SENIOR INDEPENDENT
                                 LIVING FACILITY
                              MANAGEMENT AGREEMENT



                                 by and between


                          CAPITAL SENIOR LIVING, INC.,
                               a Texas corporation
                                  ("Manager"),


                             SHP II CARMICHAEL, LLC,
                      a Delaware limited liability company
                                   ("Owner"),






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                                TABLE OF CONTENTS


Section           Title                                                                                        Page
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<C>               <C>                                                                                            <C>


Section 1.        APPOINTMENT OF MANAGER..........................................................................1
Section 2.        TERM............................................................................................1
Section 3.        RESPONSIBILITIES OF MANAGER.....................................................................1
                  3.1        Operation and Affairs................................................................2
                  3.2        Management and Employees.............................................................2
                  3.3        Salaries and Benefits................................................................2
                  3.4        Billing, Accounting and Collections..................................................2
                  3.5        Services.............................................................................3
                  3.6        Payment Services.....................................................................3
                  3.7        Community Relations..................................................................3
                  3.8        Manuals..............................................................................3
                  3.9        Insurance............................................................................3
                  3.10       Agreements...........................................................................3
                  3.11       Employee Relations...................................................................4
                  3.12       Licensing............................................................................4
                  3.13       Evaluations..........................................................................4
                  3.14       Accounting and Control Systems.......................................................4
                  3.15       Quality Control......................................................................4
                  3.16       Marketing and Overall Business Plan..................................................4
                  3.17       Cooperation Upon Termination and in Connection with Sales and Financings.............4
                  3.18       Certifications.......................................................................5
                  3.19       Operation as a REOC..................................................................5
Section 4.        RESPONSIBILITIES OF OWNER.......................................................................5
                  4.1        Cooperation..........................................................................5
                  4.2        Inspection of Documents..............................................................5
                  4.3         Proprietary Property................................................................5
                  4.4        Rights to Inspect and Review.........................................................5
Section 5.        FEES............................................................................................6
                  5.1        Management Fee.......................................................................6
                  5.2        Other Fees and Reimbursements........................................................6
                  5.3        Overdue Invoices.....................................................................6
Section 6         ANNUAL PLAN, BUDGETS AND REPORTS................................................................6
                  6.1        Annual Plan..........................................................................6
                  6.2        Annual Budget........................................................................7
                  6.3        Capital Expenditures.................................................................7
                  6.4        Operating Budget.....................................................................7

                                      (i)
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                  6.5        Reports..............................................................................8
                  6.6        Budget Variances.....................................................................9
Section 7         BANK ACCOUNTS AND WORKING CAPITAL...............................................................9
                  7.1        Operating Account....................................................................9
                  7.2        Taxes...............................................................................10
Section 8.        LICENSES, PERMITS, CERTIFICATIONS AND CONTESTS.................................................10
                  8.1        Licenses, Permits and Approvals.....................................................10
                  8.2        Government Actions..................................................................10
                  8.3        Legal Proceedings...................................................................10
                  8.4        Compliance..........................................................................11
Section 9.        INSURANCE......................................................................................11
                  9.1        Facility Insurance..................................................................11
                  9.2        Liability Insurance.................................................................11
                  9.3        Additional Insurance................................................................12
                  9.4        Subcontractor's Insurance...........................................................13
                  9.5        Certificates of Insurance...........................................................13
                  9.6        Mutual Waivers......................................................................13
                  9.7        Cooperation With Insurance Carriers.................................................14
                  9.8        Compliance With Insurance Policies..................................................14
                  9.9        Insurance Claims....................................................................14
                  9.10       Financial Condition of Carriers.....................................................15
Section 10.       MANAGER'S HOME OFFICE PERSONNEL................................................................15
Section 11.       REPRESENTATIONS AND WARRANTIES.................................................................15
                  11.1       Status..............................................................................15
                  11.2       Authority and Due Execution.........................................................15
                  11.3       Litigation..........................................................................15
Section 12.       TERMINATION....................................................................................16
                  12.1       Termination for Cause...............................................................16
                             (a)         Bankruptcy, etc.........................................................16
                             (b)         Default.................................................................16
                             (c)         Willful Misconduct......................................................16
                  12.2       Termination Without Cause...........................................................16
                             (a)         Damage/Condemnation.....................................................17
                             (b)         Sale....................................................................17
                             (c)         NOI Threshold...........................................................17
                  12.3       Effect of Termination...............................................................17
Section 13.       NOTICES........................................................................................18
Section 14.       COSTS AND EXPENSES, INDEMNITY AND INSURANCE....................................................19
                  14.1       Costs and Fees......................................................................19
                  14.2       Indemnification.....................................................................19

                                      (ii)
<PAGE>

Section 15        MISCELLANEOUS..................................................................................20
                  15.1       Government Regulations..............................................................20
                  15.2       Good Faith Effort by Manager........................................................20
                  15.3       Assignment..........................................................................20
                  15.4       Subordination.......................................................................20
                  15.5       Retention of Control by Owner.......................................................21
                  15.6       Books and Records...................................................................21
                  15.7       Binding Agreement...................................................................21
                  15.8       Relationship of Parties.............................................................21
                  15.9       Entire Agreement; Amendments........................................................21
                  15.10      Governing Law.......................................................................21
                  15.11      Arbitration of Accounting Matters...................................................21
                  15.12      Maintenance of Books, Records and Documents.........................................22
                  15.13      Further Assurances..................................................................22
                  15.14      Certain Definitions.................................................................22
                             (a)         Affiliate...............................................................22
                             (b)         Person..................................................................22
                             (c)         Gross Revenue...........................................................22
                             (d)         Facility Operating Expenses.............................................22
                  15.15      Attorneys' and Other Fees...........................................................23
                  15.16      Severability........................................................................23
                  15.17      Counterparts........................................................................23
Section 16        RIGHT OF FIRST OFFER FOR SALE OF PROPERTY......................................................23


Schedule 1........-          Legal Description
Schedule 6.1......-          Forms of Annual Plan, Annual Budget, Capital Budget and
                             Operating Budget

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                                     (iii)
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                               SENIOR INDEPENDENT
                                 LIVING FACILITY
                              MANAGEMENT AGREEMENT



         THIS MANAGEMENT AGREEMENT (the "Agreement"),  dated as of September 30,
2003,  is entered  into by and between  CAPITAL  SENIOR  LIVING,  INC.,  a Texas
corporation  ("Manager"),  SHP II CARMICHAEL,  LLC, a Delaware limited liability
company ("Owner").

                                   BACKGROUND

         A. Owner is the owner of the property  more  particularly  described in
Schedule 1 attached  hereto which is improved with a senior  independent  living
facility (such real property,  existing facilities and equipment are referred to
individually as a "Facility").

         B. Owner  desires to engage  Manager to  operate,  manage and lease the
Facility.

         C. Manager desires to operate,  manage,  market and lease such Facility
and provide operational,  accounting and financial services to such Facility and
Manager is willing to provide such  services with respect to the Facility on the
basis, terms and conditions set forth below.

         D. Owner and  Manager  hereby  acknowledge  that this  Agreement  shall
supercede any prior agreements between the parties.

                                      TERMS

         NOW,  THEREFORE,   in  consideration  of  the  mutual  representations,
covenants and  agreements  set forth below,  and intending to be legally  bound,
Manager and Owner agree as follows:

         Section 1.  APPOINTMENT OF MANAGER.  Owner hereby  appoints and employs
Manager as  operating  manager of the  Facility,  and  Manager  agrees to act as
operating  manager  of the  Facility,  to  supervise,  direct  and  control  the
day-to-day  business  activities,  management  and  operation,  and  repair  the
Facility  and all  phases of its  operations  in the name of, on behalf  of, and
subject to the  overall  supervision  of and  control  of Owner and for  Owner's
account during the term of this Agreement.

         Section 2. TERM. The term of this Agreement  shall commence on the date
hereof (the "Effective Date"), and shall continue,  unless otherwise  terminated
as permitted herein,  until the date five (5) years from the Effective Date (the
"Initial Term").

         Section  3.   RESPONSIBILITIES  OF  MANAGER.  In  connection  with  the
supervision,  direction and  management  of the Facility,  Manager shall (either
directly or through  supervision  of employees of the  Facility),  as agent,  on
behalf  of,  and  subject  to the  terms  of  this  Agreement  and  the  overall

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supervision  and  control  of  Owner,  perform  or  cause to be  performed,  the
following services:

         3.1. Operation and Affairs.  Manage the operations and business affairs
of the  Facility,  including,  but not limited to, the provision of services and
assistance to residents of the Facility, staffing,  accounting services (but not
audit  services),  billing,  collection,  marketing,  maintenance,  construction
coordination, advertising, rate setting and general on-site administration.

         3.2. Management and Employees. Select, employ, supervise, and train all
employees  and personnel  necessary for the effective  operation of the Facility
and as required by law, subject to availability,  including, without limitation,
as  reasonably  deemed  necessary,  corporate  staff,  accounting  personnel,  a
marketing director, a dietary director,  leasing agents,  maintenance personnel,
assistants and an executive director (the "Director"). Each of the employees may
be replaced by Manager from time to time and  promoted,  directed,  assigned and
discharged,  all within  Manager's  sole  discretion.  Such  employees  shall be
employees of Manager,  but the  "Employment  Costs" (as defined  below) for such
employees  will be included in the operating  costs of the Facility.  Subject to
and in  accordance  with the  approved  Annual  Budget  and the  Annual  Plan or
variances as may be permitted under Section 6, Owner agrees to reimburse Manager
for all direct and indirect  employment  related costs  associated with any such
employee,   including,  without  limitation,   compensation,   salary,  bonuses,
reasonable business expense reimbursements approved by Manager,  employer's FICA
payments,  severance,  unemployment  compensation  and other  employment  taxes,
bonuses,  automobile  allowances,  vacation,  personal and sick leave  benefits,
workers'  compensation,  group life,  health and  accident  insurance  premiums,
pension,  disability and other benefits and third party payroll  processing fees
(collectively,  "Employment Costs").  Notwithstanding the foregoing, Owner shall
not be obligated to  reimburse  Manager for  Employment  Costs  associated  with
corporate or regional  personnel of Manager or any  personnel not located at the
Facility  unless  approved in writing by Owner nor shall Owner be  obligated  to
reimburse Manager for travel costs for such employees except up to an amount not
in excess of $10,000.00 in any calendar year.

