Exhibit 10.1

 

LIMITED LIABILITY COMPANY AGREEMENT

 

OF

 

Summit Union Life Holdings, LLC

 

THE INTERESTS OF THE MEMBERS ISSUED UNDER THIS AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE
OR THE DISTRICT OF COLUMBIA. NO RESALE OR TRANSFER OF AN INTEREST BY A MEMBER IS
PERMITTED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT AND ANY
APPLICABLE FEDERAL OR STATE SECURITIES LAWS, AND ANY VIOLATION OF SUCH
PROVISIONS COULD EXPOSE THE SELLING OR TRANSFERRING MEMBER AND THE COMPANY TO
LIABILITY.

 

Dated as of April 7, 2015

 

 

 

 

TABLE OF CONTENTS

 

        Page           ARTICLE I. DEFINITIONS   1           1.1   Definitions  
1           1.2   General Interpretive Principles   10           ARTICLE II. THE
COMPANY AND ITS BUSINESS   11           2.1   Company Name   11           2.2  
Term   11           2.3   Filing of Certificate and Amendments   11          
2.4   Business; Scope of Members’ Authority   12           2.5   Principal
Office; Registered Agent   12           2.6   Authorized Persons   12          
2.7   Organization Expenses   12           ARTICLE III. MANAGEMENT OF COMPANY
BUSINESS   12           3.1   Appointment of Manager   12           3.2   Duties
of Manager   13           3.3   Specific Duties of Manager   14           3.4  
Bank Accounts   15           3.5   Manager Compensation; Reimbursement for Costs
and Expenses   15           3.6   Limitations on Authority of Manager   15      
    3.7   Liability of Manager   16           3.8   Removal of Manager   17    
      3.9   Other Activities of the Manager   17           ARTICLE IV. RIGHTS
AND DUTIES OF MEMBERS   17           4.1   Members Will Not Have Power to Bind
Company   17           4.2   Other Activities of the Members   18

 

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4.3   Indemnification   18           4.4   Dealing with Members   19          
4.5   Use of Company Assets   19           4.6   Designation of Tax Matters
Member   19           4.7   OFAC; Not Foreign Person; Not Prohibited Person   20
          ARTICLE V. BOOKS AND RECORDS; REPORTS   20           5.1   Books and
Records   20           5.2   Availability of Books and Records; Return of Books
and Records   20           5.3   Reports and Statements   21           5.4  
Accounting Expenses   21           ARTICLE VI. CAPITAL CONTRIBUTIONS, LOANS AND
LIABILITIES   21           6.1   Initial Capital Contributions of the Members  
21           6.2   Mandatory Additional Capital Contributions   22           6.3
  Additional Memberships   22           6.4   Loans   22           6.5  
Reimbursements   23           6.6   Capital of the Company   23           6.7  
Limited Liability of Members   23           ARTICLE VII. CAPITAL ACCOUNTS,
PROFITS AND LOSSES AND ALLOCATIONS   24           7.1   Capital Accounts   24  
        7.2   General Allocation Rules   25           7.3   Special Allocations
  26           7.4   Income Tax Elections   28           7.5   Income Tax
Allocations   28           7.6   Transfers During Fiscal Year   29           7.7
  Election to be Taxed as Association   29

 

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7.8   Assignees Treated as Members   29           ARTICLE VIII. DISTRIBUTIONS OF
NET OPERATING CASH FLOW AND CAPITAL PROCEEDS   29           8.1   Distributions
of Net Operating Cash Flow   29           8.2   Distribution of Capital Proceeds
  30           ARTICLE IX. DISPOSITION OF INTERESTS   30           9.1  
Permitted Transfers   30           9.2   Limitation on Assignments of Interests
by Members   30           9.3   Drag Along Rights   31           9.4  
Assignment Binding on Company   31           9.5   Substituted Members   31    
      9.6   Acceptance of Prior Acts   32           ARTICLE X. DISSOLUTION OF
THE COMPANY; WINDING UP AND DISTRIBUTION OF ASSETS   32           10.1  
Dissolution   32           10.2   Winding Up   33           10.3   Distribution
of Assets   33           ARTICLE XI. AMENDMENTS   34           11.1   Amendments
  34           11.2   Additional Members   34           11.3   Documentation  
34           ARTICLE XII. INTENTIONALLY OMITTED   34           ARTICLE XIII.
MEMBER REPRESENTATIONS AND WARRANTIES   34           13.1   General   34        
  13.2   Securities Laws Restrictions   34           13.3   Suitability and
Understanding of Risk   35           13.4   Representations Concerning the
Subsidiaries and the Facilities   35

 

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13.5   Information   35           13.6   Reliance   36           ARTICLE XIV.
MISCELLANEOUS   36           14.1   Further Assurances   36           14.2  
Notices   36           14.3   Headings and Captions   37           14.4  
Variance of Pronouns   37           14.5   Counterparts   37           14.6  
Governing Law; Dispute Resolution   38           14.7   Partition   38          
14.8   Invalidity   38           14.9   Successors and Assigns   38          
14.10   Entire Agreement   38           14.11   Waivers   38           14.12  
No Brokers   39           14.13   Confidentiality   39           14.14   No
Third Party Beneficiaries   39           14.15   Power of Attorney   39        
  14.16   Invalidity   39           14.17   Construction of Documents   40      
    14.18 REIT Limitations   40

  

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THIS LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”) of Summit Union Life
Holdings, LLC, a Delaware limited liability company (the “Company”) is entered
into effective as of April 7, 2015 (the “Effective Date”), by and among Summit
Healthcare Operating Partnership, a Delaware limited partnership (“Summit”), and
Best Years LLC, a Delaware limited liability company (“Union Life”).

 

RECITALS

 

WHEREAS, pursuant to the Certificate of Formation of the Company filed in the
office of the Delaware Secretary of State on January 26, 2015 the Company was
formed as a limited liability company under the Delaware Limited Liability
Company Act; and

 

WHEREAS, the parties desire to enter into this Agreement for the purpose of
setting forth and agreeing upon their respective rights, duties and
responsibilities with respect to the management and affairs of the Company and
memorializing certain other agreements between them with respect to the Company
and their interests therein;

 

NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual
covenants and agreements set forth herein, the contributions to the capital of
the Company made and to be made hereunder, and for other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the parties hereby agree as follows:

 

ARTICLE I.
DEFINITIONS

 

1.1           Definitions As used in this Agreement, the following terms have
the meanings set forth below, which meanings will be applicable equally to the
singular and plural of the terms defined:

 

“Act” means the Delaware Limited Liability Company Act (6 Del. C. §18-101 et
seq.), as amended from time to time.

 

“Adjusted Basis” means the basis for determining gain or loss for federal income
tax purposes from the sale or other disposition of property, as defined in
Section 1011 of the Code.

 

“Adjusted Capital Account Deficit” means, with respect to any Member, the
deficit balance, if any, in such Member’s Capital Account as of the end of the
relevant Fiscal Year, after giving effect to the following adjustments:

 

(a)          Credit to such Capital Account any amounts which such Member is
obligated to restore or is deemed to be obligated to restore pursuant to
Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and

 

(b)          Debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4) (reasonably expected adjustments for depletion
allowances), 1.704-1(b)(2)(ii)(d)(5) (certain other reasonably expected
allocations of loss or deduction), and 1.704-1(b)(2)(ii)(d)(6) (reasonably
expected distributions) of the Regulations.

 

The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations
and will be interpreted consistently therewith.

 

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“Affiliate” means a Person, which controls, is controlled by, or is under common
control with another Person. For the purposes of this definition, “control”
means the power to direct the management and policies of a Person, directly or
indirectly, whether through the ownership of voting securities or other
beneficial interest, by contract or otherwise; and the terms “controlling” and
“controlled” have the meanings correlative to the foregoing. A Person will not
be deemed to be under common “control” with another Person solely based on the
fact that one or more Person(s) serve as a director of both Persons.

 

“Affiliate Guaranties” or “Affiliate Guaranty” means a customary indemnity or
carve-out guaranty, (or guaranties) or similar limited recourse undertakings
(that may spring into full recourse in certain limited carve-out events) made by
Summit Guarantor (“Lender Guaranty”) for the benefit of a Lender relating to a
Financing (including, without limitation, with respect to each Facility (a) a
recourse liabilities guaranty made by Summit Guarantor for the benefit of the
Lender, dated as of the date hereof; and (b) an environmental indemnity
agreement, as applicable, made by Summit Guarantor and/or the Subsidiary for the
benefit of Lender, dated as of the date hereof) or under any future refinancing.

 

“Agreement” means this Limited Liability Company Agreement of the Company, as it
may hereafter be amended or modified from time to time.

 

“Assignee” means a Person to whom an Interest has been transferred in accordance
with this Agreement and who has not been admitted as a Member.

 

“Bankruptcy” means, with respect to the affected party, (a) the entry of an
order for relief under the Bankruptcy Code, (b) the admission by such party of
its inability to pay its debts as they mature, (c) the making by it of an
assignment for the benefit of creditors, (d) the filing by it of a petition in
bankruptcy or a petition for relief under the Bankruptcy Code or any other
applicable federal or state bankruptcy or insolvency statute or any similar law,
(e) the application by such party for the appointment of a receiver for the
assets of such party, (f) the filing of an involuntary Bankruptcy petition
against it that is not dismissed for 60 or more days, or (g) the imposition of a
judicial or statutory lien on all or a substantial part of its assets. With
respect to a Member, this definition of Bankruptcy supersedes the definition of
Bankruptcy set forth in Sections 18-101(1) and 18-304 of the Act.

 

“Bankruptcy Code” means Title 11 of the United States Code, as amended from time
to time.

 

“Business Day” means any day other than (a) a Saturday or Sunday and (b) a day
on which federally insured depositary institutions in the State of New York are
authorized or obligated by law, governmental decree or executive order to be
closed.

 

“Capital Account” when used in respect of any Member means the Capital Account
maintained for such Member in accordance with Section 7.1, as said Capital
Account may be increased or decreased from time to time pursuant to the terms of
Section 7.1.

 

“Capital Call” means any written notice given to the Members pursuant to Article
VI, in accordance with the requirements of Section 14.2, requesting a Capital
Contribution that is required to be made by the Members pursuant to said Article
VI.

 

“Capital Contribution” when used with respect to any Member, means (i) the
initial Capital Contribution of such Member as set forth on Schedule 6.1
attached hereto, and (ii) any additional capital contributed to the Company by
such Member (and, for clarification, will not include any consideration paid by
a Member to another Member for its Interest).

 

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“Capital Proceeds” means funds of the Company arising from a Capital
Transaction, net of the actual costs incurred by the Company with third parties
in consummating the Capital Transaction.

 

“Capital Transaction” means any of the following: (a) a sale, exchange,
transfer, assignment or other disposition of all or a portion of a direct or
indirect interest (i.e., equity in a subsidiary) in any Company Asset other than
(i) tangible personal property that is not sold or transferred in connection
with the sale or transfer of real property or (ii) a leasehold interest in real
property that is otherwise sold or transferred in the ordinary course of
business; (b) any condemnation or deeding in lieu of condemnation of all or a
portion of any Company Asset used for restoration of any Facility; (c) any
financing or refinancing of any Company Asset; (d) the receipt of proceeds due
to any fire or other casualty to any Company Asset; and (e) any other
transaction involving a Company Asset, the proceeds of which, in the Manager’s
sole discretion, are considered to be capital in nature. For purposes of
distributions under Section 8.2, net proceeds from a Capital Transaction will
only include those distributions to be made to the Members under this Agreement
after any third party payments relating to the Capital Transaction have been
made.

 

“Carrying Value” means, with respect to any asset, the Adjusted Basis of the
asset, except as follows:

 

(a)          The initial Carrying Value of an asset contributed by a Member to
the Company will be the fair market value of the asset, as determined and agreed
upon by the Members at the time the asset is contributed;

 

(b)          The Carrying Values of the Company’s assets will be adjusted to
equal their respective fair market values, as determined by the Company’s
Manager pursuant to GAAP, in consultation with the Company’s certified public
accountant as of the following times: (i) the acquisition of an additional
interest in the Company by any new or existing Assignee or Member in exchange
for more than a de minimis Capital Contribution; (ii) the distribution by the
Company to a Member or an Assignee of more than a de minimis amount of property
as consideration for all or part of a Member’s Interest or an Assignee’s
economic rights; and (iii) the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g); but adjustments pursuant to clauses
(i) and (ii) above will be made only if the Company’s Certified Public
Accountant, pursuant to GAAP, reasonably determines that such adjustments are
necessary or appropriate to reflect the relative economic interests of the
Members in the Company;

 

(c)          The Carrying Value of an asset of the Company distributed to a
Member will be adjusted to equal the fair market value of the asset on the date
of distribution as determined by the Manager; and

 

(d)          The Carrying Values of the Company’s assets will be increased (or
decreased) to reflect any adjustments to the Adjusted Basis of those assets
pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that
those adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-l(b)(2)(iv)(m); but the Carrying Values
will not be adjusted pursuant to this clause (d) to the extent the Manager
determines that an adjustment pursuant to clause (b) above is necessary or
appropriate in connection with a transaction that would otherwise result in an
adjustment pursuant to this clause (d).

 

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If the Carrying Value of an asset is determined or adjusted pursuant to clauses
(a), (b) or (d), such Carrying Value will thereafter be adjusted by the
Depreciation taken into account with respect to the asset for purposes of
computing Profit and Loss.

 

“Certificate of Formation” means the Certificate of Formation of the Company
filed with the Secretary of State of the State of Delaware on January 26, 2015
as the same may hereafter be amended and/or restated from time to time.

 

“Claim” means any claim or demand for payment made by a Lender to a Summit
Guarantor under any of the Affiliate Guaranties.

 

“Code” means the Internal Revenue Code of 1986, as amended from time to time, or
any corresponding provision(s) of succeeding law.

 

“Company” has the meaning set forth in the preamble of this Agreement.

 

“Company Assets” means all right, title and interest of the Company in and to
all or any portion of the assets of the Company or the assets of a Subsidiary of
the Company and any property acquired in exchange therefor or in connection
therewith.

 

“Company Minimum Gain” has the same meaning as the term “partnership minimum
gain” set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.

 

“Confidential Information” has the meaning set forth in Section 14.13.

 

“Costs” has the meaning set forth in Section 4.3(a).

