Carolina

 

 

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EXHIBIT “C”
 

 
OWNERSHIP INTERESTS IN BORROWER
 

 
100% owned by Emeritus Corporation

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EXHIBIT “D”

QUARTERLY FINANCIAL STATEMENT AND CENSUS DATA
Facility Name:
 
Management Company:
 
Report Date:
     
Quarter
Ending
(Date)
 
Quarter
Ending
(Date)
 
Quarter
Ending
(Date)
 
Quarter
Ending
(Date)
 
12 Mths.
Ending
(Date)
 
Census Data
                   
Total Number of Units
                   
Number of Days in Period
                   
Total Resident Days Available
                   
Resident Utilization Days
                   
Medicaid
                   
Private
                   
Medicare
                   
Other Payor (Specify)
                   
Total Utilization Days
                   
Average Occupancy
                                         
Debt Service Coverage Analysis
                 
(C)
Net Routine Patient (Resident) Revenue
                   
Other Revenues
                   
Total Revenues
                   
Total Expenses
                   
Pre-Tax Income
                                         
Add Back
                   
Depreciation and Amortization
                   
Interest on Capmark loan (or Facility Lease Expense)
                   
Extraordinary Items
                 
(A)
Net Operating Income after Actual Management Fees
                                       
(B)
Principal and Interest payments due for the period
                                       
(A) (B)
Debt Service Coverage after Actual Mgmt. Fees
                                       
(A)
Net Operating Income after Actual Management Fees
                 
+
Add Back
                   
Actual Management Fees
                 
-
Less
                 
(C) * 5%
Assumed Management Fees (1)
                 
(D)
Net Operating Income after Assumed Management Fees
                                       
(D) (B)
Debt Service Coverage after Assumed Mgmt. Fees
                 

 
I certify the above to be true and correct. Dated this _____ day of
_______________.
 
By:
 
Name:
 

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Title:
 

 
(1) Percentage used as defined in definitions section of Loan Agreement.
 

49

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EXHIBIT “E”

COMPLIANCE CERTIFICATE
Capmark Bank
 
 
 

 
Re:
Loan Agreement dated _____________, 2007 (together with amendments, if any, the
“Loan Agreement”), by and among CAPMARK BANK, as Lender, and EMERI-SKY SC LLC, a
Delaware limited liability company, EMERIVILL SC LLC, a Delaware limited
liability company, and EMERIPARK SC LLC, a Delaware limited liability company
(together, collectively, with their respective successors and assigns,
“Borrowers” or “Borrower”, and, individually, a “Borrower”), as Borrowers

 
The undersigned officer of the above-named Borrowers, does hereby certify that
for the quarterly financial period ending __________________:
 
1. No Default or Event of Default has occurred or exists except _____________.
 
2. The Debt Service Coverage Ratio after deduction of Actual Management Fees for
the preceding twelve (12) months (or such lesser period as shall have elapsed
following the closing of the Loan) through the end of such period is:
 

 
Required:
1.0 to 1.0

Actual:  ___ to 1.0
 
The manner of calculation is attached in Exhibit “D” to the Loan Agreement.
 
3. The Debt Service Coverage Ratio after deduction of Assumed Management Fees
for the preceding twelve (12) months (or such lesser period as shall have
elapsed following the closing of the Loan) through the end of such period is:
 

 
Required:
1.35 to 1.0

Actual:  ___ to 1.0
 
The manner of calculation is attached in Exhibit “D” to the Loan Agreement.
 
4. The year to date average daily occupancy (on a twelve (12) calendar month
rolling basis) for all Facilities is:
 

 
Required:
Not less than 80%

Actual:  _____ %
 

 

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5. [ANNUAL COMPLIANCE CERTIFICATE ONLY] The capital expenditures per unit are:
 

 
Required:
$300.00 per unit.

 
Actual:
$______ per unit.

 
Evidence of such capital expenditures is attached hereto.
 
6. The outstanding principal balance of all Indebtedness (other than the Loan)
of Borrower is $___________, consisting of the following:
 
[Describe each debt and the balance thereof.]
 
7. If Borrower is a partnership, the outstanding principal balance of all
indebtedness of the Borrower to its partners as of the date hereof is
$____________.
 
8. All representations and warranties made by Borrower in the Loan Agreement and
in other Loan Documents are true and correct in all material respects as though
given on the date hereof, except ________________________.
 
9. All information provided herein is true and correct.
 
10. Capitalized terms not defined herein shall have the meanings given to such
terms in the Loan Agreement.
 
Dated this ______ day of _____________________, _______.
 
By:      
Name:      
Title:      

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