         3.3.  Salaries  and  Benefits.  With the prior  written  consent of the
Owner, which shall not be unreasonably withheld or delayed,  institute and amend
from time to time,  general salary scales,  personnel  policies and  appropriate
employee benefits for all employees of the Facility.

         3.4. Billing, Accounting and Collections.  Issue bills for services and
materials  furnished by the Facility and collect accounts  receivable and monies
owed to the Facility;  design and maintain  accounting,  billing and  collection
records;  and to the extent  applicable,  prepare  and file,  or  supervise  the
preparation  and filing of all  necessary or desirable  billings,  applications,
reports and claims related to revenue  production.  Owner expressly  constitutes
Manager,  to the extent permitted by applicable law, as its agent to administer,
process  and  collect,  on  Owner's  behalf  and in its name,  any  third  party
receivables.  Manager shall have the right to enforce Owner's rights as creditor
under any contract  relating to the Facility or in connection with rendering any
services at the Facility for the purposes of collecting  accounts receivable and
monies owed the Facility,  and Manager shall make reasonable  efforts to collect
all such receivables and monies at Owner's expense.



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<PAGE>

         3.5.  Services.  Administer,  supervise,  coordinate  and  schedule all
services of the Facility, including the provision of food, barber/beautician and
any other ancillary services as Manager deems appropriate.  Such services may be
provided  by  contracts  or leases for the  account  of Owner.  Except as may be
approved in advance by Owner, all such service agreements which require payments
in excess of  $50,000.00  shall be entered  into by  Manager  with the party who
submits the lowest,  conforming bid from among at least three (3) qualified bids
obtained by Manager.  Any such  agreements or leases not terminable  upon thirty
(30) days' notice shall be subject to prior  approval of Owner,  which  approval
may be withheld  in Owner's  sole  discretion.  Manager  may  contract  with any
companies  that are  owned by  Manager,  are owned  under  common  control  with
Management,  that own Manager, or the controlling  interest of which is owned by
some  or  all  of  the  parties  that  own   controlling   interest  in  Manager
("Affiliates"),  only with the prior written  approval of Owner,  which approval
Owner will not  unreasonably  withhold,  condition or delay,  so long as (i) the
contract  terms and price are in  keeping  with the  market  terms that would be
offered by an unrelated third party,  and (ii) if Owner, in its sole discretion,
requires that the applicable service  requirement be put out for bid (regardless
of the amount),  the bid submitted by the  Affiliate was with lowest  conforming
bid from among at least  three (3)  bidders.  Manager  shall use all  reasonable
efforts to obtain for the benefit of the  Facility  and the Owner all  discounts
and rebates  available by making bulk  purchases and by making early payments of
invoices  (consistent with the then approved Annual Budget). All such discounts,
rebates or the like shall  accrue to the benefit of the  Facility  and Owner and
not to the Manager.

         3.6.  Payment  Services.  Provide for the payment of accounts  payable,
employee  payroll  taxes,  insurance  premiums,   mortgage  payments  and  other
obligations of the Facility.

         3.7.  Community  Relations.  Establish and carry out appropriate public
and community  relations programs in accordance with the approved marketing plan
approved pursuant to the provisions of Section 3.16, below.

         3.8.  Manuals.  Upon request by Owner,  furnish to Owner for review and
approval,  which approval shall not be unreasonably withheld or delayed,  policy
manuals  discussing  aspects  of the  operation  of  the  Facility  and  propose
revisions to such policy manuals from time to time.

         3.9. Insurance. Obtain and maintain insurance coverage for the Facility
as required by Section 9 of this Agreement,  including insurance coverage naming
Owner,  Manager  and such  other  persons  as may be  required  by Section 9 and
reasonably requested by Owner as additional  insureds,  with respect to services
that could be provided by the Facility.

         3.10.  Agreements.  Negotiate  and  enter  into,  in the name of and on
behalf of Owner,  such  agreements,  contracts  and orders as  Manager  may deem
necessary or advisable for the furnishing of services,  concessions and supplies
for the operation and maintenance of the Facility.

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<PAGE>

         3.11. Employee Relations.  Handle and settle employee relation matters,
union and non-union,  and negotiate  with any labor union  lawfully  entitled to
represent employees who work at the Facility;  provided however,  any collective
bargaining  agreement or labor contract must be submitted to Owner for its prior
approval and provided, further, that the institution of any labor litigation and
any  labor  settlement  in  excess of the sum of  Twenty-five  Thousand  Dollars
($25,000) for the Facility must be approved by Owner,  which  approval shall not
be unreasonably withheld or delayed.

         3.12.  Licensing.  At Owner's sole cost and expense,  file all reports,
pay all  fees,  respond  to all  notices  and take all other  action  reasonably
necessary to keep in full force and effect all licenses  necessary for operation
of the Facility.

         3.13. Evaluations.  Make periodic evaluations of the performance of all
departments  of the Facility and provide  written  notification  to Owner in the
event of any material substandard performance.

         3.14. Accounting and Control Systems. Implement and maintain accounting
and internal control systems using accounts and classifications  consistent with
those  used  in  senior  facilities  managed  by  Manager.   Manager  agrees  to
consolidate  and forward  electronically  summary  data in an Excel  spreadsheet
format as reasonably required by Owner or such other format as may be reasonably
required by Owner.  To the extent that such format  requires  new or  additional
computer  hardware or  software,  the Owner shall be  responsible  for the costs
thereof.

         3.15.  Quality  Control.  Implement  and  maintain a program to provide
objective  measurements of the quality of services  provided at the Facility and
which may utilize resident  questionnaires and interviews,  periodic inspection,
and such other  techniques as Manager may reasonably  deem necessary to maintain
the quality of services at the Facility.

         3.16.  Marketing and Overall Business Plan. Manager shall implement and
maintain a program to operate the Facility and to lease units in the Facility to
residents. Manager shall act as Owner's signatory for execution of all leases or
occupancy  agreements.  Manager  shall  submit to Owner,  along with the "Annual
Budget," as provided in Section 6, below,  a written  marketing  plan and budget
for Owner's review and approval.

         3.17.  Cooperation  Upon  Termination  and in Connection with Sales and
Financings.  Manager  shall extend its full  cooperation  to any broker,  agent,
lenders,  appraisers  or other  advisors  involved in any  prospective  sales or
financings which Owner elects to pursue with respect to the Facility and also to
Owner and any third party who takes over  management  of the  Facility  upon the
termination of this  Agreement.  Such full  cooperation  shall include,  without
limitation, (i) providing access to the Facility, (ii) arranging interviews with
residents,  and  Manager's  key  employees,  and (iii)  providing  promptly upon
request all  information  related to the  Facility in  Manager's  possession  or
readily available to Manager including,  without limitation,  financial records,
property  tax records,  employee  records,  copies of leases,  copies of service
contracts,  copies of warranties and  guarantees,  health care licenses (and all
reports related  thereto),  complete  resident  files,  loss history reports and
maintenance  and repair  records.  Owner will  reimburse  Manager for any actual
out-of-pocket costs incurred by Manager to comply with this Section 3.17.

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<PAGE>

         3.18. Certifications.  Manager shall use its  reasonable  efforts to
provide the  certifications  and support  necessary for Owner to fulfill Owner's
obligations  in the Purchase  and Sale  Agreement  related to licensing  for the
Facility.

         3.19. Operation  as a REOC.  Manager  acknowledges  that  Owner  has
undertaken  to conduct its affairs so as to qualify as a "real estate  operating
company" ("REOC") within the meaning of 29C.F.R. Section 2510.3-101.

         Section  4.  RESPONSIBILITIES  OF  OWNER.  Owner  makes  the  following
covenants  which are  material  covenants  and upon which  Manager  relies as an
inducement to enter into this Agreement:

         4.1. Cooperation. Owner will cooperate with Manager to allow Manager to
perform its services  under this  Agreement  and will  furnish  Manager with all
information  required  by it for the  performance  of its  services  under  this
Agreement. Owner will permit Manager full access to the Facility.

         4.2. Inspection of Documents. Other than the review and approval of the
Annual  Plan and  Annual  Budget,  the  procedures  and timing for which will be
governed by Section 6, below,  Owner will examine all requests for approvals and
documents  submitted by Manager and render decisions  pertaining  thereto,  when
required,  promptly,  to avoid  unreasonable  delay in the progress of Manager's
work, and, in any event, if Owner shall not respond negatively in writing to the
notice within fifteen (15) days after the notice is sent,  Owner shall be deemed
to have approved the matter  submitted to Owner. In any emergency  situation (as
determined by Manager),  Manager shall not be required to seek or obtain Owner's
approval for any actions which Manager, in its sole judgment, deems necessary or
appropriate to respond to such situations,  provided Manager promptly thereafter
reports such action to Owner in writing.  Subject to Owner's  reasonable  review
and approval  thereof,  Owner shall execute and deliver any and all applications
and other  documents  necessary or proper to be executed by Owner in  connection
with the operation of the Facility.

         4.3.  Proprietary  Property.  Owner  agrees  that  Manager  retains all
ownership and other rights in all proprietary systems, computer software, policy
and other manuals, materials and other information,  in whatever form, developed
by Manager in the performance of its services under this Agreement. Owner agrees
to maintain such  proprietary  systems and information on a confidential  basis.
Nothing  contained in this Agreement shall be construed as a license or transfer
of such information either during the term of this Agreement or otherwise.  Upon
termination of this Agreement,  or earlier upon Manager's  request,  Owner shall
immediately return all such information to Manager.

