EXHIBIT 10.1


 


MEMORANDUM OF UNDERSTANDING


 


This Memorandum of Understanding (“MOU”)
is entered into as of January 31, 2005, by and among:


 


I.                                         LTC
Properties, Inc. (“LTC, Inc.”),
and Texas-LTC Limited Partnership (“Texas-LTC”)
(the foregoing parties are referred to herein individually and collectively as “LTC”); and


 


II.                                     Extendicare
Health Services, Inc. (“EHSI”),
Alpha Acquisition, Inc. (“Alpha”),
Assisted Living Concepts, Inc. (“ALC, Inc.”),
and Carriage House Assisted Living, Inc. (“Carriage”).  (Assisted Living Concepts, Inc., and Carriage
House Assisted Living, Inc. are referred to herein individually and
collectively as “ALC/CHAL”; Assisted Living
Concepts Inc., Carriage House Assisted Living, Inc., Alpha Acquisition Inc. and
Extendicare Health Services, Inc. are referred to herein individually and collectively
as “ALC”.)


 


Background:


 


A.                                   On November 4,
2004, EHSI and Alpha entered into a Plan of Merger and Acquisition Agreement (“Merger Agreement”) with ALC, Inc. pursuant
to which it is anticipated that Alpha, a subsidiary of EHSI, will merge with
and into ALC, Inc. and ALC, Inc. will continue as the surviving corporation
after the merger (the “Merger”).  Upon conclusion of the Merger in accordance
with the terms of the Merger Agreement, EHSI will be the sole shareholder of
ALC, Inc.


 


B.                                     LTC leases a total
of thirty-seven (37) assisted living facility properties (the “Leased Properties”) currently containing a
total of approximately 1,427 assisted living units (a “Unit”) to ALC/CHAL under a master lease agreement
or individual leases and amendments thereto (collectively the “Leases”). 
The Leased Properties, their number of Units, and the respective parties
to the Leases for each Leased Property are set forth in Exhibit A.  For purposes of this MOU, a “Unit” is an
apartment located within an assisted living facility in which one or more
residents could reside.


 


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C.                                     Under the Leases,
LTC may declare an Event of Default (as defined in the Leases) if a Change of
Control (as defined in the Leases) of the tenant occurs and the surviving
tenant-entity does not have a Net Worth (as defined in the Leases) equal to or
greater than Seventy-Five Million Dollars ($75,000,000.00).  Under the Leases, a Change of Control includes,
but is not limited to, circumstances where (i) any person becomes the
beneficial owner of thirty percent (30%) or more of the outstanding shares of ALC/CHAL;
or (ii) the stockholders of ALC/CHAL approve a merger or consolidation of ALC/CHAL
with any other corporation.


 


D.                                    At the request of
ALC, Inc., representatives of LTC have previously identified certain
circumstances that they contend constitute non-conformity by ALC/CHAL with the
Leases (such matters, collectively, the “Identified
Concerns”), a summary of which Identified Concerns was disclosed as
part of ALC, Inc.’s public filings with the Securities and Exchange Commission.


 


E.                                      ALC and LTC agree
that it is in their mutual best interests to resolve all disputes under the
Leases prior to the Merger and to ensure the continued existence of leasing
arrangements by and among LTC and ALC following the Merger.


 


Now,
therefore, taking the foregoing Background into account, and in consideration
of the mutual covenants, agreements and conditions set forth herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:


 


1.                                       Understandings and Agreements Regarding Terms of New
Master Leases:


 


1.1.                            Number of Units.  The parties agree that the number of assisted
living Units for each of the Leased Properties shall be as set forth in Exhibit A.