 

“Depreciation” means, for each Fiscal Year, an amount equal to the depreciation,
amortization or other cost recovery deduction allowable with respect to an asset
for such Fiscal Year, except that if the Carrying Value of an asset differs from
its Adjusted Basis at the beginning of the Fiscal Year, Depreciation will be an
amount which bears the same ratio to the beginning Carrying Value as the federal
income tax depreciation, amortization or other cost recovery deduction for the
Fiscal Year bears to such beginning Adjusted Basis; but if the Adjusted Basis of
an asset at the beginning of a Fiscal Year is zero, Depreciation will be
determined with reference to the beginning Carrying Value using any reasonable
method selected by the Tax Matters Member.

 

“Disposition Period” means the period commencing upon the expiration of the
Lockout Period and ending on the eighth anniversary of the Effective Date,
provided, that the Disposition Period may be extended for additional one (1)
year periods by the Manager with the unanimous consent of the Members.

 

“Effective Date” has the meaning set forth in the Preamble.

 

“Facilities” means the facilities listed on Schedule 1.1, which schedule may be
amended from time to time as additional Facilities are acquired by the Company
or its Subsidiaries, and will include all real property, including, without
limitation, the Improvements and related personal property comprising such
Facilities and owned by each Subsidiary.

 

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“Facility Documents” means all agreements relating to the Facilities.

 

“Financing” means mortgage indebtedness obtained to fund acquisition and/or
refinancing of the Facilities and/or any other facilities acquired by the
Company or any Subsidiary from time to time, as evidenced by a Loan Agreement
and certain additional Loan Documents made by the respective Subsidiary.
Financing shall include any mortgage indebtedness secured by any Facility
existing as of the date of this Agreement and any new mortgage indebtedness
secured by any Facility as may be obtained by the Company or any Subsidiary from
time to time. The Financing is sometimes referred to herein as the
“Refinancing.”

 

“Fiscal Year” means the fiscal year of this Company, which will be the calendar
year; provided that the first Fiscal Year of the Term will commence on the
Effective Date and will end on the last day of the calendar year in which the
Effective Date occurs and the last Fiscal Year of the Term will end on the last
day of the Term and will commence on the first day of the calendar year in which
such last day occurs.

 

“GAAP” means generally accepted accounting principles in the United States of
America.

 

“HUD” means the United States Department of Housing and Urban Development.

 

“Improvements” means all structures and buildings located on the Properties.

 

“Independent Accountant” means an accounting firm jointly agreed upon by the
Members.

 

“Indemnified Person” has the meaning set forth in Section 4.3(a).

 

“Interest” means the entire limited liability company interest of a Member in
the Company at any particular time, including, without limitation, the right of
such Member to any and all benefits to which a Member may be entitled as
provided in this Agreement, together with the obligations of such Member to
comply with all the terms and provisions of this Agreement. For purposes of
clarity, the Interest of Summit will include Summit’s rights and obligations as
Manager hereunder.

 

“IRS” means the Internal Revenue Service and any successor agency or entity
thereto.

 

“Lender” means each bank or other financial institution that provides debt
funding to one or more of the Subsidiaries for acquisition or refinancing of the
Facilities.

 

“Lien” means any mortgage, deed of trust, deed to secure debt, lien (statutory
or other), pledge, hypothecation, assignment, preference, priority, security
interest, or any other encumbrance or charge on or affecting real or personal
property, or any portion thereof, or any interest therein (including, without
limitation, any conditional sale or other title retention agreement, any
sale-leaseback, any financing lease having a similar economic effect to any of
the foregoing, the filing of any financing statement or other similar instrument
under the UCC or any comparable law of any jurisdiction, domestic or foreign,
and mechanics’, materialmen’s and any other similar lien or encumbrance).

 

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“Loan Agreement” means that any loan agreement entered into by the Company or
any of its Subsidiaries to acquire or refinance the Facilities or any other
facility acquired by the Company from time to time, as the same may be amended,
restated, supplemented or otherwise modified from time to time.

 

“Loan Documents” mean any and all documents supplemental to a Loan Agreement
entered into by the Company or any of its Subsidiaries in connection with the
acquisition or refinancing of any of the Facilities or any other facility
acquired by the Company from time to time.

 

“Lockout Period” has the meaning set forth in Section 9.3.

 

“Major Decision” means any action or decision with respect to the Company that
relates to (i) the sale, exchange, transfer, or conveyance all or substantially
all of the assets of the Company, (ii) the sale, exchange, transfer or
conveyance of the voting interests in any Subsidiary or all or substantially all
of the assets of a Subsidiary, (iii) the commencement of any Bankruptcy
proceeding by the Company or any Subsidiary, (iv) the reorganization,
consolidation or merger of the Company or any Subsidiary with any other entity,
(v) the dissolution of the Company or any Subsidiary, (vi) the acquisition of
any additional Facility by the Company or any Subsidiary, including a newly
formed Subsidiary, or (vii) the amendment of this Agreement, except as otherwise
provided for in Section 11.1 hereof.

 

“Majority Vote” means the vote, consent or approval of Members holding more than
fifty percent (50%) of the Membership Interests at the time that the vote takes
place or the approval or consent is sought.

 

“Manager” means the person or entity selected to manage the daily affairs of the
Company as set forth in Section 3.1.

 

“Management Fee” has the meaning set forth in Section 3.5(a).

 

“Member” means each of Summit and Union Life, and any Substituted Member who is
admitted as a member of the Company after the Effective Date as permitted by
this Agreement.

 

“Member Minimum Gain” means the amount, with respect to each Member Nonrecourse
Debt, equal to the Company Minimum Gain that would result if such Member
Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with Regulations Section 1.704-2(i)(3).

 

“Member Nonrecourse Debt” has the same meaning as the term “partner nonrecourse
debt” set forth in Regulations Section 1.704-2(b)(4).

 

“Member Nonrecourse Deductions” has the same meaning as “partner nonrecourse
deductions” set forth in Regulations Section 1.704-2(i)(1) and (2). The amount
of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for a
Fiscal Year equals the excess, if any, of the net increase, if any, in the
amount of Member Minimum Gain attributable to such Member Nonrecourse Debt
during that Fiscal Year over the aggregate amount of any distributions during
that Fiscal Year to the Member that bears the economic risk of loss for such
Member Nonrecourse Debt to the extent such distributions are from the proceeds
of such Member Nonrecourse Debt and are allocable to an increase in Member
Minimum Gain attributable to such Member Nonrecourse Debt, determined according
to the provisions of Regulations Section 1.704-2(i)(2).

 

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"Membership Interests" means a Member's aggregate rights in the Company,
including, without limitation, such Member’s share of the profits and losses of
the Company, the right to receive distributions from the Company and the right
to vote, approve and participate in the management of the Company.

 

“Net Operating Cash Flow” for any calendar quarter or Fiscal Year (or portion
thereof) of the Company, means (a) the sum of (i) net income (loss), computed in
accordance with GAAP, excluding extraordinary items, as defined by GAAP, and
gains (or losses) from sales of property, plus (ii) depreciation and
amortization on real estate assets, plus (iii) impairment charges recorded, less
(b) any cash reserves the Manager reasonably determines may be required for the
working capital, capital expenditures and future needs of the Company or any
Subsidiary.

 

“Non-Discretionary Items” means, with respect to the Company and to each of the
Subsidiaries, (i) real estate taxes, (ii) insurance premiums, (iii) regular
payments of debt service and any reserve amounts due under any Financing or any
future refinancing thereof (but excluding the principal amount of such
indebtedness at the maturity date of such Financing, as the same may be
accelerated), (iv) amounts necessary to pay judgments or Liens against (a) the
Company, (b) a Subsidiary or (c) any of the Company Assets, (v) any amounts
required to be withheld pursuant to Section 1446 of the Code (or similar
provisions of state or local law), and (vi) amounts currently due and payable,
or to become due and payable within thirty (30) days, under any leases, service
contracts or other agreements or contractual obligations (to the extent not
entered into in violation of this Agreement) to which the Company or a
Subsidiary is a party or obligor, whether or not the same are categorized for
accounting purposes as ordinary operating expenses or capital improvements.

 

“Nonrecourse Deductions” has the meaning set forth in Regulations Section
1.704-2(b)(1). The amount of Nonrecourse Deductions for a Fiscal Year equals the
excess, if any, of the net increase, if any, in the amount of Company Minimum
Gain during that Fiscal Year over the aggregate amount of any distributions
during that Fiscal Year of proceeds of a Nonrecourse Liability that are
allocable to an increase in Company Minimum Gain, determined according to the
provisions of Section 1.704-2(c) of the Regulations.

 

“Nonrecourse Liability” has the meaning set forth in Sections 1.704-2(b)(3) and
1.752-1(a)(2) of the Regulations.

 

“OFAC” has the meaning set forth in Section 4.7.

 

“Organizational Document” means, with respect to any Person: (a) in the case of
a corporation, such Person’s certificate of incorporation and by-laws, and any
shareholder agreement, voting trust or similar arrangement applicable to any of
such Person’s authorized shares of capital stock; (b) in the case of a
partnership, such Person’s certificate of limited partnership, partnership
agreement, voting trusts, statement of qualification or similar arrangements
applicable to any of its partnership interests; (c) in the case of a limited
liability company, such Person’s certificate of formation or articles of
organization, limited liability company operating agreement or other document
affecting the rights of holders of limited liability company interests; or (d)
in the case of any other legal entity, such Person’s organizational documents
and all other documents affecting the rights of holders of equity interests in
such Person.

 

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“Partially Adjusted Capital Account” means, with respect to any Member for any
Fiscal Year, the Capital Account balance of such Member at the beginning of such
period, adjusted as set forth in the definition of Capital Account for all
contributions and distributions during such period and all special allocations
pursuant to Section 7.3 with respect to such period but before giving effect to
any allocation with respect to such period pursuant to Section 7.2.

 

“Percentage Interest” means, with respect to any Member, the percent of a
Member’s ownership of the Company as listed for each Member in Schedule 6.1, as
the same may be adjusted pursuant to the terms of this Agreement.

 

“Permitted Transfer” has the meaning set forth in Section 9.1.

 

“Person” means any individual, partnership, corporation, limited liability
company, trust or other legal entity.

 

“Prohibited Person” has the meaning set forth in Section 4.7.

 

“Profits and Losses” means, for each Fiscal Year or other period, an amount
equal to the Company’s taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss or deduction required to be stated separately pursuant to
Code Section 703(a)(1) will be included in taxable income or loss), with the
following adjustments:

 

(e)          Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses will be
added to such taxable income or loss;

 

(f)          Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses, will be subtracted from such taxable income or
loss;

 

(g)          In the event the Carrying Value of any Company Asset is adjusted
pursuant to subparagraph (b) or subparagraph (c) of the definition of Carrying
Value herein, the amount of such adjustment will be taken into account as gain
or loss from the disposition of such asset for purposes of computing Profits or
Losses;

 

(h)          Gain or loss resulting from any disposition of a Company Asset with
respect to which gain or loss is recognized for federal income tax purposes will
be computed by reference to the Carrying Value of the asset disposed of,
notwithstanding that the adjusted tax basis of such asset differs from its
Carrying Value;

 

(i)          In lieu of the depreciation, amortization and other cost recovery
deductions taken into account in computing such taxable income or loss, there
will be taken into account Depreciation for such Fiscal Year or other period,
computed in accordance with the terms of this Agreement; and

 

-8-

 

 

(j)          Notwithstanding any other provision of this Agreement, any items
which are specially allocated pursuant to Section 7.3 will not be taken into
account in computing Profits or Losses. In addition, any items which are
specially allocated pursuant to Sections 7.2(a) or 7.2(b) will not be taken into
account in computing Profits and Losses for purposes of Section 7.2(c).

 

“Property” means the real property owned by any Subsidiary and upon which each
Facility has been constructed.

 

“Purchase Price” means the purchase price for each Facility, as set forth on
Schedule 1.1 attached hereto.

 

“REIT” means Summit Healthcare REIT, Inc., a Maryland corporation.

 

“Regulations” means the permanent and temporary regulations, and all amendments,
modifications and supplements thereof, from time to time promulgated by the
Department of the Treasury under the Code.

 

“Return” means the annual non-compounding return on each Member’s Total Capital
Contribution, as more fully set forth in Section 8.1(a).

 

“Subsidiary” means any entity in which the Company holds any ownership
interests, whether directly or indirectly through one or more Persons and formed
for the purpose of holding title to the Facilities.

 

“Substituted Members” means any Person admitted to the Company as a Member
pursuant to the provisions of Section 9.7.

 

“Summit” has the meaning set forth in the preamble of this Agreement, and will
include any of its assignees or transferees to the extent permitted in this
Agreement, but only so long as any such Person continues in its capacity as a
Member in the Company.

 

“Summit Guarantor” means Summit Healthcare REIT, Inc. or another Affiliate of
Summit acceptable to the Lender.

 

“Summit Person” means Summit or an Affiliate of Summit.

 

“Summit Recourse Claim” means a Claim made under an Affiliate Guaranty to the
extent resulting from gross negligence, willful misconduct or fraud of Summit or
any Affiliate of Summit.

 

“Target Capital Account” means, with respect to any Member for any Fiscal Year
or other period, an amount (which may be either a positive or negative balance)
equal to (a) the hypothetical distribution (if any) such Member would receive if
all Company Assets, including cash, were sold for cash equal to their Carrying
Values (taking into account any adjustments to Carrying Values for such period),
all Company liabilities were satisfied in cash according to their terms
(limited, with respect to each Nonrecourse Liability of the Company, to the
Carrying Values of the assets securing such liability), and the net proceeds of
such sale to the Company (after satisfaction of said liabilities) were
distributed in full pursuant to Section 10.3 on the last day of such period,
minus (b) the sum of (i) such Member’s share of Company Minimum Gain and Member
Minimum Gain immediately prior to such deemed sale, plus (ii) the amount, if
any, which such Member is obligated to contribute to the capital of the Company
pursuant to the terms of this Agreement as of the last day of such period (but
only to the extent such capital contribution obligation has not been taken into
account in determining such Member’s share of Member Minimum Gain).

 

-9-

 

 

“Tax Matters Member” means the Manager.

 

“Term” has the meaning set forth in Section 2.2.

 

“Third Party Costs and Expenses” means, with respect to each Claim made against
a Summit Guarantor, the reasonable third party costs and expenses actually
incurred by a Summit Guarantor in connection with such Claim, including, without
limitation, reasonable costs and expenses (including legal fees and expenses) of
settlement discussions, litigation, arbitration, mediation or other proceedings
relating to the Claim.

 

“Total Capital Contribution” means, with respect to any Member, the Initial
Capital Contributions, plus all additional Capital Contributions made by such
Member and less any Capital returned to such Member pursuant to Section 8.2(b).