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<PAGE>


         4.4. Rights to Inspect and Review.  Owner, its accountants,  attorneys,
agents and any of Owner's lenders shall have the right to enter upon any part of
the  Facility  at any  time  during  normal  business  hours  (at any time if an
emergency  exists)  for the  purposes of  examining  or  inspecting  the same or
examining  and  making  extracts  and  copies of the books  and  records  of the
Facility  or for any other  purpose,  including  audits,  which the Owner of the
Facility,  in its  discretion,  shall deem necessary or advisable,  but the same
shall be done with as little  disruption  to the  business  of the  Facility  as
practicable.  Books and records of the  Facility  shall be kept at the  Facility
and/or the Manager's corporate offices and a summary thereof in such location as
directed by Owner.

         Section 5.        FEES.

         5.1.  Management Fee.  Compensation to the Manager,  in addition to the
other  fees  provided  in this  Section 5 and the  reimbursement  for  operating
expenses of the  Facility  (including,  without  limitation,  Employment  Costs)
consists  of a monthly  fee (the  "Management  Fee"),  payable on the  fifteenth
(15th) day of each month in an amount  equal to five  percent (5%) of the "Gross
Revenues"  (as defined in Section  15.14(c)) of the Facility for the period from
the first (1st) day of the prior month until the last day of the prior month. At
the end of each calendar year,  Gross Revenue for the entire calendar year shall
be determined, and if such determination results in any adjustments to the Gross
Revenue, as determined on a monthly basis, appropriate adjustments shall be made
to the Management Fee, and any overpayments of such fee for such period shall be
deducted from the next monthly installments of the Management Fee coming due.

         5.2.  Other Fees and  Reimbursements.  The  Management  Fee shall be in
addition  to any  and  all  other  reimbursements  due  to  Manager  under  this
Agreement.

         5.3. Overdue Invoices.  Owner shall pay Manager interest on amounts due
to Manager  which are not paid  within  thirty  (30) days of their due date (and
which  late  payment  is not cured by Owner  within  ten (10)  business  days of
written notice from Manager),  at a rate of one and  five-tenths  percent (1.5%)
per month on past due balance.

         Section 6.        ANNUAL PLAN, BUDGETS AND REPORTS.

         6.1. Annual Plan. Prior to the Effective Date of this Agreement, and no
later than November 15 of calendar year 2003 and each calendar year  thereafter,
Manager shall submit to Owner an annual  forecast of operations for the Facility
for the upcoming  calendar year ("Annual Plan"),  which Annual Plan will include
the Annual Budget,  Capital Budget,  and Operating  Budget, as more particularly
described below. The Annual Plan, as well as the Annual Budget,  Capital Budget,
and Operating  Budget,  shall be in reasonable  detail and in substantially  the
form  attached  hereto as  Schedule  6.1.  The  Annual  Plan shall  include  the
assumptions upon which the forecasts and budgets were prepared and shall include
a  proposed  annual  marketing  plan,  and  such  other  information  as  may be
reasonable  and  appropriate  to fully advise  Owner of all  material  facts and
assumptions relevant to an evaluation of the Annual Plan. Upon request of Owner,
Manager will meet with Owner to review the Annual  Plan.  Owner has approved the
initial  Annual  Plan  together  with the  Annual  Budget,  Capital  Budget  and
Operating  Budget dated  September  10, 2003 for the  remainder of calendar year
2003. Owner shall approve or disapprove any subsequent Annual Plan no later than
fifteen (15) days prior to the end of each calendar  year.  When the Annual Plan
has been approved by Owner,  Manager is  authorized  to pay operating  costs and
make capital expenditures as set forth in the Annual Budget, Capital Budget, and
Operating Budget, and Manager shall implement the provisions of the Annual Plan.
Manager  shall not  expend  more than the  applicable  amounts  approved  in the
Capital Budget or Operating Budget respectively except as expressly permitted in
Section 6.6 below. If Owner does not approve  specific items in the Annual Plan,
Manager  shall make  appropriate  revisions  to the Annual Plan and resubmit the
Annual  Plan to Owner for  approval.  If Owner  disapproves  the Annual  Budget,
Capital Budget, or Operating Budget, expenditures for the upcoming calendar year

                                       6
<PAGE>

will be  handled as  described  in  Section  6.2 below  until such time as a new
Annual Plan is approved.  Manager agrees to use its commercially reasonable best
efforts to operate the Facility as provided in the approved Annual Plan.

         6.2. Annual Budget. Prior to the Effective Date of this Agreement,  and
no  later  than  November  15 of  calendar  year  2003 and  each  calendar  year
thereafter,  Manager  shall  submit to Owner an annual  budget  (each an "Annual
Budget") covering the operations of and proposed capital expenditures to be made
with respect to the Facility for the next calendar year (or the remainder of the
current calendar year, in the case of the initial  budget).  Owner shall approve
or disapprove  the Annual Budget  submitted by Manager no later than December 15
of each  calendar  year.  Unless  and until the  Annual  Budget  for any year is
approved by Owner,  Manager shall operate the Facility on the basis of the prior
year's approved Annual Budget (excluding any  extraordinary  items) increased by
the percentage  change in the Consumer Price Index,  All Urban  Consumers  (U.S.
Cities  Average)  ("CPI")  released by the United  States  Department  of Labor,
Bureau of Labor Statistics in the previous twelve (12) months.  If the CPI shall
no longer be published or cannot be readjusted,  then another  index,  generally
recognized  as  authoritative,  shall be  substituted  by agreement  between the
parties.

         6.3.  Capital  Expenditures.  The Annual Budget shall include a capital
budget (the "Capital Budget") outlining a program of capital expenditures as may
be required by  applicable  law, any lender to Owner or in Manager's  reasonable
business judgment during the next calendar year (or the remainder of the current
calendar  year,  in the case of the  initial  budget),  in which  each  proposed
capital  expenditure will be designated as either mandatory,  highly recommended
or  desirable.  Owner may approve or reject,  in its  discretion,  each proposed
capital  expenditure,  except those  indicated as  mandatory.  Manager  shall be
responsible for designating as a "mandatory capital expenditure" any expenditure
which, if not made would, in Manager's judgment, (a) cause a Facility to lose or
put at risk its license;  (b) place at risk the safety of a Facility resident or
employee;  (c) cause the issuance of a formal notice that the operating  license
for the Facility, or any substantial portion of the Facility, will be revoked or
suspended or qualified in any material adverse respect;  or (d) subject Owner or
Manager to civil or criminal prosecution.

         6.4.  Operating  Budget.  The Annual  Budget shall include an operating
budget (the "Operating  Budget") setting forth an estimate of operating revenues
and expenses related to the operation,  management, marketing and leasing of the
Facility, including, without limitation,  Employment Costs, third party expenses
and   reimbursements   to  Manager   for   out-of-pocket   expenses,   including
extraordinary travel costs associated with financing, for the next calendar year

                                       7
<PAGE>

(or the  remainder  of the  current  calendar  year,  in the case of the initial
budget).  The Annual  Budget shall also include an  explanation  of  anticipated
changes in the Facility,  including budgets for maintenance,  operations and the
acquisition of capital assets and capital  improvements.  In the  preparation of
the Annual Budget,  Manager may make reasonable  allocations of expenses between
the Facility and other  facilities  operated by Manager  based upon the relative
benefit of such expenses to the Facility.

         6.5. Reports.  As soon as available and in any event within twenty (20)
days  after  the end of each  month,  Manager  shall  provide  to Owner a report
reconciling  the actual  operating  expenses  incurred  during such month to the
operating  expenses shown on the Operating Budget for such month.  Manager shall
also  furnish or arrange  for the  preparation  of such other  reports as may be
required from time to time which may include:  (a) unaudited  monthly  financial
statements  of the  Owner for the  month  then  ended  related  to the  Facility
prepared on a basis  consistent with the Annual Budget;  (b) at Owner's expense,
audited  annual  financial  statements  of the  Owner  related  to the  Facility
prepared by a nationally  recognized  certified public  accounting firm or other
independent  certified  public  accounting  firm,  prepared in  accordance  with
generally  accepted  accounting  principles,  and including a balance  sheet,  a
statement  of income and expenses  for the year then ended;  (c) monthly  census
information  of the  Facility  as of the  end of  such  month;  and  (d) an aged
accounts  receivable  report  from the  Facility  in  sufficient  detail to show
amounts due from each resident by the account age classifications of thirty (30)
days, sixty (60) days, ninety (90) days, one hundred twenty (120) days, and over
one hundred  twenty (120) days.  Manager shall submit  year-end  profit and loss
statements  to Owner prior to March 1 of the year  following  the year for which
they are  prepared.  Except as otherwise  provided  herein,  Manager  shall also
prepare or cause to be prepared (at Manager's expense) and delivered to Owner on
a monthly  basis  within  twenty (20) days  following  the end of each  calendar
month, unless indicated to the contrary below, the following reports:

                  6.5.1 A current and year to date statement of operations, with
         material variance explanations, to be delivered within twenty-five (25)
         days following the end of each calendar month;

                  6.5.2 A current occupancy  report,  including rental rates for
         each unit and any move-ins or move-outs;

                  6.5.3 A capital  expenditure  report,  with material  variance
         explanations;

                  6.5.4 Upon request of Owner, an annual inventory;

                  6.5.5  Promptly  upon  completion  of the work,  copies of all
         invoices for all capital expenditures in excess of Twenty-five Thousand
         Dollars ($25,000), and, upon request, all other invoices;

                  6.5.6 The  calculations  and amounts used in  determining  the
         Management Fee payment;

                                       8
<PAGE>

                  6.5.7  Upon  request  by  Owner,  copies  of all bank  account
         statements from all Facility accounts with reconciliation ledgers;

                  6.5.8 Upon request of Owner,  an annual listing of all amounts
         held as  security  deposits  within  sixty  (60) days of the end of the
         calendar year;

                  6.5.9  At  reasonable   intervals,   general  reports  on  all
         construction in progress;

                  6.5.10 Such additional financial and operational  information,
         excluding annual audits and tax returns for Owner, as may be reasonable
         and specifically requested from time to time by Owner; and

                  6.5.11 A monthly balance sheet.

         Manager shall provide from time to time such additional  reports as may
reasonably be requested by Owner concerning the Facility and its operations. All
reports,  statements and proposed  budgets to be delivered  under this Agreement
shall be provided in form  reasonably  acceptable to Owner and shall be provided
to all  partners/members of Owner, as may be designated in writing by Owner. All
monthly  reports shall be submitted by Manager to Owner in an electronic  format
reasonably approved by Owner.