 


1.2.                            Master Leases.  LTC and ALC shall enter into two (2) master
lease agreements (the “Master Leases”)
upon terms and conditions similar to those contained in the Master Lease
Agreement dated November 30, 2001, between LTC and ALC/CHAL (the “Original Master Lease”), except as
otherwise specified in this MOU.  The
Leased Properties shall be grouped under the Master Leases according to the
groupings set forth in Exhibit A.  The Master Leases shall be


 


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deemed as of the “Commencement Date” (as that term is hereinafter
defined) to have amended, restated, superseded and replaced the Leases,
including the Original Master Lease, for all purposes and the Master Leases and
this MOU shall constitute the only agreements between LTC and ALC with respect
to the Leased Properties; provided, however, that nothing in this MOU shall
relieve ALC/CHAL (and, following consummation of the Merger, ALC) of any
accrued or unpaid obligation to pay rent or other monies to LTC, whether under
any Lease or otherwise.  Notwithstanding
the foregoing, ALC and LTC agree that the Master Leases shall contain the
following elements, with the terms of this MOU superseding the terms of the
Original Master Lease to the extent they are inconsistent, conflict with, or
vary from any of the terms or conditions of the Original Master Lease:


 


1.2.1.                   Term. 
The term of the each Master Lease shall commence retroactive to January 1,
2005, subject to the Merger becoming effective, upon the date the Merger
becomes effective (the “Commencement Date”)
and shall expire (if not sooner terminated under the terms of the Master
Leases) at midnight (California time) December 31, 2014 (the “Initial Term”).


 


1.2.2.                   Minimum Rent.  Commencing retroactive to January 1,
2005, the monthly base rent (“Minimum Rent”)
payable under each Master Lease shall be as set forth on Exhibit A such that the combined
initial Minimum Rent under the Master Leases during 2005 shall be equal to the
total Minimum Rent paid in 2004 under all the existing Leases increased by 2%,
plus $250,000.00 (such sum, the “Initial Fixed Amount
Increase”), with such Minimum Rent being adjusted retroactively to January 1,
2005.  Specifically, it is agreed that
the 2005 Minimum Rent for the First Master Lease will be $4,500,000, and the
2005 Minimum Rent for the Second Master Lease will be $4,864,785, unless
modified pursuant to Section 1.2.10 of this MOU.  On January 1, 2006, and continuing each January 1
thereafter, during the Initial Term of each Master Lease and during the second
through tenth year of each Extended Term thereof, the Minimum


 


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Rent payable with respect to each Master Lease shall increase by two
percent (2%) per annum over the final Minimum Rent due in the preceding Lease
Year.  In addition, on each January 1
of 2006, 2007 and 2008, the annual combined Minimum Rent payable under both
Master Leases shall increase by $250,000.00 each year, respectively.  A summary of the Minimum Rent payable, unless
modified by conditions specified in Section 1.2.10 of this MOU,
with respect to each of the Master Leases calculated for each Lease Year during
the Initial Term is set forth on Exhibit A.


 


1.2.3.                   Options to Extend.  Provided there exists no uncured Event of
Default under either of the Master Leases (excepting stemming from a loss of
any licenses necessary to operate a Facility as an assisted living facility
under applicable state laws, which loss of licensure shall not be deemed an
Event of Default for purposes hereof provided ALC consummates a substitution in
accordance with this MOU and the applicable Master Lease with respect to the
unlicensed Facility within one hundred twenty (120) days of such loss of
license), ALC shall have the right to extend the term of each Master Lease for
up to three (3) separate additional periods of ten (10) years each (each, an “Extended Term”), commencing immediately
following the end of the Initial Term or the immediately preceding Extended
Term.  The option to extend each Master
Lease must be exercised in writing not later than twelve (12) months prior to
the end of the Initial Term or the then-current Extended Term.  Time is of the essence as to providing timely
notice of exercise. The Master Leases during any Extended Terms shall be on the
same terms and conditions as applied during the Initial Term, except that:


 


I.                                       The Minimum Rent
during the first year of the first Extended Term shall be increased by the
greater of (a) 2% over the final Minimum Rent due in the last year of the
Initial Term , or (b) the sum of the final Minimum Rent due during the first
year of the Master Lease (calculated prior to inclusion


 


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of the Initial Fixed Amount Increase), plus
$1,000,000.00, with such sum being multiplied by a fraction, the numerator of
which is the CPI of the second to last month of the Initial Term (i.e., November 2014)
and the denominator is the CPI of November 2004.  For purposes of the Master Leases “CPI” shall
mean and refer to the Consumer Price Index published by the Bureau of Labor
Statistics of the Department of Labor, U.S. Cities Average, All Items
(1982-84=100); provided, however, that if compilation of the CPI is
discontinued or transferred to any other governmental department or bureau,
then the index most nearly the same as the CPI shall be used.