 

“Transfer” means, with respect to a specified interest, any transfer, sale,
pledge, hypothecation, encumbrance, assignment or other disposition of any sort,
voluntary or involuntary, whether by operation of law or otherwise, of all or
any portion of such interest, or any agreement or arrangement to do any of the
foregoing.

 

“Transfer Expenses” mean any customary transaction expenses in connection with a
sale of a Facility, including, without limitation, brokerage commissions,
transfer taxes, loan prepayment fees and other costs, to the extent the same are
saved in the proposed Transfer between the Members; such expenses to be
reasonably determined by an independent accountant of the Company in a manner
consistent with then customary market practices for properties similar to such
Facility and to be allocated equitably among the Members in accordance with
their Percentage Interests.

 

“UCC” means the Uniform Commercial Code as in effect in the State of Delaware,
as amended from time to time, or any corresponding provision(s) of succeeding
law.

 

“Union Life Person” means Union Life or an Affiliate of Union Life.

 

“Union Life Recourse Claim” means a Claim made under an Affiliate Guaranty to
the extent resulting from gross negligence, willful misconduct or fraud of Union
Life or any Affiliate of Union Life.

 

1.2          General Interpretive Principles.

 

(a)          All references to sections, schedules and exhibits are to sections,
schedules and exhibits in or to this Agreement unless otherwise specified.

 

(b)          Unless otherwise specified, the words hereof, herein and hereunder
and words of similar import will refer to this Agreement as a whole and not to
any particular provision of this Agreement.

 

(c)          If the context requires, the use of any gender will also refer to
any other gender, and the use of either number will also refer to the other
number. The word including is not exclusive; if exclusion is intended, the word
comprising is used instead. The word or will be construed to mean and/or unless
the context clearly prohibits that construction.

 

-10-

 

 

(d)          All terms that are defined by the UCC have the same meanings
assigned to them by the UCC, unless (and to the extent) they are varied by this
Agreement.

 

(e)          All accounting terms not specifically defined have the meanings
determined by reference to GAAP.

 

(f)          Unless the context prevents this construction, a reference to a
Facility will be construed to refer to all or any portion of that Facility.

 

(g)          The term mortgage means a mortgage, deed of trust, deed to secure
debt or similar instrument, as applicable, and mortgagee means the secured party
under a mortgage.

 

(h)          The term deemed means conclusively presumed. The absence of a
conclusive presumption does not mean that a particular circumstance does not
exist or that a particular condition is not satisfied; it just means that there
is no conclusive presumption.

 

(i)          The term presumed means presumed subject to rebuttal and the burden
of proof is on the Person seeking to rebut the fact presumed.

 

(j)          All yields and interest rates will be calculated on a the basis of
a 360-day year.

 

(k)          Any consent required by a Member that is described in this
Agreement as not to be unreasonably withheld means that such consent will not be
unreasonably withheld, conditioned or delayed.

 

ARTICLE II.
THE COMPANY AND ITS BUSINESS

 

2.1          Company Name. The business of the Company will be conducted under
the name of “Summit Union Life Holdings, LLC” in the State of Delaware and under
such name or such assumed names as the Manager deems necessary or appropriate to
comply with the requirements of any other jurisdiction in which the Company may
be required to qualify.

 

2.2          Term.  The term of the Company has commenced on the date of the
filing of the Certificate of Formation with the State of Delaware and will
continue in full force and effect until it is dissolved and its affairs wound up
in accordance with the terms of this Agreement and the applicable provisions of
the Act (“Term”).

 

2.3          Filing of Certificate and Amendments.  The Certificate of Formation
was filed with the Secretary of State of the State of Delaware. The Manager
hereby agrees to cause the execution and filing of any required amendments to
the Certificate of Formation and will do all other acts requisite for the
constitution of the Company as a limited liability company pursuant to the laws
of the State of Delaware or any other applicable law.

 

 

-11-

 

 

2.4           Business; Scope of Members’ Authority.

 

 (a)          The Company is formed for the purpose of owning, improving,
leasing, and operating through one or more Subsidiaries, those skilled nursing,
assisted living, memory care, senior independent living, and other similar
Facilities located in the United States which are identified on Schedule 1.1
hereto (as may be amended from time to time), and engaging in any and all lawful
activities necessary or incidental to the foregoing as the Manager may from time
to time designate.

 

 (b)          Except as otherwise expressly and specifically provided in this
Agreement, no Member has the authority to bind, to act for, or to assume any
obligation or responsibility on behalf of, the Company or any other Member.
Neither the Company nor any Member will, by virtue of executing this Agreement,
be responsible or liable for any indebtedness or obligation of any other Member
incurred or arising either before or after the Effective Date of this Agreement,
except, as to the Company, as to those joint responsibilities, liabilities,
indebtedness, or obligations expressly assumed by the Company as of the
Effective Date or incurred after the Effective Date pursuant to and as limited
by the terms of this Agreement.

 

2.5           Principal Office; Registered Agent.  The principal office of the
Company will initially be at the offices of Summit at 2 South Pointe Drive,
Suite 100, Lake Forest, California 92630 or such other place as the Manager may
from time to time determine. The registered agent and the registered address,
respectively, of the Company will be CT Corporation, 1209 Orange Street,
Wilmington, Delaware. The Manager may elect to change the Company’s registered
agent and the Company’s registered and principal offices by complying with the
relevant requirements of the Act.

 

2.6           Authorized Persons.  The Person who executed, delivered and filed
the Certificate of Formation with the Office of the Delaware Secretary of State
is an authorized person within the meaning of the Act, and upon the filing of
the Certificate of Formation with the Office of the Delaware Secretary of State,
his or her powers as an authorized person ceased. The Manager is hereby
designated as an “authorized person” within the meaning of the Act. Any one of
such authorized persons is hereby authorized to execute, deliver and file any
other certificates or documents (and any amendments and/or restatements thereof)
on behalf of the Company. The existence of the Company as a separate legal
entity will continue until cancellation of the Certificate of Formation as
provided in the Act.

 

2.7           Organization Expenses.  Each Member will bear the costs of its own
legal counsel and other professional advisors in connection with the negotiation
of this Agreement. Those out-of-pocket expenses that have been incurred in
connection with the acquisition or refinancing of the Facilities by or on behalf
of the Company or a Subsidiary by a Summit Person or a Union Life Person on or
prior to the Effective Date and are listed on Schedule 2.7 will be expenses of
the Company and reimbursed out of the Initial Capital Contributions of the
Members.

 

ARTICLE III.
MANAGEMENT OF COMPANY BUSINESS

 

3.1          Appointment of Manager.  REIT will be the initial Manager of the
Company with the rights and responsibilities set forth in this Agreement. The
rights of the Manager may not be assigned to any other Person whether
voluntarily or by operation of law. The duties of the Manager may not be
delegated to any other Person whether voluntarily or by operation of law. In the
event for any reason whatsoever that there is no acting Manager, then a Manager
will be elected by a Majority Vote of the existing Members. Nothing in the
preceding sentence is intended to prohibit or restrict the Manager from engaging
a Summit Person, a Union Life Person, accountants, lawyers and other
professional and independent service providers for the purpose of performing
services for the Company.

 

-12-

 

 

3.2           Duties of Manager.  Subject to Section 3.6 below, the Manager has
the authority and the duty to manage the day-to-day business and affairs of
Company and the Subsidiaries and implement the purposes of the Company in
accordance with the terms of this Agreement acting in a prompt and businesslike
manner, and exercising such care and skill as a prudent owner with
sophistication and experience in owning, operating and managing facilities
similar to the Facilities would exercise in dealing with its own facilities. The
Manager will devote such time to the Company and its business as is reasonably
necessary to conduct the operations of the Company and to carry out the
Manager’s responsibilities. Subject to Section 3.6, the Manager has the
following rights and authority to act on behalf of the Company, at its full
discretion and without the further act, vote, or approval of any Member:

 

(a)          To enter into HUD-insured Financings of the Facilities listed on
Schedule 1.1 on behalf of the Subsidiaries named on Schedule 3.2 upon terms no
less favorable than those set forth in the models previously approved by the
Members and attached hereto as Exhibit A and upon such other terms and
conditions as Manager, in its reasonable discretion deems necessary or
appropriate.

 

(b)          In connection with any Financing described in Section 3.2(a) above
or any other Financing or borrowing of funds approved by a Majority Vote of the
Members, to execute and to deliver for and on behalf of the Company any
promissory notes, deeds of trust, mortgages, security agreements, financing
statements, assignments of leases, master leases, conveniences leases, or other
instruments required or advisable in connection with any Financings,
conveyances, mortgages, pledges, or hypothecations.

 

(c)          To execute any contracts on behalf of the Company; provided any
approvals of any such contracts (if any) as may be required pursuant to Section
3.6 shall have been obtained.

 

(d)          To prepare, or have prepared, and file any state or federal tax
return.

 

(e)          To make any tax elections to be made by the Company.

 

(f)          To pay all taxes, assessments, rents, and other impositions
applicable to the assets of the Company and undertake when appropriate any
action or proceeding seeking to reduce such taxes, assessments, rents or other
impositions.

 

(g)          To form a Subsidiary in connection with the acquisition of any
additional Facility approved by the Members.

 

(h)          To collect revenues generated by the Company and to pay all
expenses of the Company as permitted under this Agreement.

 

(i)          To establish, maintain and draw upon checking, savings and other
accounts in the name of the Company as provided in Section 3.4.

 

(j)          To use a trade name in the operation of the Company.

 

-13-

 

 

(k)          To enter into, or cause the Subsidiaries to enter into, all
Facility Documents, provided any approvals of the Members (if any) as may be
required pursuant to Section 3.6 shall have been obtained.

 

(l)          To hire, terminate the hiring of, supervise, and compensate such
persons, firms, or corporations for and in connection with the business of the
Company and the management, and any approved financing, refinancing, sale,
exchange, or other disposition of the Facilities as Manager, in its reasonable
discretion, deems necessary or desirable; provided that any employment of
persons that are direct employees of the Company or any Subsidiary shall require
a Majority Vote.

 

(m)          To take all actions reasonably necessary to cause the tenants of
each of the Facilities to maintain in full force and effect all licenses,
permits, approvals and insurance required for the ownership, operation and
maintenance of the Facilities.

 

(n)          To pay any debts and other obligations of the Company, including
amounts due under Financings and other loans to the Company and costs of
operating the Company.

 

(o)          To take all other actions reasonably necessary to implement the
purposes of the Company, including without limitation to manage the Company
Assets.

 

(p)          To do any and all of the foregoing upon such terms and conditions
as the Manager in its reasonable discretion determines to be necessary,
desirable or appropriate, except as otherwise provided in this Agreement.

 

3.3          Specific Duties of Manager.

 

(a)          The Manager shall provide to each Member a monthly dashboard for
each Facility showing the results of operations for the Facility for the
preceding month and the rent coverage ratio as set forth in the operating lease
for a trailing 3-month period, shall present to the Members a written corrective
plan of action with respect to a Facility, in the event the tenant of such
Facility does not meet the Facility’s rent coverage ratio as set forth in the
operating lease of such Facility, and, upon written request (which writing may
be an e-mail) of either Member, a written corrective plan of action for any
Facility if the tenant does not meet with required rent coverage ratio for any
3-month trailing period.

 

(b)          Subject to Majority Vote, from and after the commencement of the
Disposition Period, the Manager shall endeavor to dispose of the Company Assets
promptly and in an orderly fashion.

 

3.4          Bank Accounts.  The Company will maintain separate bank accounts in
such banks as the Manager may designate exclusively for the deposit and
disbursement of the funds of the Company. All funds of the Company will be
promptly deposited in such accounts. The Manager from time to time will
authorize signatories for such accounts. The Manager shall provide to each
Member, promptly upon receipt, copies of the monthly bank statements for all
bank accounts maintained by the Company or its Subsidiaries and shall respond,
within five (5) days following receipt of any Member inquiry, to questions
concerning any account activity.

 

-14-

 

 

3.5          Manager Compensation; Reimbursement for Costs and Expenses.

 

(a)          The Manager or its designee shall be paid the following amounts in
connection with its performance of its obligations under this Agreement

 

(i)          Acquisition Fee. A one-time fee equal to one percent (1%) of the
Purchase Price of each of the Facilities described on Schedule 1.1 hereto, which
shall be payable directly by Union Life to Summit Healthcare Asset Management,
LLC, a Delaware limited liability company, upon full execution of this
Agreement. The amount paid by Union Life for the initial Acquisition Fee shall
not be treated as part of Union Life’s Initial Capital Contribution, but shall
instead be a direct expense of Union Life. The Acquisition Fee payable upon the
acquisition of any additional Facility by the Company or a Subsidiary shall be
paid by the Company.

 

(ii)         Management Fee. An annual fee equal to one quarter percent (0.25%)
of the Purchase Price of each Facility, payable quarterly to Summit Healthcare
Asset Management, LLC , a Delaware limited liability company throughout the term
of the Company (the “Management Fee”). In addition to the Management Fee,
Manager shall be entitled to reimbursement by the Company or the applicable
Subsidiary of actual out-of-pocket expenses, not to exceed $10,000 per year per
Facility, reasonably incurred by the Manager in overseeing the operation of the
Company and the Subsidiaries. An itemized list of Manager’s actual out-of-pocket
expenses shall be provided to each Member at the end of each Fiscal Year.
Manager’s overhead and general administrative expense, including employee
compensation, shall be included in the Management Fee.

 

(b)          The Manager will fix the amounts, if any, which the Company will
reimburse each Member for any costs and expenses incurred by such Member on
behalf and for the benefit of the Company; provided, however, that except as
otherwise provided herein or in any separately-executed agreement relating to
the business and operation of the Company, no overhead or general administrative
expenses of any Person other than the Company itself will be allocated to the
operation of the Company.

 

3.6          Limitations on Authority of Manager.

 

(a)          All Major Decisions will require the unanimous written approval of
all Members, which approval will be in the sole discretion of each Member. If a
dispute or deadlock arises with respect to a Major Decision, the Members will
attempt to resolve such dispute during a sixty (60) day meet, confer and cooling
off period (the “Cooling Off Period”). In the event the parties are unable to
resolve a deadlock with regard to a Major Decision, the Major Decision shall be
deemed denied.