         6.6. Budget Variances.

         Manager may incur and expend amounts as an Owner's expense,  consistent
with the then  approved  Annual  Budget,  Capital  Budget or  Operating  Budget.
Manager  may incur and expend  amounts  as an Owner's  expense in excess of such
Budgets if such amounts are incurred as a result of an emergency, or as a result
of an increase in a third-party  expense which was unexpected,  not budgeted and
outside  Manager's  control  such  as an  increase  in  real  estate  taxes  and
assessment or utility  charges,  additions or modifications of Budget items as a
result of compliance with laws or insurance requirements, increases in insurance
premiums for insurance  policies/coverages approved by Owner, costs and expenses
of  litigation  and  similar  proceedings  and any final  orders,  judgments  or
settlements.  In  addition  to the  foregoing,  the Manager may incur and expend
amounts as an Owner's expense to the extent that the total applicable  quarterly
Budget is not exceeded by more than ten percent  (10%) of an amount equal to the
total quarterly Budget for all items other than taxes, insurance,  utilities and
the  Management  Fee or if  Manager  believes  such  quarterly  Budget is may be
exceeded,  Manager may seek  Owner's  approval to exceed the  quarterly  Budget,
which approval  shall not be  unreasonably  withheld,  conditioned or delayed by
Owner.

         Section 7.        BANK ACCOUNTS AND WORKING CAPITAL.

         7.1. Operating Account. Manager, in the name of the Owner and on behalf
of Owner, shall transfer all operating revenues of the Facility for deposit into
a bank account  established  exclusively  for that purpose by Owner  ("Operating
Account").  Manager shall supervise the disbursements from the Operating Account
on behalf of Owner of such amounts and at such times as the same are required in

                                       9
<PAGE>

Manager's reasonable business judgment. Manager shall discharge such supervisory
responsibilities  in accordance with reasonable and customary business standards
and practices.  All costs and expenses (including  Manager's  Management Fee and
other amounts due Manager and any  Affiliates)  incurred in the operation of the
Facility shall be paid out of the Operating Account. Manager shall specify, with
the approval of Owner,  which approval shall not be unreasonably  withheld,  the
signatory or signatories of Manager required on all checks or other documents of
withdrawal  submitted  by  Manager on the  Operating  Account,  but a  signatory
designated  by  Owner  may  also be an  authorized  signatory  on the  Operating
Account.  If at any time the funds in the Operating  Account are insufficient to
pay the current  operating  expenses of the Facility,  as provided in the Annual
Budget or  otherwise  incurred  by Manager as  permitted  by Section 6, above (a
"Deficit"),  the Owner shall  within  five (5)  business  days after  receipt of
notice from the Manager  identifying  such Deficit,  deposit into such Operating
Account an amount  equal to the  Deficit;  provided,  however,  that (i) Manager
shall with such notice provide adequate supporting documentation to substantiate
such Deficit,  and,  (ii) all such current  operating  expenses  shall have been
incurred  consistent with the terms of this Agreement.  In no event will Manager
be  required to provide  working  capital  funds to Owner or the  Facility or to
advance funds or fund any Deficit.

         7.2.  Taxes.  Any federal,  state or local taxes,  assessments or other
governmental  charges imposed on the Facility and arising from Owner's period of
ownership are the obligations of Owner, not of Manager, and shall be paid out of
the Operating Account. With the Owner's prior written consent,  Manager may (and
at Owner's discretion, Manager shall) contest the validity or amount of any such
tax or imposition on the Facility.

         Section 8.        LICENSES, PERMITS, CERTIFICATIONS AND CONTESTS.

         8.1. Licenses, Permits and Approvals. Manager, as agent of Owner, shall
assist  Owner in its  application  for, in the name of Owner,  and to obtain and
maintain,  on behalf of Owner, all necessary licenses,  permits and approvals to
operate the Facility,  to  substantially  comply with all applicable laws, rules
and regulations.

         8.2.  Government  Actions.  Neither  Owner nor  Manager  shall take any
action  or fail to take any  action  which  such  party  knows  will  cause  any
governmental authority having jurisdiction over the operation of the Facility to
institute any  proceeding  for the  suspension,  rescission or revocation of any
necessary license, permit, certification or approval. Manager shall not take any
action or fail to take action  which  Manager  knows will  adversely  affect the
Owner's  right to accept  and  obtain  payments  under any  private  third-party
medical payment programs, if any.

         8.3. Legal Proceedings.  Manager shall, with the approval of and at the
cost of Owner,  have the right,  on behalf of Owner,  to contest by  appropriate
legal proceedings,  diligently conducted in good faith in the name of Owner, the
validity  or  application  of  any  agreement,  law,  ordinance,  rule,  ruling,
regulation,  order or requirement of any governmental agency having jurisdiction
over the operation of the  Facility.  Owner shall fully  cooperate  with Manager
with regard to the contest  and Owner shall pay from the  Operating  Account all
reasonable attorneys' fees incurred with regard to the contest.  Counsel for any

                                       10
<PAGE>

such  contest  shall be selected by Manager  and  reasonably  approved by Owner;
provided,  that Owner may also elect to hire its own attorney, who shall also be
paid from the Operating Account. Manager shall, with the consent of Owner and at
Owner's  expense,  process  all third party  payment  claims and appeals for the
services provided at the Facility,  including without limitation,  exhaustion of
all applicable administrative proceedings or procedures,  adjustment and denials
by governmental agencies or their intermediaries and other third-party payors.

         8.4.Compliance.  Owner shall comply with all  federal,  state and local
laws, rules and regulations and  requirements  which are applicable to Owner and
outside  the  scope of  Manager's  obligations  hereunder  to  comply  with such
requirements  on Owner's  behalf,  provided that Owner,  at its sole expense and
without  expense to  Manager,  shall  have the right to contest by proper  legal
proceedings  the validity,  so far as  applicable to it, of any such law,  rule,
regulation  or  requirement,  provided  that such contest  shall not result in a
suspension of operations of the Facility, and provided, further, Owner shall not
be deemed to be in breach of this covenant if Owner's failure to comply with any
such law, rule,  regulation or requirement is the result of the gross negligence
or willful misconduct of Manager.

         Section 9.         INSURANCE

         9.1. Facility Insurance. Owner, at its expense, will obtain and keep in
force "All Risk"  facility  insurance  for the  Facility and all  equipment  and
contents  therein (other than that owned by  residents).  Owner will also obtain
and keep in force  Boiler and  Machinery  coverage for the  Facility.  Owner may
self-insure all or part of the risk described above.  Each of the policies shall
contain appropriate clauses pursuant to which the respective  insurance carriers
shall waive all rights of subrogation  with respect to losses payable under such
policies.

         9.2. Liability Insurance.  Manager, at the expense of the Owner (except
as provided below with respect to professional liability coverage),  will obtain
and keep in force commercial general liability insurance coverage. Manager shall
be the insured on such  policy,  with Owner named as an  additional  insured for
accidents  occurring  on or  about  the  Facility.  Neither  Owner  nor  Owner's
insurance company shall be liable to Manager for the gross negligence, malice or
willful  misconduct of Manager,  its officers or  employees,  nor shall Owner or
Owner's  insurance  company  be liable to Manager  for  accidents  arising  from
conditions  solely created out of Manager's breach of the duties and obligations
required by this Agreement to be performed by it. Owner may  self-insure  all or
part of the risk described above.  Owner's coverage will be primary with respect
to claims not herein  excluded.  The  foregoing  is not  intended  to affect the
general  requirement  of this  Agreement  that the  Facility  shall be  managed,
operated and maintained in a safe condition and in a proper and careful  manner.
Manager shall furnish whatever  information is reasonably requested by Owner for
the purpose of establishing  the placement of insurance  coverages and shall aid
and  cooperate in every  reasonable  way with respect to such  insurance and any
loss covered thereunder.  The professional liability insurance which is included
in the coverage being  maintained by Manager on behalf of Owner for the Facility
as of the  date  of this  Agreement,  and  which  has  been  approved  by  Owner
("Approved  Professional  Liability  Insurance"),   is  being  provided  without

                                       11
<PAGE>

additional  premium beyond the amount Manager would pay for standard  commercial
general  liability  coverage  which  did  not  include  professional   liability
coverage.  If, at any time  that  this  Agreement  remains  in effect  Manager's
current  insurance  carrier  charges  an  additional  premium  for the  Approved
Professional  Liability  Insurance  coverage or if Manager  obtains the Approved
Professional  Liability Insurance coverage from a different carrier and must pay
a premium for that Approved Professional  Liability Insurance coverage,  Manager
shall be solely  responsible  for the payment of such  premiums  and Owner shall
have  no  obligation  whatsoever  to  reimburse  Manager  for  the  cost of such
premiums.  If Manager fails to pay such premiums at any time, Owner may pay such
premiums and deduct the amount paid from the  Management  Fee. The  professional
liability  coverage  which  Manager  must keep in place at all time  shall  have
coverage  limits  and  deductibles  and  be of  the  same  form  (written  on an
occurrence basis) as the Approved  Professional  Liability  Insurance  coverage.
Liability insurance should have the following minimum amounts:

         (a)      Each Claim -  $1,000,000  per  occurrence  and must  include a
                  professional  liability  endorsement if a separate policy does
                  not exist.
         (b)      Deductible  - $25,000 or more.  Owner to decide  amount at the
                  inception of a new policy year. Any  deductible  payments will
                  not be included in Facility Operating Expenses.
         (c)      General Aggregate - $3,000.000 per policy term.
         (d)      Umbrella/Excess  - $3,000,000  per  occurrence  or as mutually
                  agreed to by Owner; and
         (e)      Business Auto  Liability  including  hired and non-owned  auto
                  coverage - $1,000,000 combined single limit.