 


II.                                   The Minimum Rent
during the first year of the second Extended Term shall be increased by the
greater of (a) 2% over the final Minimum Rent due in the last year of the first
Extended Term, or (b) the final Minimum Rent due during the first year of the
first Extended Term, multiplied by a fraction, the numerator of which is the
CPI of the second to last month of the first Extended Term (i.e., November 2024)
and the denominator is the CPI of November 2014.


 


III.                               The Minimum Rent during
the first year of the third Extended Term shall be increased by the greater of
(a) 2% over the final Minimum Rent due during the last year of the second
Extended Term, (b) the Minimum Rent due during the first year of the second
Extended Term, multiplied by a fraction, the numerator of which is the CPI of
the second to last month of the second Extended Term (i.e., November 2034)
and the denominator is the CPI of November 2024, or (c) an amount
necessary to cause such Minimum Rent to be equal to Fair Market Rent, which
shall be determined as set forth on Exhibit C
attached hereto.


 


1.2.4.                   Right of Substitution.  Provided that there is no Event of Default
existing under either of the Master Leases, then subject to the terms and
conditions set forth in this Section 1.2.4, ALC may substitute into
the applicable


 


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Master Lease one, or more, of the 122 assisted living facilities owned
and operated by ALC/CHAL prior to EHSI’s acquisition of ALC, Inc. (a “Substitute Facility”). ALC may effect such
a substitution in the event that (a) the Facility to be substituted under the
applicable Master Lease becomes unprofitable to operate by ALC based on ALC’s
reasonable commercial judgment, or (b) the Facility to be substituted loses any
licenses necessary to operate the same as an assisted living facility under
applicable state laws (such loss of licensure not being deemed an Event of
Default,  provided ALC consummates a
substitution in accordance with this MOU with respect to such unlicensed
Facility).


 


Upon a minimum of ninety (90) days prior written notice to LTC ( a “Substitution Notice”, which Substitution Notice shall
include the information called for in Exhibit B
hereto and shall be in a form reasonably acceptable to LTC) of ALC’s intent to
effect such substitution, ALC shall have the right to substitute into the
applicable Master Lease a Substitute Facility provided that all of the following
additional conditions with regard to such Substitute Facility are met both at
the time of the Substitution  Notice and
at the time of the closing of the substitution (any Substitute Facility
satisfying said conditions shall be referred to as a “Qualifying Substitute Facility”):  (i) the Substitute Facility has an equal or
greater number of assisted living units as the original Facility being
substituted out; (ii) the EBITDARM of the Substitute Facility for each of the
trailing three (3) months and the trailing twenty-four (24) months,
respectively, is equal to or greater than that of facility being substituted
out; (iii) the Substitute Facility is free of any encumbrances or liens other
than municipal and zoning ordinances and agreements entered thereunder,
recorded building and use restrictions, recorded easements and similar matters
of record, and unrecorded leases and occupancy agreements (such matters
affecting title, the “Encumbrances”),
none of which, considered individually or on a combined basis, adversely affect
or diminish the use, value or operation of the Substitute Facility, and none of
which differ


 