 

(b)          Without a Majority Vote of the Members, Manager does not have the
right or power to do any of the following:

 

(i)          Remove the property manager and/or tenant or operator of any
Facility or to enter into an agreement with a replacement property manager
and/or tenant or operator;

 

(ii)         Incur new Financing or otherwise borrow any monies on behalf of the
Company or any Subsidiary after the date of this Agreement; provided such
limitation shall not apply to any acquisition Financing of any of the Facilities
listed on Schedule 1.1 which have not been acquired by a Summit Affiliate as of
the Effective Date or HUD Refinancing for any Facility identified in Section
3.2(a) hereof;

 

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(iii)        Make Capital Calls for any purpose other than as required to fund
Non-Discretionary Items owing by the Company or any Subsidiary;

 

(iv)        Approve on behalf of a Subsidiary any change in the permitted
Healthcare Use of any of the Facilities, as defined in the Facility Documents in
effect as of the Effective Date;

 

(v)         Approve on behalf of a Subsidiary any proposed assignment of the
tenant’s or operator’s interest in a Facility or an indirect change in the
ownership of any such tenant or operator;

 

(vi)        Approve on behalf of a Subsidiary any alterations which require the
owner’s approval under the terms of the lease or operator agreement for any
Facility;

 

(vii)       Enter into any contract or agreement with any individual or entity
affiliated with Summit or with Manager to provide services to the Company or any
of the Subsidiaries or otherwise pertaining to the conduct of the business of
the Company or any Subsidiary;

 

(viii)      Enter into any contract or agreement with any individual or entity
unrelated to either Summit or Manager requiring payments in excess of (1) Ten
Thousand Dollars ($10,000) for any one contract or agreement in the aggregate
over the term of the contract or agreement or (2) Twenty Thousand Dollars
($20,000) for one or more contracts or agreements in the aggregate at any one
time per Facility, but excluding from such requirement any contract or agreement
with respect to the day to day operation of, or the audit of any records of, the
Company or any Subsidiary and any otherwise permitted Financings; or

 

(ix)         Take any other action with respect to which this Agreement provides
that a Majority Vote is required.

 

(c)          The Members hereby agree to provide written approval or disapproval
of any such actions that require a Majority Vote, as set forth in this Section
3.6, as follows: (i) within ten (10) business days of the Manager’s request for
such approval with respect to any actions that do not involve the wiring of
funds by Union Life out of China, and (ii) within fifteen (15) business days of
the Manager’s request for such approval with respect to any actions that do
involve the wiring of funds by Union Life out of China. The Members may mutually
agree to extend such ten (10) or fifteen (15) business day period, as
applicable. In the event a Member fails to provide its disapproval within the
applicable time periods set forth in this Section 3.6(c)(i), the action
requiring a Majority Vote shall be deemed to have been approved by such Member.
In the event a Member fails to provide its disapproval within the applicable
time periods set forth in this Section 3.6(c)(ii), the action requiring a
Majority Vote shall be deemed to have been disapproved by such Member.

 

3.7          Liability of Manager. Manager will not be liable or accountable, in
damages or otherwise, to the Company or to any Member (i) for any error of
judgment or for any mistakes of fact or law or for anything which it may do or
refrain from doing hereafter in connection with the business and affairs of the
Company except in the case of willful misconduct or gross negligence or (ii) for
the return of any Member’s capital contribution.

 

-16-

 

 

3.8          Removal of Manager. Notwithstanding any other provision in this
Agreement, the REIT cannot be removed as Manager except in accordance with this
Section 3.8. Subject to approval, as applicable, of the Lenders, REIT may be
removed or expelled as Manager by a Majority Vote of the Members, if:

 

(a)          REIT is guilty of fraud or intentional misconduct;

 

(b)          REIT has handled the affairs of the Company or any Subsidiary in a
grossly negligent manner or has abused its authority with respect to any
material matter, including without limitation misappropriation of funds of the
Company, breach or violation of law materially adversely affecting Union Life’s
Interest or the occurrence of a material default under any Financing caused by
Manager or having a material adverse effect on the Company, other than as a
result of a lack of Company funds to satisfy the Company’s obligations under
such Financing;

 

(c)          The bankruptcy or voluntary or involuntary dissolution of REIT;

 

(d)          Summit or a Summit Affiliate is no longer a Member; or

 

(e)          Kent Eikanas is no longer the President of REIT or otherwise
actively involved in the day to day management of REIT, and the REIT has failed
to replace Kent Eikanas with another person with similar qualifications within
six (6) months after the disassociation of Kent Eikanas.

 

In no event will REIT be removed if, following such removal, it or any of its
officers remain liable as a guarantor or other surety on or in respect to any
Financing of the Company or its Subsidiaries.

 

3.9          Other Activities of the Manager. Manager is free to engage in, to
conduct, or to participate in any business or activity whatsoever, including,
without limitation, the acquisition, development, management, and exploitation
of real property and senior care communities, without any accountability,
liability, or obligation whatsoever to the Company or to any Member, even if
such business or activity competes with or is enhanced by the business of the
Company. Manager is not obligated to present any investment opportunity or any
prospective economic advantage to the Company, even if the opportunity is of the
character that, if presented to the Company, could be taken by the Company;
provided, however, that neither Manager nor any of its Affiliates shall acquire
an assisted living and/or skilled nursing facility within a twenty (20) mile
radius of any of the Facilities without first offering the opportunity to the
Company. Upon receipt of a notice of any such acquisition opportunity, the
Members by a Majority Vote shall accept or reject the opportunity within ten
(10) Business days of such notice. If the Members fail to accept the opportunity
within the time period set forth herein, the Manager is free to acquire the
facility at any time.

 

ARTICLE IV.
RIGHTS AND DUTIES OF MEMBERS

 

4.1          Members Will Not Have Power to Bind Company.  Except as set forth
in Section 3.2, in its capacity as Manager (if applicable), no Member, acting
solely in its capacity as a Member, will transact business for the Company nor
will any Member, acting solely in its capacity as a Member, have the power or
authority to sign, act for or bind the Company.

 

-17-

 

 

4.2          Other Activities of the Members.

 

(a)          Each of the Members acknowledges that the Members will continue to
pursue their separate business opportunities outside of the Company and the
Facilities. Except as otherwise provided in Section 3.9 above, each Member is
free to pursue all such activities and may engage in or possess an interest in
any other business venture or ventures of any nature and description and in any
vicinity whatsoever, independently or with others, including, without
limitation, the ownership, development, financing, leasing, operation,
management, syndication, brokerage, subdivision or sale of real property,
facility and related services and related services, and neither the Company nor
any other Member has any rights in and to such independent ventures or to income
or profits derived therefrom.

 

(b)          Each Member may engage or invest in any other activity or venture
or possess any interest therein independently or with others. Except as
otherwise provided in Section 3.9 above, none of the Members, the Company or any
other Person employed by, related to or in any way affiliated with any Member or
the Company has any duty or obligation to disclose or offer to the Company or
the other Members, or obtain for the benefit of the Company or the other
Members, any other activity or venture or interest not made with respect to the
Company or any Facility. None of the Company, the Members, the creditors of the
Company or any other Person having any interest in the Company has any claim,
right or cause of action against any Member or any other Person employed by,
related to or in any way affiliated with, any Member (i) by reason of any direct
or indirect investment or other participation, whether active or passive, in any
such activity or venture or interest therein, or (ii) any right by reason of any
such activity or venture or interest therein or the income or profits derived
therefrom.

 

4.3          Indemnification.

 

(a)          To the fullest extent permitted by law, the Company will defend,
indemnify and hold harmless the Members or Manager, or any of their directors,
officers, members, stockholders, employees, or other Persons directly involved
in the management of the Company (an “Indemnified Person”) against any losses,
claims, damages, liabilities, obligations, penalties, actions, judgments, suits,
proceedings, costs, expenses and disbursements of any kind or nature whatsoever,
including, without limitation, reasonable attorney’s fees and costs
(collectively, “Costs”) involved in any threatened, pending or completed action,
proceeding or investigation, arising out of the operations of the Company or any
Subsidiary to which such Indemnified Person may become subject in connection
with any matter arising out of or in connection with any claims brought against
the Indemnified Person, including without limitation claims by any governmental
entity, relating to the Company or the operation of the Company Assets, except
to the extent that any such Costs result from the gross negligence, fraud, or
willful misconduct of such Indemnified Person.  The Company will periodically
reimburse such Indemnified Person for its reasonable legal and other expenses
(including, without limitation, the cost of any investigation and preparation)
incurred in connection therewith, up to a maximum of $50,000, provided that (i)
the Indemnified Person has submitted defense of the claim to the Company and has
not retained separate counsel absent a refusal by the Company to accept such
defense; (ii) such periodic reimbursement of legal fees and expenses shall not
be available for any suit or claim against such Indemnified Person which
involves the breach of a fiduciary duty to the Company; (iii) such Indemnified
Person will promptly repay to the Company the amount of any such reimbursed
expenses paid to it if it will ultimately be determined that such Indemnified
Person is not entitled to be indemnified by the Company in connection with such
action, proceeding or investigation as provided in the exception contained in
the second succeeding sentence; and (iv) an Indemnified Person shall not be
reimbursed for multiple proceedings involving the same claim.  If it is
ultimately determined that the Indemnified Person is entitled to be indemnified
by the Company in connection with such action, proceeding or investigation, the
Company will reimburse the Indemnified Person for the remainder of its legal and
other expenses reasonably incurred in connection therewith.  If for any reason
other than the gross negligence, fraud, or willful misconduct of such
Indemnified Person, the foregoing indemnification is unavailable to such
Indemnified Person, or insufficient to hold it harmless, then the Company will
contribute to the amount paid or payable by such Indemnified Person as a result
of such Costs in such proportion as is appropriate to reflect not only the
relative benefits received by the Company on the one hand and such Indemnified
Person on the other hand but also the relative fault of the Company and such
Indemnified Person, as well as any relevant equitable considerations.  The
reimbursement, indemnity and contribution obligations of the Company under this
Section 4.3 will be in addition to any liability which the Company may otherwise
have to any Indemnified Person and will be binding upon and inure to the benefit
of any successors, assigns, heirs and personal representatives of the Company
and any Indemnified Person.  The reimbursement, indemnity and contribution
obligations of the Company under this Section 4.3 will be limited to the Company
Assets, and no Member or Manager has any personal liability on account thereof. 
The foregoing provisions will survive any termination of this Agreement.

 

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(b)          To the fullest extent permitted by law, each Member or Manager will
defend and indemnify the Company and the other Members against, and will hold it
and them harmless from, any Costs as and when incurred by the Company or the
other Members or Manager in connection with or resulting from such indemnifying
Member’s or Manager’s gross negligence, fraud, or willful misconduct.

 

(c)          In addition to and not in limitation of any other indemnification
obligations set forth in this Agreement, each Member will indemnify the other
Member with respect to any Costs incurred by a Member arising from any
representations and warranties made in this Agreement by the indemnifying
Member.

 

4.4          Dealing with Members.  Subject to compliance with Section 3.6, the
fact that a Member, an Affiliate of a Member, or any officer, director,
employee, member, partner, consultant or agent of a Member or an Affiliate, is
directly or indirectly interested in or connected with any Person employed by
the Company to render or perform a service, or from or to whom the Company may
buy or sell any property or have other business dealings, will not prohibit a
Member from employing such Person or from dealing with him or it on customary
terms and at competitive rates of compensation, and neither the Company, nor any
of the other Members has any right in or to any income or profits derived
therefrom by reason of this Agreement.

 

4.5          Use of Company Assets.  No Member will make use of the Company
Assets or any other funds or property of the Company, or assign its rights to
specific Company property, other than for the business or benefit of the
Company.

 

4.6          Designation of Tax Matters Member.  The Tax Matters Member will act
as the “tax matters member” of the Company as provided in the regulations
pursuant to Section 6231 of the Code. Each Member hereby approves of such
designation and agrees to execute, certify, acknowledge, deliver, swear to, file
and record at the appropriate public offices such documents as may be deemed
necessary or appropriate to evidence such approval. To the extent and in the
manner provided by applicable Code sections and regulations thereunder, the Tax
Matters Member (a) will furnish the name, address, profits interest and taxpayer
identification number of each Member to the IRS and each Member will provide
such information to the Tax Matters Member upon request and (b) will inform each
Member of administrative or judicial proceedings for the adjustment of Company
items required to be taken into account by a Member for income tax purposes.
Each Member hereby reserves all rights under applicable law, including, without
limitation, the right to retain independent counsel of its choice at its expense
(which counsel will receive the full cooperation of the Tax Matters Member).

 

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4.7           OFAC; Not Foreign Person; Not Prohibited Person.  No Member is a
“foreign person” within the meaning of Section 1445(f)(3) of the Code. Each
Member represents and warrants that it is not or will not be an entity or person
(a) that is listed in the Annex to, or is otherwise subject to the provisions of
Executive Order 13224 issued on September 24, 2001 (“EO13224”), (b) whose name
appears on the United States Treasury Department’s Office of Foreign Assets
Control (“OFAC”) most current list of “Specifically Designated National and
Blocked Persons” (which list may be published from time to time in various
mediums including, without limitation, the OFAC website,
http:www.treas.gov/ofac/t11sdn.pdf), (c) who commits, threatens to commit or
supports “terrorism”, as that term is defined in EO13224, or (d) who is
otherwise affiliated with any entity or person listed above (any and all parties
or persons described in clauses [a] – [c] above are referred to as a “Prohibited
Person”). Each Member represents, warrants and covenants that it will not (e)
knowingly conduct any business, nor engage in any transaction or dealing, with
any Prohibited Person, including, without limitation, knowingly making or
receiving any contribution of funds, goods, or services, to or for the benefit
of a Prohibited Person in violation of applicable laws, or knowingly selling or
otherwise Transferring an interest in itself to any Prohibited Person or (f)
knowingly engage in or conspire to engage in any transaction that evades or
avoids, or has the purpose of evading or avoiding, or attempts to violate, any
of the prohibitions set forth in EO13224. The Members agree to deliver (from
time to time) to the Manager any such certification or other evidence as may be
reasonably requested by the Manager, confirming that (g) no Member is a
Prohibited Person and (h) no Member has knowingly engaged in any business,
transaction or dealings with a Prohibited Person, including, without limitation,
knowingly making or receiving any contribution of funds, goods, or services, to
or for the benefit of a Prohibited Person in violation of applicable laws.

 

ARTICLE V.
BOOKS AND RECORDS; REPORTS

 

5.1           Books and Records.  At all times during the continuance of the
Company, the Manager, or such other Person as the Manager designates in
accordance with the last sentence of Section 3.2, will (a) keep or cause to be
kept true and complete books and records, including corporate and governance
documents, of the Company and its subsidiaries in which will be entered each
transaction of the Company and its subsidiaries and (b) maintain and keep in
good order the Organizational Documents of the Company and its subsidiaries and
monitor corporate housekeeping issues relating to the Company and its
subsidiaries. Such books and records will be kept on the basis of the Fiscal
Year in accordance with the accrual method of accounting, and will reflect all
transactions of the Company in accordance with GAAP.