         9.3.  Additional  Insurance.  Manager shall continuously  maintain,  at
Owner's cost,  and furnish Owner  certificates  evidencing  the existence of the
following insurance policies:

                  (a)      Worker's   Compensation   -  the  statutory   minimum
                           required in the state where the Facility is located;
                  (b)      Employers'  Liability  -  $1,000,000  or  such  other
                           higher  limits   imposed  in   accordance   with  the
                           requirement,  if any,  of the laws of the state where
                           the Facility is located;
                  (c)      Fidelity and Crime  Insurance  known as  "Dishonesty,
                           Disappearance   &   Destruction"   (3-D   Policy)  or
                           individual    policies   covering:    dishonesty   of
                           employees;  loss of money and  securities  inside the
                           Facility,  being  transported  by messenger,  or loss
                           outside   of  the   Facility   due   to   dishonesty,
                           disappearance,   or   destruction;    depositor/check
                           forgery.  Minimum  amounts  should be the  greater of
                           $1,000,000 or 2 months of rent receipts.

The certificate  shall contain an endorsement  that Owner will be given at least
thirty (30) days prior written notice of  cancellation of or any material change
in the policy.  This insurance will be primary for any occurrences  described in
Section  9.2 above.  Manager's  respective  insurance  carriers  shall waive all
rights of subrogation with respect to losses payable under such policies.  Owner
shall be named as an  additional  insured on the  Manager's  Commercial  General
Liability insurance.

                                       12
<PAGE>

         9.4.  Subcontractor's   Insurance.   Manager  shall  require  that  all
subcontractors  performing  repairs or  providing  any services for an amount in
excess of  Twenty-Five  Thousand  and No/100  Dollars  ($25,000.00)  and who are
brought  onto  the  Facility  have  insurance  coverage  at the  subcontractor's
expense, in the following minimum amounts:

                  (a) Workers  Compensation - the statutory  minimum required in
                  the state where the Facility is located;

                  (b)  Employer's  Liability  - $500,000  or such  other  higher
                  limits imposed in accordance with the requirement,  if any, of
                  the laws of the state where the Facility is located;

                  (c) Commercial  General Liability - $1,000,000 per occurrence,
                  $2,000,000    general   aggregate   with    Products/Completed
                  Operations  coverage  (with  evidence  of   Products/Completed
                  Operations Coverage shown for a minimum of two years following
                  completion of the work described in the contract);

                  (d) Business Auto Liability including hired and non-owned auto
                  coverage - $1,000,000 combined single limit; and

                  (e)   Umbrella/Excess   -   $2,000,000   or  more  as   deemed
                  appropriate.

This insurance will be primary and noncontributory with respect to the insurance
described in Sections 9.1 and 9.2 above.  Manager  shall insure that Manager and
Owner are named as additional insureds on the subcontractor's Commercial General
Liability  insurance.  The subcontractor's  respective  insurance carriers shall
waive all  rights of  subrogation  with  respect  to losses  payable  under such
policies.  Manager  shall obtain and keep on file a  Certificate  of  Insurance,
which shows that the  subcontractor  is so insured.  Manager must obtain Owner's
permission  to  waive  any of the  above  requirements.  Higher  amounts  may be
required if the work to be performed is hazardous.

         9.5.  Certificates of Insurance.  Any contract requires that such party
maintain any insurance  coverage,  Manager shall obtain  insurance  certificates
annually,  or more  frequently as required  pursuant to the applicable  lease or
contract,  from each such party and review the  certificates for compliance with
such lease or contract terms.

         9.6.  Mutual  Waivers.  Owner,  on behalf of itself  and its  insurers,
waives its rights of recovery against Manager or Manager's  officers,  directors
and employees,  for damages  sustained by Owner as a result of any damage to the
Facility  arising from any risk or peril  generally  covered or coverable by any
insurance policy actually carried by or required to be carried by Owner pursuant

                                       13
<PAGE>

to the terms of this  Agreement,  and Owner  agrees that no party shall have any
such right of recovery by way of subrogation or assignment.  Manager,  on behalf
of itself  and its  insurers,  waives its rights of  recovery  against  Owner or
Owner's officers, directors and employees, for damages sustained by Manager as a
result of any damage to any Facility  arising  from any risk or peril  generally
covered or coverable by any insurance  policy actually carried by or required to
be carried by  Manager  pursuant  to the terms of this  Agreement,  and  Manager
agrees that no party shall have any such right of recovery by way of subrogation
or assignment.  Owner and Manager shall each notify their  respective  insurance
carriers of the mutual waivers herein contained and shall cause their respective
insurance policies required hereunder to be endorsed,  if necessary,  to prevent
any invalidation of coverage as a result of the mutual waivers herein contained.

         9.7. Cooperation With Insurance Carriers.  Manager shall cooperate with
and provide  reasonable  access to  Facility to agents of any and all  insurance
companies and/or insurance brokerages or agencies who may, from time to time, be
involved  with the issuance of  insurance  policies or with  inspections  of the
Facility in connection with insurance policies then in force.  Manager agrees to
use all  reasonable  efforts  to comply  with any and all  requirements  of such
insurance  companies or their agents, and agrees to exercise due care not to use
the Facility or permit the same to be used for any purpose which would make void
or voidable  any of such  insurance  policies,  and shall not keep or  knowingly
allow to be kept on the Facility any material, machinery,  equipment,  substance
or other things which may make void or voidable any such insurance policies.

         9.8. Compliance With Insurance  Policies.  Manager shall be responsible
for full  compliance with all duties in the event of loss, or the assistance and
cooperation in the event of loss,  with any insurance  policy held by Owner with
respect to the  Facility so as to avoid any loss insured  thereunder  from being
uncollectible.  Owner will  notify  Manager of  specific  actions or  prohibited
actions of which Owner is aware that are necessary for such compliance.

         9.9.   Insurance  Claims.   Manager  shall  promptly   investigate  all
accidents, claims or damage relating to the ownership, operation and maintenance
of the Facility and any damage or  destruction  to the  Facility.  Manager shall
prepare a written  notice to the  applicable  insurance  company  describing the
matter  at  issue  and  Manager  shall  send a copy  of  such  notice  to  Owner
contemporaneously  with sending such notice to the  insurance  company  within 7
days of becoming aware of the matter. Manager acknowledges receipt of a separate
Claims   Procedure   Manual  which   outlines  in  more  detail  the  steps  and
documentation  to follow  should a potential  claim arise and Manager  agrees to
comply with the terms of such Claims  Procedure  Manual.  Manager  shall take no
action which may operate,  or omit to take any action which,  if not taken,  may
operate,  (a) to bar Owner from  obtaining  any  protection or payment under any
policies  of  insurance  held by either  Owner or  Manager  or (b) to  prejudice
Owner's  defense in any legal  proceeding  arising out of, or otherwise  prevent
Owner from protecting its interests against, any such claim; provided,  however,
nothing  herein  shall  be  construed  to  prohibit  or  restrict  Manager  from
cooperating  with any  investigation  in good  faith and  honestly.  If any such
accident,  claim,  damage or destruction  shall result in the  commencement of a
lawsuit or other  similar  proceeding,  Manager  shall  provide such services in
connection  therewith as shall  reasonably be necessary.  Owner or its insurance
carrier  shall have the  exclusive  right,  at Owner's  option,  to conduct  the
defense of any claim, demand,  liability or suit. Manager shall have no right to
settle,  compromise or otherwise dispose of any claims, demands,  liabilities or
suits for amounts in excess of $25,000.00,  whether or not covered by insurance,
without the prior written consent of Owner.

                                       14
<PAGE>


         9.10  Financial  Condition  of  Carriers.   Carriers  for  Manager  and
Subcontractor  coverages  above  should be A.M Best Insurer  Financial  Strength
rating of A- or better (if unavailable, S&P A or better will be acceptable), and
Financial Size Category of VIII or larger.  Lloyd's of London syndicates Minimum
Stamp Capacity of $100 MM (US).

         Section 10. MANAGER'S HOME OFFICE  PERSONNEL.  In addition to the other
managerial  services provided for in this Agreement,  Manager shall be obligated
to make available to the Facility, as needed, accounting, budgeting, management,
personnel,   purchasing,   quality  assurance,   polices  and  procedures,   and
third-party  reimbursement.  Manager shall provide these supervisory services to
the on-site  employees  to the extent  necessary  for the on-site  employees  to
provide  the level of service  required  by this  Agreement.  Manager  shall not
charge Owner (apart from the Management Fee) for the services of the home office
supervisory personnel in the referenced areas but who are not on-site employees,
except for travel expenses to the extent expressly permitted by Section 3.2.

         Section 11. REPRESENTATIONS AND WARRANTIES.  Owner and Manager make the
following representations and warranties to the other party:

         11.1.  Status.  The  representing  party is duly  organized and validly
existing in good standing  under the laws of its state of its  organization,  is
qualified to conduct business in the State of California,  and has all necessary
power to carry on its business as now being conducted, to operate its properties
as now being operated, to carry on its contemplated business, to enter into this
Agreement and to observe and perform its terms.