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materially in content, purpose or effect from the Encumbrances
affecting title to the facility being substituted out; (iv) the Substitute
Facility shall be in compliance with all state and federal regulations,
including all licensing and operating requirements, all state and local
building and zoning codes, and all other requirements necessary to operate the
Substitute Facility as an assisted living facility; (v) the Substitute Facility
shall be in compliance with all state and federal regulations and all other
requirements necessary to allow a change of ownership (vi) the Substitute
Facility be in material compliance with any applicable laws, rules or
regulations governing the use, handling, storage and disposal of hazardous
substances and that prior to the substitution ALC has delivered a Phase I
Environmental report dated no more than six (6) months prior to the effective
date of such substitution evidencing such compliance; (vi) there have been no
more than two (2) prior substitutions under the Master Lease or this Section 1.2.4
consummated within the twelve (12) months preceding the date of the closing of
the proposed substitution, and (vii) the Substitute Facility shall be in good
physical and mechanical condition and repair and shall not require any capital
improvements or repairs in excess of $30,000, which capital improvements shall
either (a) be funded by ALC without reimbursement by LTC, or (b) if funded or
otherwise paid for by LTC, be treated as an expansion of the Facility in
question and result in the adjustments to Minimum Rent provided for in Section 1.2.10
of this MOU, and in any event shall be undertaken and diligently pursued to
completion by ALC within six (6) months of consummation of the substitution.


 


Each substitution under this Master Lease shall be treated as an
exchange of property, with the result being that LTC shall be the owner of the
real property and improvements thereon of the Qualifying Substitute Facility
and that ALC, Inc. shall be the owner of the real property and improvements
thereon of the facility being substituted out of the Master Lease (the “Substituted Facility”). In connection with
the foregoing, LTC


 


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shall have the
Substituted Facility, on or before the date of substitution, released from any
and all liens and encumbrances securing monetary obligations.


 


ALC agrees to pay all of LTC’s reasonable costs and out-of-pocket
expenses in connection with good-faith efforts to consummate any substitution
hereunder, whether or not such substitution is completed, excepting any principal
and accrued interest to pay off monetary obligations secured by liens or
encumbrances against the Substituted Facility. In addition, in lieu of LTC
charging ALC for the actual time and efforts of its staff in processing a
substitution hereunder, each time ALC delivers a Substitution Notice, together
with that Substitution Notice ALC shall remit to LTC the sum of Ten Thousand
Dollars ($10,000) as a flat and non-accountable fee to reimburse LTC for its
internal overhead costs and overhead expenses devoted to effecting a
substitution.


 


ALC shall not have the right to effect a substitution of a Facility if
any monetary lien on the Facility may not be voluntarily prepaid by LTC. Without
limitation to the foregoing, ALC shall be responsible for all acceleration or
prepayment charges (but not principal and accrued interest charges) incurred by
LTC in connection with effecting a payoff of any liens or encumbrances.  ALC shall have the right to inquire of LTC regarding
the existence of, and LTC shall provide a written statement summarizing, the
then currently applicable acceleration or prepayment charges associated with
payoff of any liens or encumbrances affecting any Facility ALC is considering
substituting, such summary to be provided to ALC prior to its election, if any,
to deliver a Substitution Notice to LTC.


 


Notwithstanding any of the forgoing, ALC shall not have the right to close
any substitution of a  Facility under either of the Master Leases
during the last twenty-four (24) months of the Term (or any Extended Term) of
said


 


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Master Lease unless ALC has given LTC its
notice to extend the Term of the relevant Master Lease.


 


Furthermore, ALC shall not be entitled to substitute any of the five
(5) Facilities located in the State of Washington that are currently encumbered
by Washington State Revenue Bonds (the “WA
Bonds”) until December 2, 2015.


 


 ALC hereby agrees that it shall
close, divest itself of, or lease the  Substituted Facility to an unaffiliated
third-party, but in any event ALC and its affiliates shall permanently cease to
operate the Substituted Facility as an assisted living or other healthcare
related facility within one (1) year of the effective date of such
substitution.  ALC’s failure to do so
shall constitute an Event of Default under the applicable Master Lease.


 


LTC and ALC hereby agree that the substitution as set forth in this Section 1.2.4
represents the entire consideration for such Qualifying Substitute Facility and
that there shall be no alteration of any Minimum Rent due under the applicable
Master Lease to LTC, and neither LTC nor ALC shall be entitled any other
consideration whether in the form of cash or otherwise.