 

5.2           Availability of Books and Records; Return of Books and
Records.  All of the books and records referred to in Section 5.1 (which will
include an executed copy of this Agreement, the Certificate of Formation, and
any amendments thereto) will at all times be maintained at the principal office
of the Company or such other location as the Manager will reasonably approve
(which other location, upon such approval, will be communicated to all of the
Members), and will be open to the inspection and examination of the Members or
their representatives during reasonable business hours upon reasonable prior
notice to the Manager. Each Member shall have the right to request an audit of
the books and records of the Company and its Subsidiaries by an independent
nationally recognized accounting firm that is not being employed, in whole or in
part, on a contingency basis. All costs of such audit shall be borne by the
requesting Member unless the audit determines that the expenses of the Company
have been overstated or the income of the Company understated, in each case
inclusive of the income and expenses of the Subsidiaries, by more than five
percent (5%), in which case the cost of the audit shall be borne by the Company
or, if attributable to the fraud, gross negligence or willful misconduct of the
Manager, by the Manager. Any dispute between the Members or Manager with regard
to the audit findings shall be resolved in accordance with the provisions of
Section 14.6 hereof.

 

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5.3           Reports and Statements.  Subject to the terms of Section 3.6, the
Manager will be responsible for determining the need for independent
accountants, selecting the Company’s independent accountants, if any, and for
preparing or overseeing the Company’s independent accountants in the preparation
of all federal, state and local tax returns required to be filed. The Manager
will cause the accountants to deliver to the Members completed IRS Schedules K-1
promptly upon receipt from the independent accountants. Each Member will notify
the other Members upon receipt of any notice of tax examination of the Company
by federal, state or local authorities. The Manager will deliver to each Member:
(a) not later than the thirtieth (30th) day of each month a copy of the
preceding month’s monthly consolidated balance sheets and income statements for
the Company prepared in accordance with GAAP; (b) not later than the thirtieth
(30th) day of each month, consolidated balance and income statement for the
preceding month and year-to-date for: (i) the Company; and (ii) each Subsidiary
owned by the Company; (c) not later than forty-five (45) days after the end of
each quarter, information (including detailed depreciation and basis
information) in a format reasonably requested by Summit to be used by Summit, or
a consultant engaged by Summit, to compute the earnings and profits of the
Company; (d) not later than ninety (90) days after the end of each Fiscal Year,
annual consolidated balance sheets and income statements for the Company
prepared in accordance with GAAP; and (e) all documentation and calculations
necessary for the Company’s independent accountants to prepare the Company’s
federal tax return and K-1’s on or before June 30th of each year. In addition
to, and not in limitation of the foregoing, the Manager will monitor and manage
the Company’s debt compliance and cash management functions. In addition, the
Manager will deliver to each Member promptly upon receipt copies of all
financial statements and operating and capital expenditure budgets provided to
each Subsidiary by the tenant/operator of its respective Facility and such other
information with respect to the operations of any Facility as such Member may
reasonably request from time to time.

 

5.4           Accounting Expenses.  All out-of-pocket expenses payable to
Persons that are retained in accordance with the terms of this Agreement in
connection with the keeping of the books and records of the Company and the
preparation of financial statements and federal, state and local tax and
information returns required to implement the provisions of this Agreement or
required by any governmental authority with jurisdiction over the Company will
be borne by the Company as an ordinary expense of its business; provided,
however, that any financial or other reporting or responsibility required of the
Company because a Member is an Affiliate of a public company will be borne by
such Member.

 

ARTICLE VI.
CAPITAL CONTRIBUTIONS, LOANS
AND LIABILITIES

 

6.1           Initial Capital Contributions of the Members.  The initial Capital
Contributions of the Members to the Company, and their respective Percentage
Interests are as set forth on Schedule 6.1 attached to this Agreement. In
addition, concurrently with the full execution of this Agreement, Summit shall
assign to the Company all of its right, title and interest in and to each of the
Subsidiaries owning the Facilities listed on Schedule 1.1.

 

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6.2           Mandatory Additional Capital Contributions.

 

(a)          In the event the Manager, in its reasonable discretion and subject
to the approval requirements set forth in Section 3.6(b)(iii), determines that
the Company needs additional capital, the Manager may call for additional
capital contributions from the Members (each, a “Capital Call”). Each Capital
Call shall be made by sending a notice (each a “Contribution Notice”) to the
Members, which notice shall set forth the amount of total capital being called
by such notice and specify a date (“Capital Call Due Date”) for contribution of
such funds. Each Capital Call Due Date shall follow the date of delivery of the
Capital Call Notice by no less than forty-five (45) business days. Upon receipt
of a Capital Call Notice, each Member shall be required to fund its pro rata
share (based on its respective Percentage Interest) of the total funds specified
in the Capital Call Notice by wire transfer of immediately available funds to an
account of the Company on or prior to the Capital Call Due Date. Upon the making
of any additional Capital Contributions pursuant to this Section 6.2(a), each
Member’s Percentage Interest shall thereafter be the ratio, expressed as a
percentage, equal to such Member’s total Capital Contributions over the
aggregate Capital Contributions made by all Members to the Company.

 

(b)          If any Member (a “Non-Contributing Member”) fails to make all or
any part of a called capital contribution by the Capital Call Due Date therefor
(such unfunded amount, a “Cash Deficiency”), the remaining Member (the
“Contributing Member”) shall be entitled (but not required) to fund the
Non-Contributing Member’s share, at the election of the Contributing Member, as
a priority loan to the Non-Contributing Member (a “Priority Loan”), on the terms
and conditions set forth in Section 6.2(c) in an amount up to the amount of such
Cash Deficiency.

 

(c)          Each Priority Loan shall bear interest, compounded annually, at 10%
per annum (or the maximum rate permitted by law, whichever is lower). If not
otherwise satisfied, Priority Loans shall be repaid out of amounts that would be
distributable to the Members under Article VIII (whether or not demand has been
made), which amounts shall be applied first to the payment of interest (or a pro
rata portion thereof) on each such Priority Loan then outstanding, and then to
the payment of principal, beginning with principal owed on the oldest Priority
Loan then outstanding until all Priority Loans have been repaid in full. All
Priority Loans must be repaid in full before any distributions are made to the
Members pursuant to Sections 8.1 and 8.2 below

 

6.3           Additional Memberships.  In the event a Capital Call is not fully
subscribed within the time frame provided for in Section 6.2 above, the Manager
may upon an affirmative Majority Vote of the Members, elect to sell membership
interests in the Company to third parties in an amount up to one hundred and
fifty percent (150%) of the shortfall on such terms as are approved by a
Majority Vote.

 

6.4           Loans.  The Manager may, in its reasonable discretion with respect
to funding of Non-Discretionary Items or otherwise upon an affirmative Majority
Vote of the Members, elect to make loans to the Company from time to time when
necessary or appropriate for conduct of the Company's business, in amounts not
to exceed $50,000 outstanding at any one time, at a non-compounded interest rate
of 6% per annum and otherwise on commercially reasonable terms. In addition, in
the event one or both parties do not fund a voluntary call provided for in
Section 6.2, the Manager may elect to arrange for short term bridge financing
with third party lenders as necessary to fund Non-Discretionary Items.

 

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6.5           Reimbursements.

 

(a)          Except as provided in Section 6.5(b) below, the Company will
reimburse each Summit Guarantor for (i) all amounts paid by a Summit Guarantor
in respect of a Claim made by a Lender under an Affiliate Guaranty and
(ii) Third Party Costs and Expenses incurred by a Summit Guarantor in respect of
the Claim. The Company will make such reimbursement from time to time, within
fifteen (15) days after receipt of a demand from a Summit Guarantor, together
with reasonable documentation substantiating the amount of the request. If the
Company has insufficient funds to make any reimbursement required under this
Section 6.5(a), the Manager will notify the Members of the amount of funds
required to pay the demand from the Summit Guarantor, and will provide the
Members with reasonable documentation substantiating the amount of the request,
and each Member’s required contribution amount. The Members will fund the amount
called for within thirty (30) Business Days after notice is given. Nothing in
this Subsection (a) shall be deemed to modify the limitation of liability of a
Summit Guarantor under any Affiliate Guaranty.

 

(b)          The Company has no reimbursement obligation with respect to a Union
Life Recourse Claim or Summit Recourse Claim.

 

(c)          Notwithstanding the foregoing, Union Life will reimburse each
Summit Guarantor for one hundred percent (100%) of (i) all amounts paid by a
Summit Guarantor in respect of a Union Life Recourse Claim made by a Lender
under an Affiliate Guaranty and (ii) Third Party Costs and Expenses incurred by
a Summit Guarantor in respect of a Union Life Recourse Claim. Union Life will
make such reimbursement from time to time, within thirty (30) Business Days
after demand from the Summit Guarantor, together with reasonable documentation
substantiating the amount of the request.

 

6.6           Capital of the Company.  The capital of the Company will be the
sum of the Members’ Capital Contributions. Except as otherwise provided in this
Agreement, no Member will be entitled to withdraw or receive any interest on, or
return of, all or any part of its Capital Contribution or to receive Company
Assets in return for its Capital Contribution.

 

6.7           Limited Liability of Members.  No Member will be bound by, or be
personally liable for, the expenses, liabilities, indebtedness or obligations of
the Company. The liability of each Member will be limited solely to the amount
of its Capital Contribution; provided, however, after a Member has received a
distribution from the Company, such Member may be liable to the Company for the
amount of the distribution but only to the extent required by this Agreement or
by the Act. Nothing in this Agreement will be construed to create liability of
any Member in excess of the amount of its Capital Contribution except for gross
negligence, fraud, or willful misconduct by the Manager in its capacity as the
Manager.

 

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ARTICLE VII.
CAPITAL ACCOUNTS, PROFITS
AND LOSSES AND ALLOCATIONS

 

7.1           Capital Accounts.

 

(a)          The Capital Accounts of Union Life and Summit established hereunder
will initially be set forth on Schedule 6.1.

 

(b)          A separate Capital Account will be maintained for each Member in
accordance with the rules of Treasury Regulations Section 1.704-1(b)(2)(iv), and
this Section 7.1 will be interpreted and applied in a manner consistent
therewith. Whenever the Company would be permitted to adjust the Capital
Accounts of the Members pursuant to Treasury Regulation 1.704-1(b)(2)(iv)(f) to
reflect revaluations of the Company, the Company may so adjust the Capital
Accounts of the Members. In the event that the Capital Accounts of the Members
are adjusted pursuant to Treasury Regulation 1.704-1(b)(2)(iv)(f) to reflect
revaluations of any of the Company’s assets or property, (i) the Capital
Accounts of the Members will be adjusted in accordance with Treasury Regulations
Section 1.704-1(b)(2)(iv)(g) for allocations of depreciation, depletion,
amortization and gain or loss, as computed for book purposes, with respect to
such assets or property, (ii) the Member’s distributive shares of depreciation,
depletion, amortization and gain or loss, as computed for tax purposes, with
respect to such assets or property will be determined so as to take account of
the variation between the adjusted tax basis and the book value of such assets
or property in the same manner as under IRC Section 704(c), and (iii) the amount
of upward and/or downward adjustments to the book value of the Company property
will be treated as income, gain, deduction and/or loss for purposes of applying
the allocation provisions of this Section. In the event that Code Section 704(c)
applies to any Company property, the Capital Accounts of the Members will be
adjusted in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(g)
for allocations of depreciation, depletion, amortization and gain and loss, as
computed for book purposes with respect to such Company property.

 

(c)          Each Member’s Capital Account will be maintained in accordance with
the following provisions:

 

(i)          Each Member’s Capital Account will be credited with the amounts of
such Member’s Capital Contributions, such Member’s distributive share of Profits
and any items in the nature of income or gain which are specially allocated to
the Member pursuant to this Article VII, and the amount of any liabilities of
the Company assumed by such Member or which are secured by any property
distributed by the Company to such Member;

 

(ii)         Each Member’s Capital Account will be charged with the amounts of
cash and the Carrying Value of any property distributed by the Company to such
Member pursuant to any provision of this Agreement, such Member’s distributive
share of Losses and any items in the nature of expenses or losses which are
specially allocated to the Member pursuant to this Article VII, and the amount
of any liabilities of such Member assumed by the Company or which are secured by
any property contributed by such Member to the Company.

 

(iii)        If all or a portion of a Member’s Interest is Transferred in
accordance with the terms of this Agreement, the transferee will succeed to the
Capital Account of the transferor to the extent it relates to the Transferred
Interest; and

 

(iv)        In determining the amount of any liability for purposes of this
Section 7.1(c), Section 752(c) of the Code and any other applicable provisions
of the Code and Regulations will be taken into account.

 

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This Section 7.1(c) and other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with Regulations Section
1.704-1(b), and will be interpreted and applied in a manner consistent with such
Regulations. If the Manager determines that it is prudent to modify the manner
in which the Capital Accounts, or any charges or credits thereto (including
charges or credits relating to liabilities which are secured by contributions or
distributed property or which are assumed by the Company or by Members), are
computed in order to comply with such Regulations, the Manager may make such
modification, but only if it is not likely to have a material effect on the
amounts to be distributed to any Member pursuant to Section 8.1, Section 8.2 or
Section 10.3 upon the dissolution of the Company. The Manager also will (c) make
any adjustments that may be necessary or appropriate to maintain equality
between the Capital Accounts of the Members and the amount of capital reflected
on the Company’s balance sheet, as computed for book purposes, in accordance
with Regulations Section 1.704-1(b)(2)(iv)(q), and (d) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Regulations Section 1.704-1(b).

 

7.2           General Allocation Rules.  Subject to the provisions of Article
VII, after giving effect to the special allocations set forth in Section 7.3,
all Profits and Losses (and to the extent necessary, as set forth in clauses
(a), (b) and (c) of this Section 7.2, items of gross income, gain, expense and
loss) of the Company will be allocated to the Members as follows:

 

(a)          If the Company has Profits for any Fiscal Year (determined prior to
giving effect to this clause (a)), each Member whose Partially Adjusted Capital
Account is greater than its Target Capital Account will be allocated,
proportionately, items of Company expense or loss for such Fiscal Year equal to
the difference between its Partially Adjusted Capital Account and Target Capital
Account. If the Company has insufficient items of expense or loss for such
Fiscal Year to satisfy the previous sentence with respect to all such Members,
the available items of expense or loss will be allocated among such Members in
proportion to such differences.