         11.2.  Authority and Due  Execution.  The  representing  party has full
power and  authority  to execute and to deliver this  Agreement  and all related
documents and to carry out the transactions  contemplated by this Agreement. The
execution of this  Agreement  by such party will not,  with the passing of time,
the  giving  of  notice,  or both,  result  in a  default  under or a breach  or
violation  of such  party's  (i)  organizational  documents;  or (ii)  any  law,
regulation,  court  order,  injunction  or decree of any  court,  administrative
agency or  governmental  body;  (iii) or any mortgage,  note,  bond,  indenture,
agreement,  lease,  license,  permit or other  instrument or obligation to which
such  party is now a party or by which  such  party or any of its  assets may be
bound or affected.  This Agreement constitutes a valid and binding obligation of
the representing  party,  enforceable  against such party in accordance with its
terms,  to  the  extent  that  its   enforceability  is  limited  by  applicable
bankruptcy,  reorganization,  insolvency,  receivership or other laws of general
application or equitable  principles relating to or affecting the enforcement of
creditors' rights.

         11.3.  Litigation.  There  is  no  litigation,   claim,  investigation,
challenge or other  proceeding  pending or, to the knowledge of the representing
party,  threatened against such party, its properties or business which seeks to
enjoin or prohibit it from entering into this Agreement.

                                       15
<PAGE>


         Section 12.       TERMINATION.

         12.1. Termination for Cause.

         (a)  Bankruptcy,  etc. If either party is dissolved or  liquidated,  or
shall  apply  for or  consent  to the  appointment  of a  receiver,  trustee  or
liquidator  of it or all or a substantial  part of its assets,  file a voluntary
petition in bankruptcy,  make a general assignment for the benefit of creditors,
file  a  petition  or an  answer  seeking  reorganization  or  arrangement  with
creditors or take advantage of any insolvency  law, or if an order,  judgment or
decree shall be entered by a court of competent jurisdiction, on the application
of a creditor,  adjudicating  the party a bankrupt or  insolvent  or approving a
petition seeking  reorganization of the party or appointing a receiver,  trustee
or liquidator for the party or all or a substantial part of its assets, and such
order,  judgment or decree shall continue  unstayed and in effect for any period
of ninety (90) consecutive  days, then in case of any such event, this Agreement
shall immediately expire, at the other party's option.

         (b) Default. If Owner or Manager shall fail to keep, observe or perform
any material  covenant,  agreement,  term or  provision of this  Agreement to be
kept,  observed or performed by it and such default shall  continue for a period
of thirty  (30) days after  written  notice by the  non-defaulting  party to the
other  specifying  the default in question  and  requesting  that the default be
cured, then the non-defaulting  party may terminate this Agreement,  on ten (10)
days  further  written  notice to the other party or may pursue  other  remedies
including,  without  limitation,  legal action for breach of contract,  provided
that,  except  with  respect to monetary  defaults  of Owner or Manager,  if the
defaulting party has commenced cure within thirty (30) days, and continually and
diligently pursues such cure to completion as soon as reasonably possible,  then
the right to give such notice of  termination  shall be  suspended  for the time
necessary to effect such cure. Such termination by either party shall be without
prejudice to either party to receive all of the fees and reimbursements provided
in  this  Agreement,  including,  without  limitation,  reimbursements  for  the
Employment Costs due for the period through the date of termination.

         (c) Willful  Misconduct.  In  addition  to its rights set forth  above,
Owner shall have the right,  after  thirty (30) days'  prior  written  notice to
Manager to terminate this Agreement if, because of Manager's willful  misconduct
(which  shall not include  any  willful  act of Manager  which is due to Owner's
breach  of  this  Agreement  including  Owner's  failure  to pay an  amount  due
hereunder),  there has been a formal notice by the  appropriate  governmental or
regulatory agency (the "Notice"), that the operating license for a Facility will
be revoked,  suspended,  or  qualified in any material  adverse  respect,  which
Notice is not  rescinded,  vacated or stayed by action of Manager (or otherwise)
on or before the earlier of (i) thirty (30) days prior to the effective  date of
the adverse action,  as set forth in the Notice, or (ii) ninety (90) days of its
issuance.

                                       16
<PAGE>

         12.2. Termination Without Cause.

         (a) Damage/Condemnation.  The Owner and the Manager shall each have the
option to terminate this Agreement,  upon thirty (30) days' prior written notice
to the other, upon the occurrence of any of the following events with respect to
the Facility:

                  (i) the  Facility or any  material  portion of the Facility is
damaged or destroyed to the extent that in the written opinion of an independent
architect  or  engineer  reasonably  acceptable  to both  parties  (A) it is not
practicable  or  desirable  to rebuild,  repair or restore  the  Facility to its
condition  immediately  preceding  such  damage  within a period of twelve  (12)
months;  or (B) the  conduct  of  normal  operations  of the  Facility  would be
prevented for a period of twelve (12) months or more; or

                  (ii) title to or the  temporary  use of, all or  substantially
all of, a Facility is taken under the exercise of the power of eminent domain by
a governmental  authority  which in the opinion of an  independent  architect or
engineer reasonably acceptable to both parties, prevents or is likely to prevent
the conduct of normal operations at the Facility for a period of at least twelve
(12) months.

         (b) Sale.  Provided  that Owner has  complied  with  Section 16 hereof,
Owner and the Manager  shall each have the option to terminate  this  Agreement,
upon  thirty (30) days' prior  written  notice to the other,  in the event Owner
sells the Facility to an unaffiliated  third party. This termination right shall
also  apply  in the  event  that  the  Facility  is  sold in  connection  with a
foreclosure, power of sale or deed-in-lieu of foreclosure such that the buyer of
the Facility under any of such scenarios may terminate this Agreement, effective
as of the date it takes  title,  so long as thirty (30) days'  prior  notice was
given to  Manager.  If Owner  sells the  Facility  and, as a result of the sale,
elects to terminate  this  Agreement  pursuant to this Section  12.2(b) prior to
January 1, 2006,  Owner will pay to Manager,  within thirty (30) days  following
the effective date of the  termination,  the entire amount of the Management Fee
that  would  have  been due and  payable  to  Manager  for the  period  from the
effective date of the termination through December 31, 2005.

         (c) NOI Threshold.  If the Facility does not, during calendar year 2005
or any  calendar  year  thereafter,  have an NOI of at least One  Million  Three
Hundred Thousand Dollars ($1,300,000.00), the Owner shall have the right, within
thirty (30) days after determination of such shortfall and notice to Manager, to
terminate this Agreement. In the event of the exercise of this termination right
by Owner, this Agreement shall terminate effective one hundred twenty (120) days
after  notice of  termination  under  this  Section  is given to  Manager.  "Net
Operating  Income"  or "NOI" for the  purpose of this  Section  shall mean Gross
Revenues  less all  Facility  Operating  Expenses,  as defined in Section  15.14
below.

         12.3.  Effect of Termination.  Upon any termination by Owner or Manager
for cause pursuant to Section 12.1 of this Agreement,  without cause pursuant to
Section  12.2  of  this  Agreement,  or  upon  expiration  of the  term  of this
Agreement,  or for any  other  reason  as  permitted  under  the  terms  of this
Agreement,  all amounts payable to Manager from Owner under this Agreement up to
the date of such  termination  shall be  immediately  due and payable.  Upon any

                                       17
<PAGE>

termination  of this  Agreement,  regardless  of the  cause,  Manager  shall  be
obligated to comply fully with the provisions of Section 3.17 above.

         Section 13. NOTICES.  Any notice,  communication or demand requiring or
permitted  to be given  under  this  Agreement  shall be in  writing  (including
facsimile  communications)  and  shall  be  sent  by  first-class  mail,  or  by
nationally-recognized  overnight  courier,  or by facsimile  transmission  or by
personal  delivery.  All notices  shall be sent to the  applicable  party at the
following addresses:

To Owner, by addressing the same to:

                           SHP II Carmichael, LLC
                                           and
                           Senior Housing Partners II, L.P.
                           c/o Prudential Real Estate Investors
                           Two Ravinia Drive, Suite 1400
                           Atlanta, GA   30346-2110
                           Attention:  Mr. John W. Dark
                           Telephone:       (770) 395-8635
                           Facsimile:       (770) 395-8454

         with a copy to:

                           Alston & Bird LLP
                           1201 W. Peachtree Street
                           Atlanta, Georgia  30309-3424
                           Attention:  Mark C. Rusche, Esq.
                           Telephone:       (404) 881-7000
                           Facsimile:       (404) 881-7777

         To Manager, by addressing the same to:

                           Capital Senior Living, Inc.
                           14160 Dallas Parkway, Suite 300
                           Dallas, Texas  75254
                           Attn:  David R. Brickman
                           Telephone:       (972) 770-5600
                           Facsimile:       (972) 770-5666

                                       18
<PAGE>


         with a copy to:

                           Jenkens & Gilchrist
                           1445 Ross Avenue, Suite 3200
                           Dallas, Texas  75202
                           Attn:   Winston Walp, II, Esq.
                           Telephone:       (214) 855-4500
                           Facsimile:       (214) 855-4300


Any such  property  given  notice shall be effective on the earliest to occur of
receipt,  telephone confirmation of receipt of facsimile communication,  one (1)
business day after delivery to a nationally  recognized  overnight  courier,  or
five (5) business days after deposit in the mail, return receipt requested.

         Section 14.       COSTS AND EXPENSES; INDEMNITY AND INSURANCE.

         14.1. Costs and Fees.  Except as otherwise  expressly  provided in this
Agreement,  and except for expenses included in the approved Annual Budget or as
otherwise permitted in this Agreement,  all fees, costs,  expenses and purchases
arising  out of,  relating  to or incurred  in the  operation  of the  Facility,
including,  without limitation,  the fees, costs and expenses of consultants and
professionals,  shall be the sole responsibility of Owner. Manager, by reason of
the execution of this  Agreement or the  performance  of its services under this
Agreement,  shall not be liable for or deemed to have assumed any  liability for
such  fees,  costs  and  expenses,  or any  other  liability  or debt  of  Owner
whatsoever, arising out of or relating to the Facility or incurred at any of its
administrative offices in the performance of its obligations hereunder, provided
that such  liabilities and debts are incurred by Manager within the scope of the
liabilities or expenses  contemplated  to be incurred by Manager under the terms
of this  Agreement.  Manager  shall  have no  obligations  to  advance  any sums
required to maintain  necessary  licenses and permits and to otherwise  keep the
Facility  operating as a long-term care facility,  without  assurances  that the
necessary  funds for the discharge of any such liability of any such  obligation
will be punctually paid by Owner.