 


1.2.5.                   Insurance. 
The language set forth in Exhibit D
attached hereto shall replace Articles XIII and XIV of the Master Lease.


 


1.2.6.                   Subletting. 
(THE FOLLOWING LANGUAGE MODIFIES SECTION 22
OF THE MASTER LEASE AS FOLLOWS) 
“Subject to the permitted exceptions set forth in Section 22.3 below, ALC may not
assign, sublease or sublet, encumber, appropriate, pledge or otherwise
transfer, the Lease or the leasehold or other interest in the Leased Property
without LTC’s consent, which may be withheld in LTC’s sole and absolute
discretion.  Notwithstanding the forgoing
in this Section 22, ALC may
sublet one or more Facility to a subsidiary of ALC or EHSI, provided


 


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that (1) such
subleasing agreement be in a form that is reasonably acceptable to LTC, and (2)
that ALC provides to LTC not less than thirty (30) days prior written notice of
ALC’s intent to effect such sublease.  In
addition, ALC shall be permitted to sublet, within any Facility under the
Master Lease, up to 20% of the square footage to any party providing ancillary
services to the residents or employees of any Facility, provided that the
number of Units available for rent at such Facility shall not be
decreased.  Upon LTC’s consent (and, in
such cases where LTC’s consent is not required pursuant to Section 22.3 below), (a) in the case
of a subletting, the sublessee shall comply with the provisions of Section 22.2, (b) ALC shall provide an
original counterpart of each such sublease, duly executed by ALC and such
sublessee, that shall be delivered promptly to LTC, and (c) ALC shall remain
primarily liable, as principal rather than as surety, for the prompt payment of
the Rent and for the performance and observance of all of the covenants and
conditions to be performed by ALC hereunder. 
Nothing hereunder shall preclude LTC from selling any of the Leased
Property or assigning or transferring its interest hereunder, provided the new
owner or assignee expressly assumes LTC’s obligations under this Lease”.


 


SECTION 22.3 OF THE MASTER LEASE SHALL
BE MODIFIED TO READ AS FOLLOWS:  “Anything contained in this Lease to the
contrary notwithstanding, ALC shall have the right at any time during the Term,
without first seeking LTC’s consent, to enter into rental agreements with
residents of the Facilities, and execute any documents necessary in connection
therewith.  Provided, however, but for
the fact that LTC’s consent need not be obtained in such situations, all other
restrictions and provisions contained in this Article XXII or elsewhere in
this Lease shall apply”.


 


1.2.7.                   Geographic Limitations.  Except as otherwise provided in this Section 1.2.7,
during the Initial Term and any Extended Term of the Master


 


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Leases, and for a period of two (2) years after expiration or earlier
termination thereof, neither ALC nor any of its affiliates, directly or
indirectly, shall operate, own, manage or have any legal or beneficial interest
in or otherwise participate in or receive revenues from any other assisted
living facility within a four (4) mile radius measured outward from the outside
boundary of each Leased Property. 
Notwithstanding the foregoing, ALC or any of its affiliates, EHSI and any
affiliates or subsidiaries of EHSI, may, directly or indirectly, operate, own,
manage or have a legal or beneficial interest in assisted living facilities
within such four (4) mile radius, if ALC or any of its affiliates, EHSI and any
affiliates or subsidiaries of EHSI, operated, owned, managed or had any legal
or beneficial interest in or otherwise participated in or received revenues
from such assisted living facility prior to the Commencement Date (a “Competing Facility”); provided, however,
that in order to avoid any conflict of interest with respect to any non-LTC
owned facility and a Competing Facility, ALC agrees it will not prefer or favor
a Competing Facility to the detriment of an LTC-owned facility.


 


1.2.8.                   Modification of Change of Control Provisions.  Section 18.1 of Article XVIII
as the same appears the Original Master Lease, entitled Change of Control,
shall be modified to reduce the surviving entity Net Worth requirement from
Seventy-Five Million Dollars ($75,000,000) to Fifty Million Dollars
($50,000,000).