 

(b)          If the Company has Losses for any Fiscal Year (determined prior to
giving effect to this clause (b)), each Member whose Partially Adjusted Capital
Account is less than its Target Capital Account will be allocated,
proportionately, items of Company gain or income for such Fiscal Year equal to
the difference between its Partially Adjusted Capital Account and Target Capital
Account. If the Company has insufficient items of income or gain for such Fiscal
Year to satisfy the previous sentence with respect to all such Members, the
available items of income or gain will be allocated among such Members in
proportion to such differences.

 

(c)          Any remaining Profits or Losses (as computed after giving effect to
clauses (a) and (b) of this Section 7.2) will be allocated among the Members so
as to reduce, proportionately, the differences between their respective
Partially Adjusted Capital Accounts and Target Capital Accounts for the period
under consideration. To the extent possible, each Member will be allocated a pro
rata share of all Company items allocated pursuant to this clause (c). No
portion of such Profits, if any, will be allocated to a Member whose Partially
Adjusted Capital Account for the period under consideration is greater than its
Target Capital Account for such period; and no portion of such Losses, if any,
will be allocated to a Member whose Target Capital Account for the period under
consideration is greater than its Partially Adjusted Capital Account for such
period.

 

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7.3           Special Allocations.  The following special allocations will be
made in the following order and priority:

 

(a)          Company Minimum Gain Charge-back. Notwithstanding any other
provision of this Article VII, if there is a net decrease in Company Minimum
Gain during any Company Fiscal Year, each Member will be specially allocated
items of Company income and gain for such year (and, if necessary, subsequent
years) in an amount equal to such Member’s share of the net decrease in Company
Minimum Gain, determined in accordance with Regulations Section 1.704-2(g).
Allocations pursuant to the previous sentence will be made in proportion to the
respective amounts required to be allocated to each Member pursuant thereto. The
items to be so allocated will be determined in accordance with Sections
1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 7.3(a) is
intended to comply with the minimum gain charge-back requirement in Section
1.704-2(f) of the Regulations and will be interpreted consistently therewith.

 

(b)          Member Minimum Gain Charge-Back. Notwithstanding any other
provision of this Article VII except Section 7.3(a), if there is a net decrease
in Member Minimum Gain attributable to a Member Nonrecourse Debt during any
Company Fiscal Year, each Member who has a share of the Member Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(5), will be specially allocated items of Company
income and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Member’s share of the net decrease in Member Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence
will be made in proportion to the respective amounts required to be allocated to
each Member pursuant thereto. The items to be so allocated will be determined in
accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations.
This Section 7.3(b) is intended to comply with the minimum gain charge-back
requirement in Section 1.705-2(i)(4) of the Regulations and will be interpreted
consistently therewith.

 

(c)          Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in the
Regulations Section 1.704-1(b)(2)(ii)(d)(4) (adjustments for depletion),
1.704-1(b)(2)(ii)(d)(5) (other loss or deduction), or 1.704-1(b)(2)(ii)(d)(6)
(reasonably expected distributions), items of Company income and gain will be
specially allocated to each such Member in any amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Member as quickly as possible, provided that an
allocation pursuant to this Section 7.3(c) will be made only if and to the
extent that such Member would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Article VII have been tentatively made as
if this Section 7.3(c) were not in the Agreement.

 

(d)          Gross Income Allocation. In the event any Member has a deficit
Capital Account at the end of any Company Fiscal Year which is in excess of the
sum of (i) the amount such Member is obligated to restore pursuant to any
provision of this Agreement and (ii) the amount such Member is deemed to be
obligated to restore pursuant to Regulations Sections 1.704-2(g)(1) and
1.704-2(i)(5), each such Member will be specially allocated items of Company
income and gain in the amount of such excess as quickly as possible, provided
that an allocation pursuant to this Section 7.3(d) will be made only if and to
the extent that such Member would have a deficit Capital Account in excess of
such sum after all other allocations provided for in this Article VII have been
tentatively made as if this Section 7.3(d) and Section 7.3(c) were not in the
Agreement.

 

(e)          Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year
will be allocated between the Members in proportion to their respective
Percentage Interests.

 

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(f)          Member Nonrecourse Deductions. Any Member Nonrecourse Deductions
for any Fiscal Year or other period will be specially allocated to the Member
who bears the economic risk of loss with respect to the Member Nonrecourse Debt
to which such Member Nonrecourse Deductions are attributable in accordance with
Regulations Section 1.704-2(i)(1).

 

(g)          Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Sections 734(b) or
743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be
taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts will be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such gain or loss will be specially allocated to the
Members in a manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to such Section of the Regulations.

 

(h)          Reversal of Regulatory Allocations.

 

(i)          The “Regulatory Allocations” consist of the “Basic Regulatory
Allocations,” as defined in Section 7.3(h)(ii), the “Nonrecourse Regulatory
Allocations,” as defined in Section 7.3(h)(iii), and the “Member Nonrecourse
Regulatory Allocations,” as defined in Section 7.3(h)(iv).

 

(ii)         The “Basic Regulatory Allocations” consist of allocations pursuant
to Section 7.3(c), 7.3(d) and 7.3(g). Notwithstanding any other provision of
this Agreement, other than the Regulatory Allocations, the Basic Regulatory
Allocations will be taken into account in allocating items of income, gain, loss
and deduction among the Members so that, to the extent possible, the net amount
of such allocations of other items and the Basic Regulatory Allocations to each
Member will be equal to the net amount that would have been allocated to each
such Member if the Basic Regulatory Allocations had not occurred. For purposes
of applying the foregoing sentence, allocations pursuant to this Section
7.3(h)(ii) will only be made with respect to allocations pursuant to Section
7.3(g) to the extent the Manager reasonably determines that such allocations
will otherwise be inconsistent with the economic agreement among the parties to
this Agreement.

 

(iii)        The “Nonrecourse Regulatory Allocations” consist of all allocations
pursuant to Sections 7.3(a) and 7.3(e). Notwithstanding any other provision of
this Agreement, other than the Regulatory Allocations, the Nonrecourse
Regulatory Allocations will be taken into account in allocating items of income,
gain, loss and deduction among the Members so that, to the extent possible, the
net amount of such allocations of other items and the Nonrecourse Regulatory
Allocations to each Member will be equal to the net amount that would have been
allocated to each such Member if the Nonrecourse Regulatory Allocations had not
occurred. For purposes of applying the foregoing sentence, (A) no allocations
pursuant to this Section 7.3(h)(iii) will be made prior to the Company Fiscal
Year during which there is a net decrease in Company Minimum Gain, and (B)
allocations pursuant to this Section 7.3(h)(iii) will be deferred with respect
to allocations pursuant to Section 7.3(e) to the extent the Manager reasonably
determines that such allocations are likely to be offset by subsequent
allocations pursuant to Section 7.3(a).

 

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(iv)        The “Member Nonrecourse Regulatory Allocations” consist of all
allocations pursuant to Section 7.3(b) and 7.3(f). Notwithstanding any other
provision of this Agreement, other than the Regulatory Allocations, the Member
Nonrecourse Regulatory Allocations will be taken into account in allocating
items of income, gain, loss and deduction among the Members so that, to the
extent possible, the net amount of such allocations of other items and the
Member Nonrecourse Regulatory Allocations to each Member will be equal to the
net amount that would have been allocated to each such Member if the Member
Nonrecourse Regulatory Allocations had not occurred. For purposes of applying
the foregoing sentence, (A) no allocations pursuant to this Section 7.3(h)(iv)
will be made with respect to allocations pursuant to Section 7.3(f) relating to
a particular Member Nonrecourse Debt prior to the Company Fiscal Year during
which there is a net decrease in Member Minimum Gain attributable to such Member
Nonrecourse Debt, and then only to the extent necessary to avoid any potential
economic distortions caused by such net decrease in Member Minimum Gain, and (B)
allocations pursuant to this Section 7.3(h)(iv) will be deferred with respect to
allocations pursuant to Section 7.3(f) relating to a particular Member
Nonrecourse Debt to the extent the Manager reasonably determined that such
allocations are likely to be offset by subsequent allocations pursuant to
Section 7.3(b).

 

(v)         The Manager has reasonable discretion, with respect to each Company
Fiscal Year, to (A) apply the provisions of Sections 7.3(h)(ii), 7.3(h)(iii) and
7.3(h)(iv) in whatever order is likely to minimize the economic distortions that
might otherwise result from the Regulatory Allocations, and (B) divide all
allocations pursuant to Sections 7.3(h)(ii), 7.3(h)(iii) and 7.3(h)(iv) among
the Members in a manner that is likely to minimize such economic distortions.

 

7.4           Income Tax Elections.  In the event of a Transfer of all or part
of a Member’s Interest (or of the interest of a partner in a partnership which
is a Member) because of death or sale, the Company will, if requested by the
transferee, make the election described in Section 754 of the Code.

 

7.5           Income Tax Allocations.

 

(a)          Except as otherwise provided in Section 7.5(c), for purposes of
Sections 702 and 704 of the Code, or the corresponding sections of any future
Federal internal revenue law, or any similar tax law of any state or other
jurisdiction, the Company’s profits, gains and losses for Federal income tax
purposes, and each item of income, gain, loss or deduction entering into the
computation thereof, will be allocated among the Members in the same proportions
as the corresponding “book” items are allocated pursuant to this Section.

 

(b)          If any portion of the Profit from a Capital Transaction allocated
among the Members pursuant to Section 7.5(a) is characterized as ordinary income
under the recapture provisions of the Code or is subject to a different rate of
tax under the Code, each Member’s distributive share of taxable gain from the
sale of the property that gave rise to such Profit (to the extent possible) will
include a proportionate share of the recapture income or income that is subject
to a different rate of tax equal to that Member’s share of prior cumulative
depreciation deductions with respect to the property that give rise to the
recapture income or the income that is subject to a different rate of tax except
to the extent otherwise required by Regulations Sections 1.1245-1(e) and
1.1250-1(f).

 

(c)          Each item of taxable income, gain, loss or deduction attributable
to (i) any property (other than cash) contributed by a Member to the Company,
and (ii) any other property of the Company the Carrying Value of which has been
adjusted pursuant to clause (iii) of the definition of Carrying Value, will be
allocated among the Members in accordance with Section 704(c) of the Code, using
such method permitted by Section 704(c) of the Code and the Regulations
thereunder as may be selected by the Manager so as to take into account the
variation, at the time of contribution or adjustment to Carrying Value, between
the Adjusted Basis and the Carrying Value of such property, as required by
Regulations Section 1.704-1(b)(4)(i) and Section 1.704-3.

 

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(d)          Solely for purposes of determining a Member’s proportionate share
of the “excess nonrecourse liabilities” of the Company within the meaning of
Regulations Section 1.752-3(a)(3), the Members’ interests in Company profits
will be in proportion to their respective Percentage Interests.

 

(e)          To the extent permitted by Sections 1.704-2(h)(3) and 1.704-2(i)(6)
of the Regulations, the Members will endeavor to treat distributions of Net
Operating Cash Flow or Capital Proceeds as having been made from the proceeds of
a Nonrecourse Liability or a Member Nonrecourse Debt only to the extent that
such distributions would cause or increase an Adjusted Capital Account Deficit
for any Member.

 

7.6           Transfers During Fiscal Year.  In the event of the Transfer of all
or any part of a Member’s Interest (in accordance with the provisions of this
Agreement) at any time other than the end of a Fiscal Year, the share of Profit
or Loss (in respect of the Interest so Transferred) will be allocated between
the transferor and the transferee in the same ratio as the number of days in the
Fiscal Year before and after such Transfer. The prior sentence will not apply to
Profit or Loss from Capital Transactions or to other extraordinary nonrecurring
items. Such amounts will be allocated between the transferor and transferee
based on the date of closing of the sale or on the date the gain is realized or
the loss incurred, as the case may be.

 

7.7           Election to be Taxed as Association.  The Company will be treated
as a partnership for federal income tax purposes. No Member or Manager will
cause the Company to elect to be treated other than as a partnership for federal
income tax purposes in accordance with Regulations Section 301.7701-3(c), unless
such election is approved in writing by all Members. If at any time the Company
has just one Member, it will be disregarded as a separate entity for federal,
state and local tax purposes.

 

7.8           Assignees Treated as Members.  For all purposes of this Article
VII, but for no other purpose, an Assignee will be treated as a Member and each
reference in this Article VII to the Members will be deemed to include
Assignees.

 

ARTICLE VIII.
DISTRIBUTIONS OF NET OPERATING CASH FLOW
AND CAPITAL PROCEEDS

 

8.1           Distributions of Net Operating Cash Flow.  Distributions of Net
Operating Cash Flow will be made to the Members within thirty (30) days after
the close of each calendar quarter (unless (x) such distribution is not in
compliance with law or (y) such distribution would result in a breach of any
covenants or undertakings provided by the Company (including covenants or
undertakings provided for third party financing) or would, in the opinion of the
Manager, acting reasonably, be likely to do so during the following twelve (12)
months) to each Member, in accordance with the following priorities:

 

(a)          First, to the Members pari passu until each Member has received a
ten percent (10%) annual non-compounding return on its Total Capital
Contribution as of the date of distribution (the “Return”). Any portion of the
annual Return not paid when due shall accrue and shall be payable pursuant to
Section 8.2(a) below.

 

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(b)          Thereafter, to Union seventy five percent (75%) and Summit twenty
five percent (25%).

 

8.2           Distribution of Capital Proceeds.  Capital Proceeds will be
distributed after a Capital Transaction (unless (x) such distribution is not in
compliance with law or (y) such distribution would result in a breach of any
covenants or undertakings provided by the Company (including covenants or
undertakings provided for third party financing) or would, in the opinion of the
Manager, acting reasonably, be likely to do so during the following twelve (12)
months) to each Member in accordance with the following priorities:

 

(a)          First, to the Members pari passu until each Member has received an
amount equal to its accrued, but unpaid Return;

 

(b)          Second, to the Members pair passu until each Member has received an
amount equal to such Member’s Total Capital Contribution; and

 

(c)          Thereafter, to Union Life seventy five percent (75%) and Summit
twenty five percent (25%).