         14.2. Indemnification.

                  (a) Subject to the  application  of any  insurance  coverages,
Owner shall indemnify,  defend and hold Manager and Manager's agents,  officers,
employees, directors,  shareholders,  partners and members (Manager and all such
parties  being  collectively  referred to as "Manager's  Indemnified  Parties"),
harmless  from  and  against  any  and  all  claims,   losses,  costs,  damages,
liabilities,  suits, actions, proceedings,  judgments, fines, penalties, charges
and expenses,  including  reasonable  attorneys' fees (collectively,  "Claims"),
that may be asserted against,  imposed upon or incurred by Manager's Indemnified
Parties with respect to the operation of the Facility  provided Manager acted in
a  manner  Manager  reasonably  believed  to be in or not  opposed  to the  best
interests  of Owner  and  provided  such  Claims  do not  result  from the gross

                                       19
<PAGE>


negligence or willful misconduct of any of the Manager Indemnified Parties. This
indemnification shall survive the termination or expiration of this Agreement.

                  (b) Subject to the  application  of any  insurance  coverages,
Manager  shall  indemnify  and hold Owner  harmless from and against any and all
Claims,  demands,  obligations,  that may be asserted  against,  imposed upon or
incurred,  caused or occasioned by Manager's acting in bad faith and in a manner
reasonably  believed not to be in the best  interests of Owner or arising out of
the gross  negligence or willful  misconduct  of any of the Manager  Indemnified
Parties,  except to the extent such Claims  result from the gross  negligence or
willful misconduct of Owner. This indemnification  shall survive the termination
or expiration of this Agreement.

         Section 15. MISCELLANEOUS.

         15.1. Government Regulations.  In accordance with its obligations under
this  Agreement,  Owner and Manager  shall  operate and maintain the Facility in
compliance  with  the  requirements  of  any  statute,   ordinance,  law,  rule,
regulation or order of any  governmental or regulatory body having  jurisdiction
over the Facility.  If for any reason any term or condition of this Agreement is
found to be invalid or  contrary  to  government  laws,  rules,  regulations  or
orders,  Owner and Manager  agree to  immediately  and in good faith modify such
term or condition to comply with such government law, rule, regulation or order.

         15.2. Good Faith Effort by Manager. Manager shall act in good faith and
use its reasonable efforts to perform its obligations under this Agreement,  but
shall have no liability to Owner for any  decisions  made with respect to or any
actions  taken  or in the  omission  of  any  actions  in  connection  with  the
Facility's operations, so long as such decisions, actions or omissions were made
or taken in good faith and met the standard of care set forth herein. Any action
taken or omitted by Manager in reliance on written advice from  accountants with
respect to financial  reporting  matters or legal  counsel with respect to legal
questions  shall be  conclusively  deemed to have been taken in good faith.  The
liability of Manager to Owner is limited to actual damages  suffered by Owner as
a direct and  proximate  result of Manager's  breach under any provision of this
Agreement. Manager makes no warranties, express or implied, and shall not assume
any financial or other responsibilities in connection with its obligations under
this Agreement, except as specifically provided in this Agreement. Manager shall
be  responsible  for  managing the Facility and all of their assets and services
with the same  diligence and skill as is employed by prudent owners and managers
in the management of similar senior independent  living residential  facilities,
and  consistent  with  the  provisions  of  this  Agreement  and in  substantial
compliance with all obligations imposed on Owner which are known to Manager.

         15.3.  Assignment.  Manager shall not assign its rights or  obligations
under this Agreement without prior written consent of Owner.

         15.4.  Subordination.  Manager  agrees  that  this  Agreement  shall be
subordinate to any third-party financing from time to time obtained by the Owner
for purposes of financing the Facility.  Manager shall execute such documents as
may be reasonably  requested by the Owner and/or its lender in order to evidence

                                       20
<PAGE>

such  subordination.  Manager  acknowledges  that any such lender shall have the
right  to  terminate  this  Agreement  for any  reason  or no  reason  upon  the
occurrence  of a default by Owner under the loan  documents  or upon such lender
acquiring  Owner's  title to the Facility or upon such taking  possession of the
Facility.

         15.5.  Retention of Control by Owner. Except as limited by the terms of
this Agreement,  Owner shall at all times continue to exercise  control over the
assets  and   operations  of  the  Facility,   and  Manager  shall  perform  its
responsibilities  as described  in this  Agreement  in  accordance  with written
policies and directives adopted by Owner. By entering into this Agreement, Owner
does not  delegate  to Manager any of the  powers,  duties and  responsibilities
vested in the Owner by law, or by its governance documents. Owner may, according
to the terms of this Agreement adopt the Facility's  policy,  recommendations or
proposals  made by Manager,  provided that any such policies shall be consistent
with the terms of this Agreement.

         15.6.  Books and  Records.  Manager  shall make  available to Owner for
inspection and copying by Owner upon reasonable  request,  all books and records
and financial  data  relating to the Facility.  Manager shall provide Owner with
copies of all licensure and/or certification surveys conducted at the Facility.

         15.7. Binding Agreement. The terms, covenants,  conditions,  provisions
and agreements  contained in this  Agreement  shall be binding upon and inure to
the benefit of Owner and Manager, their successors and assigns.

         15.8.  Relationship  of Parties.  Nothing  contained in this  Agreement
shall constitute or be construed to be or to create a partnership, joint venture
or lease between Owner and Manager with respect to the Facility.

         15.9.  Entire  Agreement;  Amendments.  This  Agreement,  including the
Schedules  attached  hereto,  contain the entire  agreement  between the parties
hereto with respect to the subject matter, and no prior oral or written,  and no
contemporaneous  oral  representations  or  agreements  between the parties with
respect  to the  subject  matter  of this  Agreement  shall be of any  force and
effect. Any additions, amendments or modifications to this Agreement shall be of
no force and effect unless in writing and signed by both Owner and Manager.

         15.10.  Governing  Law.  This  Agreement  is made  under,  and shall be
construed and enforced in accordance  with,  the laws of the State of California
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.

         15.11.  Arbitration of Accounting  Matters.  If any controversy  should
arise between the parties in the performance,  interpretation and application of
this Agreement which involves  accounting  matters,  either party may serve upon
the  other a  written  notice  stating  that  such  party  desires  to have  the
controversy  reviewed by an arbitrator,  who shall be a representative of a firm
specializing in accounting in the senior  independent  living  industry.  If the
parties  cannot agree within  fifteen (15) days from the service of such notice,
upon the selection of such an arbitrator,  the  arbitrator  shall be selected or
designated by the American  Arbitration  Association upon the written request of

                                       21
<PAGE>

either party hereto.  Arbitration of such  controversy,  disagreement or dispute
shall be  conducted in  accordance  with the rules then in force of the American
Arbitration Association and the decision and award of the arbitrator so selected
shall be binding upon Owner and Manager.

         15.12. Maintenance of Books, Records and Documents.  Manager shall make
available  to Owner for a three (3) year period  after the  termination  of this
Agreement such books, documents and records relating to the nature and extent of
the costs of the  services  provided by Manager  under this  Agreement.  Manager
further  agrees  that in the event it carries  out any of its duties  under this
Agreement  through a  subcontract  with a value or cost of Ten Thousand  Dollars
($10,000)  or more over a twelve  (12)  month  period,  such  subcontract  shall
contain a clause  identical  to that  contained  in the first  sentence  of this
Section.

         15.13. Further Assurances. At any time and from time to time during the
term of this  Agreement,  at either party's  request,  each party shall promptly
execute and deliver all such further agreements,  certificates,  instruments and
documents, including a certificate of Owner in a form reasonably satisfactory to
Manager stating that this Agreement is in effect with respect to, and is binding
against,  Owner, and each party shall perform such further actions, as the other
party may  reasonably  request  in order to fully  consummate  the  transactions
contemplated  by this  Agreement  and carry out the  purposes and intent of this
Agreement.

         15.14. Certain Definitions.

                  (a)  Affiliate.   The  term   "Affiliate,"  as  used  in  this
Agreement,  means  a  person  that,  directly  or  indirectly,  controls  or  is
controlled by, or is under common control with, the person specified.

                  (b) Person. The term "person," as used in this Agreement means
any individual, sole proprietorship,  joint venture,  corporation,  partnership,
governmental body, regulatory agency or other entity of any nature.

                  (c) Gross Revenue.  The term "Gross  Revenue," as used in this
Agreement, means all revenues accrued during the term of this Agreement from the
operation of the  Facility,  whatever  source,  including,  without  limitation,
rental income from residents,  space rentals,  service fee income,  food income,
assisted living income (if any), guest fees, and other income generated from the
operation of the Facility excluding all proceeds from or otherwise  attributable
to a sale,  financing,  re-financing,  equity  contribution  or similar  capital
event.  Gross  Revenue shall exclude  insurance  proceeds  (except for rent loss
proceeds), condemnation awards, and security deposits (unless forfeited).

                  (d) Facility Operating Expenses.  The term "Facility Operating
Expenses"  shall mean all costs and expenses of whatsoever  kind (excluding debt
service  on  mortgage  loans  encumbering  the  Facility  and  excluding  taxes,
insurance, capital expenses, capital reserves and amounts paid for items covered
by insurance but which are under the deductible limits) that are paid or accrued

                                       22
<PAGE>

by Owner with respect to the Facility, regardless of whether paid directly or by
reimbursing  Manager. In calculating  Facility Operating Expenses for any annual
period,  expenses for the Facility that are  attributable  to longer  periods of
time shall be appropriately  pro-rated and allocated to that year (e.g. 1/2 of a
two year payment, 1/3 of a three year payment).