 


1.2.9.                   Books and Records.  The last paragraph in Section 24.3
of the Master Lease shall be modified as follows:


 


“Whether or not expressly stated elsewhere above in this Section 24.3, all information,
reports, filings, etc. provided by ALC to LTC under this Section 24.3 shall be (i) prepared in
accordance with GAAP, and (ii) accompanied with a written certificate from a
duly authorized officer of ALC certifying that to the best knowledge of


 


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the officer
executing such certificate, all accompanying information is true and
complete.  ALC may satisfy the reporting requirements with respect to providing
quarterly and annual consolidated financial statements of ALC by the timely
filing of all required financial reports with the SEC by EHSI.  However, in the event that EHSI ceases to
file all such required financial reports with the SEC, Lessee shall remain
obligated for all the reporting requirements to LTC hereunder, and shall
furnish the applicable quarterly and annual reports directly to LTC.  In addition to all of the items expressly
identified and required elsewhere in this Section 24.3
(or elsewhere in this Lease), ALC shall promptly comply with any request by LTC
or any Facility Mortgagee for the production of additional financial
information (whether relating to ALC, or a Controlling Entity of ALC) as may be
reasonably deemed relevant or prudent by LTC and/or any Facility Mortgagee, provided, however, that such requests for additional
information pursuant to the immediately preceding sentence (a) shall not
require further detail or unconsolidated financial analysis than is provided
pursuant to any filings with the SEC completed by EHSI, and (b) are
customary in form and content and not unreasonably or unusually burdensome to
produce”.


 


1.2.10.             Expansion of Leased Properties.  ALC will work cooperatively with LTC to
expand the number of living Units, at mutually agreed upon Leased Properties,
with each party acting in good faith based upon the exercise of its
commercially reasonable judgment in light of, among other things, facility
occupancy rates, operating costs, and resident revenues.  Prior to commencing any such expansion, ALC
and LTC shall agree upon a development plan outlining the costs and timelines
for such expansion.  All costs for such
expansion shall be paid for by LTC when such expansion is completed having a
certification of occupancy and licensure


 


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of the additional
Units.  All expenditures must be jointly
approved by ALC and LTC, with each party acting in good faith based upon the
exercise of its commercially reasonable judgment.  The monthly Minimum Rent for any Leased
Property that has been expanded shall be adjusted and increased by increasing
the Minimum Rent by an amount equal to (a) nine and one-half percent (9.5%)
plus the positive difference, if any, between the average for the last five (5)
business days prior to funding of the yield on the U.S. Treasury 10-year note
minus 420 basis points (expressed as a percentage), multiplied by (b) the
amounts actually paid to third parties by or on behalf of ALC, and reimbursed
by LTC, to complete the expansion.  The
foregoing adjustment to the Minimum Rent shall occur on the first day of the
month during which such funding occurred. 
Subject to the provisions of this Section 1.2.10, LTC’s
funding of any expansion to the Leased Properties shall be limited to
$5,000,000.00 in any calendar year.


 


1.3.                            Waiver of Potential Events of Default.  LTC acknowledges and agrees that EHSI
requires LTC’s agreement to allow ALC time to cure any of the Identified
Concerns (a) as inducement to cause ALC to enter into the Master Leases on the
terms and conditions set forth in this MOU, and (b) to facilitate the timely
receipt of ALC, Inc.’s shareholder approvals and closing of the Merger.  LTC further acknowledges that EHSI will not
agree to proceed further with the negotiation of any Master Leases or other
renewals or extensions of the Leases with LTC without receipt of such time to
cure from LTC and without the representations and warranties contained in this
Paragraph.  LTC agrees as follows:


 


1.3.1.                   Effect of MOU and Leases on Pre-Existing Default.  It is the parties’ intention that the new
Master Leases contemplated hereby, when fully executed, shall substitute for
and act as a novation of the original Leases. 
Accordingly, in the event an Event of Default exists or existed under
the original Leases, LTC agrees it shall not seek to terminate the Leases or
the Master Leases or disturb ALC’s occupancy of the Leased Properties as a
consequence thereof, ALC having, to the extent not expressly waived


 


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pursuant to the terms of this MOU, any and all rights to cure the same
as were established under the terms of the Original Master Lease; provided,
however, that nothing in this MOU or any of the new Master Leases shall relieve
ALC of any accrued or unpaid obligation to pay rent or other monies to LTC,
whether under any Lease or otherwise; and provided further that nothing herein
shall prohibit or bar LTC from enforcing any term or provision of the new
Master Leases or of Sections 1.3 and 2 of this MOU.