 

ARTICLE IX.
DISPOSITION OF INTERESTS

 

9.1           Permitted Transfers.  A Member may, without any consent of the
Manager or the other Members, Transfer all or any part of its interest in the
Company (each a “Permitted Transfer”) (i) to another Member, (ii) to any
Affiliate, (iii) in connection with a pledge of, or security or similar interest
in the Interests, as may be required by the Lenders to the Company, or (iv) to
an unrelated third party, provided that the then existing Total Capital
Contribution attributable to the transferred interest shall not be adjusted to
reflect the purchase price paid by the transferee. In each such case of
permitted Transfer is subject to approval, as applicable, of the Lenders, the
terms and conditions of the applicable Financing and assumption of any Affiliate
Guaranty by such transferee. Notwithstanding the foregoing: (A) any transfer of
an interest in violation of any provision of this Article 9 will result in the
transferee receiving only an economic interest, without any voting or management
rights whatsoever; and (B) the transferring Member will forfeit its voting
interest, and such forfeited voting interest shall be allocated to the other
Member.

 

9.2           Limitation on Assignments of Interests by Members.  Except for
Permitted Transfers described in Section 9.1 above and any Transfer described in
Section 9.4, no Member has the right to Transfer all or any portion of its
Interest without the consent of the other Members in their sole discretion and
the consent of Lenders and assumption of any Affiliate Guaranty by such
transferee. Notwithstanding anything to the contrary herein, in no event may a
Member Transfer all or any portion of its Interest unless all necessary consents
and approvals are received from the applicable governmental authority with
respect to the licensure of the Facility. Any transfer tax or similar tax
imposed on Union Life or Summit relating to a transaction pursuant to Article IX
will be paid or caused to be paid by that Member (and the Member will indemnify
the Company for any such transfer tax or similar tax).

 

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9.3           Drag Along Rights.

 

(a)          At any time during the term of this of this Agreement, if any
Member (the "Selling Member") proposes a Transfer to any Person in a bona fide
arm's-length transaction or series of transactions of a Majority Interest which
will produce an internal rate of return for each Member of twenty six percent
(26%) or greater (an "Exit Sale") then the Selling Member may elect to require
the other Member ("Drag Along Member") to Transfer its Membership Interests as a
part of the Exit Sale at the purchase price and upon the other terms and subject
to the conditions of the Exit Sale. If the Selling Member elects to sell less
than all of their outstanding Membership Interests, they may elect to require
the Drag Along Member to participate in the percentage of membership interests
being sold pro rata basis based on ownership of all Members.

 

(b)          The rights set forth in Section 9.5(a) will be exercised by giving
written notice (the "Drag Along Notice") to the Drag Along Member, within ten
(10) days of a signed proposal between the Selling Member and the bona fide
purchaser setting forth in reasonable detail the terms and conditions of such
proposed Transfer. In the event that the terms and/or conditions set forth in
the Drag-Along Notice are thereafter amended in any material respect, the
Selling Member will give written notice (an "Amended Drag-Along Notice") of the
amended terms and conditions of the proposed Transfer to the Drag Along Member.
The Drag Along Member will take all actions needed to effect their participation
in the proposed Transfer at the direction of the Manager promptly upon request.
Additionally, the Drag Along Member will comply with any other reasonable
conditions to closing generally applicable to such minority Member. The Drag
Along member will receive the same amount and form of consideration received by
the Selling Member per each Interest.

 

(c)          Notwithstanding the foregoing, no Drag-Along Rights under this
Section 9.5 will apply with respect to any Permitted Transfer.

 

9.4           Assignment Binding on Company.  No Transfer of all or any part of
the Interest of a Member permitted to be made under this Agreement will be
binding upon the Company unless and until a duplicate original of such
assignment or instrument of transfer, duly executed and acknowledged by the
assignor or transferor, has been delivered to the Company, and such instrument
evidences (i) the written acceptance by the assignee of all of the terms and
provisions of this Agreement and (ii) the assignee’s representation that such
assignment was made in accordance with all applicable laws and regulations. In
addition, a Person to whom a Transfer may be made pursuant to this Article IX,
may also be required, in the discretion of the Manager, and as a condition
precedent to its becoming a transferee, to make certain representations,
warranties and covenants including, without limitation, representations as to
its net worth, sophistication and investment intent.

 

9.5           Substituted Members.

 

(a)          Members who assign all their Interests pursuant to an assignment or
assignments permitted under this Agreement will cease to be Members of the
Company except that unless and until a Substituted Member is admitted in its
stead, the assigning Member will not cease to be a Member of the Company under
the Act and will retain the rights and powers of a Member under the Act and
pursuant to this Agreement, provided that such assigning Member may, prior to
the admission of a Substituted Member, assign its economic interest in its
Interest, to the extent otherwise permitted under this Article IX. Any Person
who is an assignee of any portion of the Interest of a Member and who has
satisfied the requirements of Section 9.1 and Section 9.2 will become a
Substituted Member only when (i) the Manager has entered such assignee as a
Member on the books and records of the Company, which the Manager is hereby
directed to do upon satisfaction of such requirements, and (ii) such assignee
has paid all reasonable legal fees and filing costs in connection with the
substitution as a Member.

 

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(b)          Any Person who is an assignee of any of the Interest of a Member
but who does not become a Substituted Member and desires to make a further
assignment of any such Interest, will be subject to all the provisions of this
Article IX to the same extent and in the same manner as any Member desiring to
make an assignment of its Interest.

 

9.6           Acceptance of Prior Acts.  Any Person who becomes a Member, by
becoming a Member, accepts, ratifies and agrees to be bound by all actions duly
taken pursuant to the terms and provisions of this Agreement by the Company
prior to the date it became a Member and, without limiting the generality of the
foregoing, specifically ratifies and approves all agreements and other
instruments as may have been executed and delivered on behalf of the Company
prior to said date and which are in force and effect on said date.

 

ARTICLE X.
DISSOLUTION OF THE COMPANY;
WINDING UP AND DISTRIBUTION OF ASSETS

 

10.1         Dissolution.

 

(a)          The Company will be dissolved and its affairs will be wound up only
upon the first to occur of the following:

 

(i)          the entry of a decree of judicial dissolution under Section 18-802
of the Act;

 

(ii)         the termination of the legal existence of the last remaining Member
of the Company or the occurrence of any other event which terminates the
continued membership of the last remaining Member of the Company in the Company
unless the business of the Company is continued in a manner permitted by this
Agreement or the Act. Upon the occurrence of any event that causes the last
remaining Member of the Company to cease to be a Member of the Company, to the
fullest extent permitted by law, the personal representative of such Member is
hereby authorized and directed to, and will, within ninety (90) days after the
occurrence of the event that terminated the continued membership of such Member
in the Company, agree in writing (A) to continue the Company and (B) to the
admission of the personal representative or its nominee or designee, as the case
may be, as a Substituted Member of the Company, effective as of the occurrence
of the event that terminated the continued membership of the last remaining
Member of the Company in the Company;

 

(iii)        a Capital Transaction effecting the sale, exchange, transfer,
assignment or other disposition, directly or indirectly, of all the Facilities
and receipt of the final payment of any installment obligation received as a
result of any such Capital Transaction;

 

(iv)        the unanimous written direction of the Members; or

 

(v)         the fiftieth (50th) anniversary of the Effective Date.

 

(b)          No Member has the right to (i) withdraw or resign as a Member of
the Company, (ii) redeem, or otherwise require redemption of, its Interest or
any part thereof or (iii) to the fullest extent permitted by law, dissolve
itself voluntarily.

 

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(c)          Notwithstanding any other provision of this Agreement, the
Bankruptcy of any of the Members will not cause said Member to cease to be a
Member of the Company and upon the occurrence of such an event, the business of
the Company will continue without dissolution. To the fullest extent permitted
by law, the Company will not be dissolved or terminated solely by reason of the
Bankruptcy, removal, withdrawal, dissolution or admission of any Member.

 

10.2         Winding Up.

 

(a)          In the event of the dissolution of the Company pursuant to Section
10.1(a), the Manager may wind up the Company’s affairs.

 

(b)          Upon dissolution of the Company and until the filing of a
certificate of cancellation of the Certificate of Formation as provided in the
Act, the Manager or a liquidating trustee, as the case may be, may, in the name
of, and for and on behalf of, the Company, prosecute and defend suits, whether
civil, criminal or administrative, gradually settle and close the Company’s
business, dispose of and convey the Company’s Asset’s and property, discharge or
make reasonable provision for the Company’s liabilities, and distribute to the
Members in accordance with Section 10.3 any remaining assets of the Company, all
without affecting the liability of Members and without imposing liability on any
liquidating trustee.

 

(c)          Upon the completion of winding up of the Company, the Manager or
liquidating trustee, as the case may be, will file a certificate of cancellation
of the Certificate of Formation in the Office of the Secretary of State of the
State of Delaware as provided in the Act. The existence of the Company as a
separate legal entity will continue until cancellation of the Certificate as
provided in the Act.

 

10.3         Distribution of Assets.  Upon the winding up of the Company, the
Company Assets will be distributed in the following priority:

 

(a)          to the satisfaction of debts and liabilities of the Company owed to
creditors (whether by payment or the making of reasonable provision for payment
thereof), in order of priority as provided by law, other than debts and
liabilities owed to Members, including, without limitation, Member Loans,
including to the payment of expenses of the liquidation and to the setting up of
any reserves that the Manager or the liquidating trustee, as the case may be,
will determine are reasonably necessary for any contingent, conditional or
non-matured liabilities or obligations of the Company or the Members;

 

(b)          to the satisfaction of debts and liabilities of the Company owed to
Members, if any; and

 

(c)          to the satisfaction of any Management Fee then due and payable to
Manager;

 

(d)          to the Members in accordance with provisions of Section 8.2 as if
such distribution was a distribution of Capital Proceeds.

 

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ARTICLE XI.
AMENDMENTS

 

11.1         Amendments.  This Agreement may only be modified, altered,
supplemented or amended pursuant to a written agreement executed and delivered
by all of the Members, provided, however, that amendments may be made to this
Agreement and the Articles, from time to time, by the Manager without the
consent of any of the Members, (i) to correct any clerical mistake or to correct
or supplement any immaterial provision herein or in the Articles, and (ii) to
make any amendments as may be required by a Lender or the HUD in connection with
a Financing. Notwithstanding the foregoing, no amendment shall become effective
without the written consent of each Member who is adversely affected by such
amendment, if such amendment would (i) increase or extend the liabilities or
obligations of such Member, (ii) amend or modify (other than clerical
modifications as described above) those provisions relating to Member Capital
Accounts, any such Member’s interest in income and losses of the Company and
allocations and distributions contained in this Agreement, (iii) reduce any of
the rights afforded a Member, or (iv) amend this Section 11.11(a). All
amendments shall be in writing, dated and signed by the Members approving such
amendment. If any conflict arises between the provisions of the amendment, or
amendments, and the terms hereof, the most recent provisions of any amendment(s)
shall govern and control.

 

11.2         Additional Members.  Notwithstanding Section 11.1, if this
Agreement will be amended as a result of adding or substituting a Member, the
amendment to this Agreement will be signed by all of the Members and by the
Person to be added or substituted and by the assigning Member, if any.

 

11.3         Documentation.  In making any amendments, the Manager will prepare
and file for recordation such documents and certificates as will be required to
be prepared and filed.

 

ARTICLE XII.
INTENTIONALLY OMITTED

 

ARTICLE XIII.
MEMBER REPRESENTATIONS AND WARRANTIES

 

13.1         General. Each Member represents, warrants, covenants and
acknowledges that (a) it is a corporation, limited liability company or limited
partnership duly organized or formed and is in good standing in the jurisdiction
in which it has been organized or formed, (b) it has the power and authority to
authorize the execution, delivery and performance of this Agreement, (c) it has
been duly authorized and is otherwise duly qualified to purchase and hold its
Interest and to execute and deliver this Agreement and all other instruments
executed and delivered on behalf of it in connection with the acquisition of its
Interest, (d) the person or persons executing and delivering this Agreement on
behalf of a Member are duly authorized to do so, (e) the consummation of such
transactions will not result in a breach or violation of, or a default under,
its Organizational Documents, or any existing agreement by which it or any of
its assets are bound, and (f) this Agreement is a valid and binding agreement on
the part of such Member enforceable in accordance with its terms against such
Member, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application affecting the
rights and remedies of creditors and general principles of equity.

 

13.2         Securities Laws Restrictions

 

(a)          Such Member acknowledges that the Interests have not been
registered under the Securities Act of 1933, as amended, or under the securities
laws of the State of Delaware or any other jurisdiction. Consequently, the
Interests may not be sold, Transferred, assigned, pledged, hypothecated or
otherwise disposed of, except in accordance with the provisions of such laws and
this Agreement.

 

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(b)          Such Member is an “accredited investor” (as defined in Rule 501(a)
of SEC Regulation D promulgated under the Securities Act).

 

(c)          Such Member acknowledges that the offer and sale of the Interest in
the Company will be deemed to have occurred in the State of California.

 

13.3         Suitability and Understanding of Risk

 

(a)          Such Member understands that an investment in the Company is
speculative. Such Member can afford to bear the risks of an investment in the
Company, including the risk of losing such Member’s entire investment.

 

(b)          Such Member understands that no U.S. federal or state agency or
exchange has reviewed the private placement of the Interests or made any finding
or determination as to the fairness of an investment in the Company.

 

(c)          Such Member has consulted with his, her or its own tax advisors
regarding the tax consequences of an investment in the Company.

 

13.4         Representations Concerning the Subsidiaries and the Facilities

 

Summit hereby represents and warrants to Union Life that:

 

(a)          It has not failed to disclose or make available any material
information it has obtained pertaining to the Facilities, the Financings, the
leases of the Facilities or the transactions contemplated hereby or thereby to
Union Life.

 

(b)          To Summit’s knowledge, it has caused to be delivered to or made
available for inspection by Union Life copies of all written information,
materials, books, records and reports in Summit’s possession which are material
to the Subidiaries’ ownership or the operation of the Facilities.

 

(c)          To Summit’s knowledge, there is no claim, cause of action or other
litigation or any judicial, administrative or investigative proceeding pending
against any Subsidiary or any Facility which is not covered by insurance.

 

(d)          Except for the Financings, no Subsidiary has any material
liability, secured or unsecured (whether absolute, accrued, contingent or
otherwise and whether due or to become due) of any nature.

 

13.5         Information. Union Life acknowledges and agrees that it has been
furnished any materials relating to the Company and the Facilities that Union
Life has requested; that Manager has answered all inquiries that Union Life has
put to it relating thereto; and that Union Life has been afforded the
opportunity to ask questions and obtain any additional information necessary to
evaluate its investment in the Company. Union Life has conducted its own due
diligence on the Company, Summit, REIT, and the Facilities, and, except the
representations set forth herein or otherwise provided to Union Life in writing,
has relied solely on such due diligence in making its decision to invest in the
Company and understands the nature and risk of an investment in the Company.
Further Union Life disclaims any warranties from Summit or REIT, except those
warranties provided to Union Life in writing.