         15.15.  Attorneys'  and Other Fees.  Should either party  institute any
action or  proceeding  to enforce or interpret  this  Agreement or any provision
hereof,  for damages by reason of any alleged breach of this Agreement or of any
provision hereof, or for a declaration of rights hereunder, the prevailing party
in any such action or  proceeding  shall be  entitled to receive  from the other
party all costs and expenses,  including  reasonable  attorneys' and other fees,
incurred by the prevailing  party in connection  with such action or proceeding.
The term  "attorneys'  and other fees" shall mean and include  attorneys'  fees,
accountants'  fees,  and any and all other  similar fees  incurred in connection
with the action or proceeding  and  preparations  therefor.  The term "action or
proceeding" shall mean and include actions,  proceedings,  suits,  arbitrations,
appeals and other similar proceedings.

         15.16. Severability. If any provision of this Agreement is construed to
be invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.

         15.17.  Counterparts.  This  Agreement may be executed in any number of
counterparts,  each of which when so executed and delivered shall  constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one (1) original counterpart hereof.

         Section 16.  Right of First Offer for Sale of Property.  Provided  each
and every one of the  Conditions  Precedent  (as defined  below) are met,  Owner
hereby agrees to give Manager a right of first offer ("Offer Right") to purchase
the Facility on all of the terms and  conditions  hereinafter  set forth in this
Section  16.  The term  "Conditions  Precedent"  shall mean that (i) none of the
circumstances  set forth in Section 12.1 of this Agreement which would give rise
to Owner's right to terminate this Agreement for cause shall exist, and (ii) the
Facility  shall have generated an average annual NOI of One Million Four Hundred
Ninety Thousand Dollars  ($1,490,000.00)  or greater during each of the calendar
years that Owner has owned the  Facility  (with  appropriate  proration  for any
partial years).

                  (a) If the Conditions  Prececent to Manager's  Offer Right are
satisfied and Owner desires to sell the Facility,  Owner shall provide Manager a
notice ("Sale Proposal") setting forth the amount, and other material terms upon
which Owner intends to attempt to sell the Facility to a third-party purchaser.

                  (b) Within  thirty (30) days after  receiving  the copy of the
Sale  Proposal,  Manager shall notify Owner that either:  (i) Manager  elects to
exercise  its  Offer  Right  to  acquire  the  Facility  for the  amount  and in
accordance  with the terms set forth in the Sale Proposal (a "Purchase  Election
Notice"),  or (ii)  Manager  does not want to  exercise  its Offer Right for the
amount in Owner's Sale Proposal,  but that Manager will exercise the Offer Right
for  an  amount  set  forth  in  Manager's  attached  counteroffer   ("Manager's
Counteroffer"), or (iii) that Manager elects not to exercise its Offer Right and

                                       23
<PAGE>

does not elect to make a Counteroffer.  Failure of Manager to deliver a Purchase
Election Notice or a Manager's  Counteroffer  within such thirty (30) day period
shall be deemed an election  by Manager not to exercise  its Offer Right and not
to make a Manager's  Counteroffer  and to allow Owner to proceed  with a sale of
the Facility under Section  16(b)(ii) below without regard to the price obtained
by Owner.

                  (i) If Manager gives a Purchase Election Notice,  the purchase
price to be paid by  Manager  for the  Facility  shall  consist  wholly of cash,
unless  the  Sale  Proposal  provides  otherwise.  Within  thirty  (30)  days of
Manager's delivery of Manager's Purchase Election Notice,  Manager shall deliver
an earnest  money  deposit,  payable to Owner,  in an amount  equal to 5% of the
purchase price of the Facility (said amount,  together with any interest  earned
thereon,  being  hereinafter  called the  "Deposit").  If within such applicable
thirty (30) day periods Manager shall deliver a Purchase Election Notice and the
Deposit  to Owner,  then  Owner and  Manager  shall  promptly  proceed  with the
purchase and sale  pursuant to this Section 16, the closing to take place within
one  hundred  twenty  (120) days  following  the date of the  Purchase  Election
Notice,  in which  event the Deposit  shall be  credited to Manager  against the
total purchase price of the Facility;  provided,  however,  that if such closing
shall fail to occur  because of a default by Manager,  then Owner shall have the
right, as its exclusive remedy, to retain the Deposit as liquidated  damages, it
being agreed that in such instance its actual damages would be difficult, if not
impossible,  to  ascertain.  After any such  default  under  this  Section 16 by
Manager,  Owner shall have the right to sell the Facility without regard to this
Section 16 and  Manager's  Offer  Right shall be null and void and of no further
force or effect.  If no default  occurs,  the  closing  shall take place  during
normal business hours at the office of Owner's counsel or as otherwise agreed by
the parties.  All prorations of real estate taxes, rents, etc., shall be made as
of the date of sale. All real property transfer taxes shall be paid for by Owner
and all recording fees and other closing costs shall be paid for by Manager.


                  (ii) If Manager  elects  not to  provide a  Purchase  Election
Notice but does provide a Manager's  Counteroffer,  Owner shall notify  Manager,
within ten (10)  business  days of Owner's  receipt  of  Manager's  Counteroffer
whether or not Owner elects to sell the Facility to Manager in  accordance  with
all of the terms  and  conditions  of  Owner's  Sale  Proposal  except  that the
purchase  price will be at the amount set forth in  Manager's  Counteroffer.  If
Owner so elects,  then,  within thirty (30) days of Owner's notice to Manager of
its acceptance of the Manager's Counteroffer, Manager shall deliver a Deposit as
described in Subsection 16(b)(i) above and the purchase and sale of the Facility
will occur as  otherwise  described  in  Subsection  16(b)(i)  above  within one
hundred  twenty  (120) days of  Owner's  election.  If Owner does not  deliver a
notice to Manager, within such ten (10) business day period, accepting Manager's
Counteroffer,  Owner will be deemed to have rejected Manager's  Counteroffer and
Owner  shall then be  entitled  to sell the  Facility at any time within one (1)
year of the date  Owner  elects  (or is  deemed to have  elected)  not to accept
Manager's  Counteroffer,  on any terms and conditions  Owner finds acceptable to
any  third  party so long as the  third  party  pays a  purchase  price  for the
Facility  which is greater than the amount set forth in Manager's  Counteroffer.
If the purchase  price is less than or equal to the purchase  price set forth in
Manager's  Counteroffer,  Owner  must give  Manager  notice of the terms of such
third  party's  offer (the  "Alternative  Offer").  Manager  shall then have the

                                       24
<PAGE>

right,  for a period of ten (10) days  after its  receipt  of such  notice  from
Owner,  to  elect  to  purchase  the  Facility  on the  terms  set  forth in the
Alternative Offer,  except that Manager's purchase price shall be payable wholly
in cash,  unless the  Alternative  Offer  provides  otherwise.  If Manager shall
deliver notice of such election  during such ten (10) day period to purchase the
Facility as  aforesaid,  the purchase and sale pursuant to this Section 16 shall
occur within one hundred  twenty (120) days after receipt by Owner of the notice
of such election.  If Manager shall not elect,  within such ten (10) day period,
to purchase the Facility  pursuant to the  foregoing  provisions of this Section
16, Owner shall have the right to effect a sale of the Facility  pursuant to the
terms of the  Alternative  Offer  provided  that the  closing of such sale shall
occur not later than ninety (90) days after the closing  date  specified  in the
Alternative  Offer. If, within thirty (30) days following  Owner's delivery of a
Sales  Proposal to Manager,  Manager does not deliver to Owner either a Purchase
Election  Notice or a  Manager's  Counteroffer,  then Owner shall be entitled to
sell the Facility at any time within one (1) year of the date Manager elects (or
is deemed to have elected) not to provide either a Purchaser's  Election  Notice
or a Manager's Counteroffer, on any terms and conditions and for any price Owner
finds  acceptable  to any third party and without any  obligation  whatsoever to
provide an  Alternative  Offer to  Manager.  If Owner has not sold the  Facility
within the  applicable  one (1) year period set forth in this Section  16(b)(ii)
(or within ninety (90) days as to an Alternative  Offer), then the provisions of
this Section 16 shall again apply to any proposed sale by Owner.

                  (c) This  Offer  Right  shall not apply  with  respect  to any
foreclosure or any  conveyance  pursuant to the exercise of a power of sale, any
deed-in-lieu of foreclosure or any other similar  conveyance  arising out of the
exercise by any lender of its rights with respect to the Facility.  In addition,
in the event this Offer Right is provided to Manager and a third party  acquires
the Facility  pursuant to the terms of a Sale Proposal or an  Alternative  Offer
and the third  party  purchaser  elects  to assume  Owner's  rights  under  this
Agreement,  this Section 16 and all of Manager's  rights  hereunder  (including,
without  limitation,  the Offer  Right) shall be null and void and of no further
force or effect  whatsoever  with  respect  to any sale by the  third  party who
acquired the Facility from Owner or any successor purchaser thereafter.


                                       25
<PAGE>


         IN WITNESS  WHEREOF,  the  parties  have caused  this  Agreement  to be
executed on their behalf by their duly authorized representatives, as of the day
and year first above written.

OWNER:

SHP II CARMICHAEL, LLC,
a Delaware limited liability company

By:      Senior Housing Partners II, L.P.,
         a Delaware limited partnership,.
         its Manager

         By:      Senior Housing Partners II, L.L.C.,
                  a Delaware limited liability company,
                  its General Partner

                  By:      The Prudential Insurance Company of America,
                           a New Jersey corporation,
                           its Managing Member

                           By:  /s/ John W. Dark
                              --------------------------------------------------
                           Name:   John W. Dark
                                  -------------------------------------
                           Its:    V.P.
                                 -----------------------------------------------


                    [SIGNATURES CONTINUED ON FOLLOWING PAGE]





                                       26
<PAGE>


MANAGER:

CAPITAL SENIOR LIVING, INC.,
a Texas corporation



By:        /s/ Lawrence A. Cohen
         -----------------------------------------------------
          Lawrence A. Cohen, CEO
         -------------------------------------------















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