 

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13.6         Reliance. The representations, warranties and agreements of such
Member contained herein shall survive the execution hereof and the purchase of
an Interest. If there should be any material change in any of the foregoing
information, representations or warranties, such Member shall inform the Company
and Manager as promptly as reasonably practicable. Such Member acknowledges that
the Company and the other Members of the Company will rely on such information,
representations and warranties on an ongoing basis.

 

ARTICLE XIV.
MISCELLANEOUS

 

14.1         Further Assurances.  Each party to this Agreement agrees to
execute, acknowledge, deliver, file and record such further certificates,
amendments, instruments and documents, and to do all such other acts and things,
as may be required by law or as, in the reasonable judgment of the Manager, may
be necessary or advisable to carry out the intent and purpose of this Agreement
so long as such acts and things do not increase the obligations or diminish the
rights of any of the Members.

 

14.2         Notices.

 

(a)          Any and all notices, including any demands, consents, approvals,
offers, elections and other communications required or permitted under this
Agreement will be deemed adequately given if in writing, addressed to the
recipient of the notice at the addresses set forth below (or to such other
addresses as the parties may specify by due notice to the others parties) and if
delivered either (a) in hand, in which case it will be deemed delivered on the
date of delivery or on the date delivery was refused by the addressee, (b) if to
be delivered within the United States, by United States mail, postage prepaid,
registered or certified, with return receipt requested, in which case it will be
deemed delivered on the date of delivery as established by the return receipt
(or the date on which the return receipt confirms that acceptance of delivery
was refused by the addressee), (c) by Federal Express or similar international
expedited commercial carrier, with all freight charges prepaid, in which case it
will be deemed delivered on the date of delivery as established by the courier
service confirmation (or the date on which the courier service confirms that
acceptance of delivery was refused by the addressee), or (d) by facsimile
transmission with a hard copy to follow by any of the other methods above, in
which case it will be deemed delivered on the day and at the time indicated in
the sender’s automatic acknowledgment. If a notice is sent to a party, then
copies of such notice under this Section will also be sent by the same delivery
method to the copy recipients. Whenever under this Agreement a notice is
required to be delivered on a day which is not a Business Day or is required to
be delivered on or before a specific day which is not a Business Day, the day of
required delivery will automatically be extended to the next Business Day. All
such notices will be addressed as follows:

 

To Summit or the Manager:

c/o Summit Healthcare REIT, Inc.

2 South Pointe Drive, Suite 100

Lake Forest, CA 92630

Attention: Kent Eikanas

Telephone: (949) 535-1923

E-Mail: KEikanas@summithealthcarereit.com

 

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With a copy to:

Hanson Bridgett LLP

425 Market Street

San Francisco, CA 94105

Attention: David C. Longinotti

Telephone: (415) 995-5041

E-Mail: DLonginotti@hansonbridgett.com

 

To Union Life:

Union Life Insurance Co., Ltd.

Union Life Building

No. 9 Xingshikou Rd.

Haidian, BJ, China

Attention: Zhigang (Fred) Tang

Telephone: +86 010 5994 9015

E-Mail: tangzg001@ulic.com.cn

 

With a copy to:

Sheppard Mullin Richter & Hampton LLP

4 Embarcadero Center, 17th Floor

San Francisco, California 94111

Attention: Joan Story

Telephone: (415) 434-9100

E-Mail: jstory@sheppardmullin.com

 

(b)          Notices, demands, requests, consents, approvals, offers, elections
and other communications given by an attorney named above on behalf of its
client and sent to the other party to this Agreement in the manner set forth in
this Section has the same effect as if given by a party to this Agreement.
Notwithstanding anything to the contrary contained in this Agreement, it is
understood that notices to each party’s outside counsel will be given as a
courtesy only and failure to provide such notice will not in any way affect or
diminish the validity of the notice given to any party under this Agreement. By
notice given as provided in this Section, the parties to this Agreement and
their respective successors and assigns has the right from time to time and at
any time during the Term to change their respective addresses effective five (5)
Business Days after the date of receipt by the other parties of such notice and
each party has the right to specify as its address any other address within the
United States of America.

 

14.3         Headings and Captions.  All headings and captions contained in this
Agreement and the table of contents hereto are inserted for convenience only and
will not be deemed a part of this Agreement.

 

14.4         Variance of Pronouns.  All pronouns and all variations thereof will
be deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the person or entity may require.

 

14.5         Counterparts.  This Agreement may be executed in two or more
counterparts, each of which will constitute an original and all of which, when
taken together, will constitute one Agreement. The submission of a signature
page transmitted by facsimile (or similar electronic transmission facility) will
be considered as an “original” signature page for purposes of this Agreement so
long as the original signature page is thereafter transmitted by mail or by
other delivery service and the original signature page is substituted for the
facsimile signature page in the original and duplicate originals of this
Agreement.

 

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14.6         Governing Law; Dispute Resolution.

 

(a)          This Agreement will be governed by, and construed in accordance
with, the laws of the State of Delaware without regard to conflict of laws
principles.

 

(b)          Any controversy or dispute arising out of or related to this
Agreement (a “Dispute”), shall be subject to private negotiation among the
Members during the Cooling Off Period as set forth in Section 3.6(a), and if
then not resolved shall be subject to binding arbitration, both as set forth
below, before any Member may institute litigation. Each Member agrees that any
Dispute, and all matters concerning any Dispute, will be considered confidential
and will not be disclosed to any Person outside the Company except (a)
disclosures to a Member’s attorneys, accountants and other consultants who
assist the Member in the resolution of the Dispute, and (b) as provided below
with respect to the mediation or as otherwise required by applicable laws.

 

(c)          Within thirty (30) days following the commencement of private
negotiation in accordance with Section 3.6(a), any Member may initiate binding
arbitration (the “Arbitration”) by written notice to the other Member, which
shall be conducted by the Hong Kong International Arbitration Center (HKIAC) in
accordance with the HKIAC Administered Arbitration Rules in force when the
notice of Arbitration is submitted.

 

(d)          The Members shall bear equally the cost of the arbitrator’s fees
and expenses, but each Member shall pay its own attorneys’ and expert witness
fees and any other Mediation associated costs.

 

14.7         Partition.  The Members hereby agree that no Member nor any
successor-in-interest to any Member has the right to have any of the Facilities
partitioned, or to file a complaint or institute any proceeding at law or in
equity to have the any of the Facilities partitioned, and each Member, on behalf
of himself, his successors, representatives, heirs and assigns, hereby waives
any such right.

 

14.8         Invalidity.  Every provision of this Agreement is intended to be
severable. The invalidity and unenforceability of any particular provision of
this Agreement in any jurisdiction will not affect the other provisions of this
Agreement, and this Agreement will be construed in all respects as if such
invalid or unenforceable provision were omitted.

 

14.9         Successors and Assigns.  This Agreement will be binding upon the
parties hereto and their respective successors, executors, administrators, legal
representatives, heirs and legal assigns and will inure to the benefit of the
parties hereto and, except as otherwise provided in this Agreement, their
respective successors, executors, administrators, legal representatives, heirs
and legal assigns.

 

14.10         Entire Agreement.  This Agreement supersedes all prior agreements
among the parties with respect to the subject matter of this Agreement and
contains the entire Agreement among the parties with respect to such subject
matter.

 

14.11         Waivers.  No waiver of any provision of this Agreement by any
party hereto will be deemed a waiver by any other party nor will any such waiver
by any party be deemed a continuing waiver of any matter by such party. No
amendment, modification, supplement, discharge or waiver of this Agreement will
require the consent of any Person not a party to this Agreement.

 

-38-

 

 

14.12         No Brokers.  Each of the Members hereto represents and warrants to
each other that there are no brokerage commissions or finders’ fees (or any
basis therefor) resulting from any action taken by such Member or any Person
acting or purporting to act on their behalf in connection with entering into
this Agreement. Each Member agrees to defend, indemnify and hold harmless each
other Member for all costs, damages or other expenses, including, without
limitation, reasonable attorneys’ fees and expenses, arising out of any
misrepresentation made in this Section 14.12.

 

14.13         Confidentiality.  Each Member agrees not to disclose or permit the
disclosure of any of the terms of this Agreement or of any other confidential,
non-public or proprietary information relating to the Company Assets or business
(collectively, “Confidential Information”), provided that such disclosure may be
made (a) to any Affiliate or other Person who is a partner, member, officer,
director or employee of such Member or Affiliate or counsel to or financial
advisors or accountants of such Member solely for their use on behalf of such
Member and on a need-to-know basis, provided that such Persons are notified of
the Member’s confidentiality obligations pursuant to this Agreement, (b) with
the consent of the other Members, (c) if required by governmental law, rule or
regulation, in which event the disclosing party will, unless prohibited by law,
immediately notify the other of the terms and circumstances of the disclosure,
and cooperate with any efforts to prevent or limit disclosure, (d) subject to
the next paragraph, pursuant to a subpoena or order issued by a court,
arbitrator or governmental body, agency or official or (e) to any lender
providing Financing to the Company.

 

14.14         No Third Party Beneficiaries.  This Agreement is not intended and
will not be construed as granting any rights, benefits or privileges to any
Person not a party to this Agreement or an Indemnified Person.

 

14.15         Power of Attorney.  Subject to Section 3.6, each of the
undersigned does hereby constitute and appoint Manager as its true and lawful
representative and attorney-in-fact, in its name, place, and stead to make,
execute, sign, and file any amendment to the Certificate of Formation of the
Company required because of an amendment to this Agreement or in order to
effectuate any change in the membership of the Company, and all such other
instruments, documents, and certificates which may from time to time be required
by the laws of the United States of America, the State of Delaware, or any other
state in which the Company will determine to do business, or any political
subdivision or agency thereof, to effectuate, implement, and continue the valid
and subsisting existence of the Company, or in connection with any state tax
filings of the Company. The power of attorney granted hereby is coupled with an
interest and will (a) continue in full force and effect notwithstanding the
subsequent death, incapacity, dissolution, termination, or Bankruptcy of the
Member granting the same or the Transfer of all or any portion of such Member’s
Interest, and (b) extend to such Member’s successors, assigns, and legal
representatives.

 

14.16         Invalidity.  The provisions of this Agreement were negotiated in
good faith by the parties to this Agreement, and the parties agree that such
provisions are reasonable and are not more restrictive than necessary to protect
the legitimate interests of the parties hereto. It is the intention of the
parties to this Agreement that if any of the restrictions or covenants contained
herein is held to be for a length of time that is not permitted by applicable
law, or is any way construed to be too broad or to any extent invalid, such
provision will not be construed to be null, void and of no effect, but to the
extent such provision would be valid or enforceable under applicable law, a
court of competent jurisdiction will construe and interpret or reform such
provision to provide for a restriction or covenant having the maximum time
period and other provisions (not greater than those contained herein) as will be
valid and enforceable under applicable law.

 

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14.17         Construction of Documents.  The parties acknowledge that they were
represented by separate and independent counsel in connection with the review,
negotiation and drafting of this Agreement and that this Agreement will not be
subject to the principle of construing its meaning against the drafter.

 

14.18         REIT Limitations.

 

(a)          Summit is owned by a real estate investment trust ("REIT") that is
subject to the provisions of Code Sections 856 through and including Code
Section 860. So long as REIT owns, directly or indirectly, any Membership
Interest, then notwithstanding any other provision of this Agreement, in no
event shall the Manager or the Company take, or be obligated to take, any action
in contravention of the following:

 

(i)          any services that would otherwise cause any rents from a Facility
to be excluded from treatment as rents from real property pursuant to Section
856(d)(2)(C) of the Code shall be provided by either (1) an independent
contractor (as described in Section 856(d)(3) of the Code) with respect to
Summit and from whom the Company does not derive or receive any income or (2) a
taxable REIT Subsidiary of Summit or an affiliate of Summit as described in
Section 856(c) of the Code;

 

(ii)         the Company shall not furnish or render services to tenants or
other persons, and shall not manage or operate the Facilities, other than
through the operator or manager of the Facilities or its successors;

 

(iii)        except for a taxable REIT Subsidiary of an Affiliate of Summit the
Company shall not own, directly or indirectly or by attribution (in accordance
with attribution rules referred to in Section 856(d)(5) of the Code), in the
aggregate more than 10% of the total value of all classes of stock or more than
10% of the total voting power (or, with respect to any such person which is not
a corporation, an interest of 10% or more in the assets or net profits of such
person) of a lessee or sublessee of all or any part of the Subsidiaries or of
any other assets of the Company except in each case with the specific written
approval of Summit;

 

(iv)        except for securities of a taxable REIT Subsidiary of Summit or its
Affiliate, the Company shall not own or acquire, directly or indirectly or by
attribution, more than 10% of the total value or the total voting power of the
outstanding securities of any issuer or own any other asset (including a
security) which would cause Summit to fail the asset test of Section
856(c)(4)(B) of the Code;

 

(v)         the Company shall not engage in any prohibited transaction within
the meaning of Section 857(b)(6) of the Code; and

 

(vi)        all Facility leases shall provide for rents that qualify as "rents
from real property" within the meaning of Section 856(d) of the Code with
respect to the REIT.

 

[SIGNATURE PAGES FOLLOW]

 

-40-

 

 

IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have
duly executed this Limited Liability Company Agreement effective as of the
Effective Date.

 

  MEMBERS:       SUMMIT:       Summit Healthcare Operating Partnership,   a
Delaware limited partnership       By:   Summit Healthcare REIT, Inc., a
Maryland corporation   Its:   General Partner               By: /s/ Kent Eikanas
      Name: Kent Eikanas       Title:   President   Date: 
                4/7/15

 

  UNION LIFE:       Best Years LLC,   a Delaware limited liability company      
     By: Union Life Insurance Co., Ltd,       a Chinese corporation          
By: /s/ Zheng Wang     Name: Zheng Wang   Title: General Manager of Real
Estate  Investment   Date:                 4/10/15       The undersigned hereby
agrees to act as the Manager of the Company and to perform its duties as Manager
in accordance with and to be bound by the terms of this Agreement.       Summit
Healthcare REIT, Inc., a Maryland corporation       By: /s/ Kent Eikanas  
Name:  Kent Eikanas   Title: President   Date:                 4/7/15

 

 

 

SCHEDULES AND EXHIBITS OMITTED