 


1.3.2.                   Specific Cure Periods  and Waivers.  Without limiting the generality of the
provisions of Section 1.3.1 above, in anticipation and support of
ALC, Inc. seeking shareholder approval of the Merger, and EHSI, Alpha and ALC,
Inc. closing on the Merger, and in consideration of all of the actions of the
parties taken in good-faith furtherance thereof, LTC agrees as follows:


 


1.3.2.1.                                                          LTC
shall not assert an Event of Default as a consequence of a Change of Control
resulting from EHSI or any of its corporate affiliates being or becoming the
beneficial owner, as defined in the Leases, directly or indirectly, of
securities or other equity interests of ALC, Inc. representing thirty percent
(30%) of more of the combined voting power of the then outstanding securities
of equity interests of ALC, Inc. ; and


 


1.3.2.2.                                                          LTC
shall not assert an Event of Default as a consequence of a Change of Control
resulting from ALC. Inc.’s stockholders or holders of equity interests
approving the Merger of ALC, Inc. with Alpha; and


 


1.3.2.3.                                                          LTC
shall not assert an Event of Default as a consequence of the number of assisted
living Units that comprise any of the Leased Properties under the Leases for
Athens, Texas,


 


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Greenville,
Texas, and Tiffen, Ohio, it being noted that Exhibit A
to this MOU specifies the agreed number of Units for each of those Facilities;
and


 


1.3.2.4.                                                          ALC
shall have until December 31, 2005 to cure any lack of licensure of the
assisted living facilities located on the Leased Properties in Elkhart, Indiana
and Madison, Indiana; and should such facilities be unable to be licensed by December 31,
2005, LTC and ALC commit to effectuate a “substitution” as defined in Section 1.2.6.,
hereunder; and


 


1.3.2.5.                                                          LTC
shall not assert an Event of Default as a consequence of any purported failure
to provide audited consolidated financial statements, or any other financial
statements or reports, for ALC/CHAL where the purported failure to provide
statements or reports occurred prior to the Commencement Date of the Master
Leases; and


 


1.3.2.6.                                                          LTC
shall not assert an Event of Default as a consequence of the adequacy, nature,
or scope of ALC/CHAL’s insurance coverage prior to the Commencement Date of the
Master Leases, provided that there has not been a casualty as to which the
absence or scope of insurance has injured LTC or an LTC-owned property that is
subject to the Leases; and


 


1.3.2.7.                                                          LTC
shall not assert an Event of Default as a consequence of any potential failure
to fulfill any requirement of the Leases that, following a Change of Control,
the surviving entity have a Net Worth of equal to or greater than Seventy-Five
Million Dollars ($75,000,000.00), LTC and ALC hereby acknowledging and agreeing
that any such surviving entity Net Worth requirement, whether appearing


 


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in  Section 18.1 of the Original
Master Lease or elsewhere in the Leases, is hereby reduced with respect to each
and all of the Leases in which it appears to an amount equal to or greater than
Fifty Million Dollars ($50,000,000).


 


The parties acknowledge and agree that none of EHSI nor ALC, Inc. or
Carriage concede that any of the aforementioned defaults or Events of Defaults
have occurred or are occurring under the Leases, all of the foregoing being
expressly enumerated (a) in response to previously asserted allegations of
defaults under the Leases, and/or (b) because they constitute matters that may,
will or are likely to arise in connection with consummation of the Merger; and
it being further agreed and acknowledged that this MOU shall not waive LTC’s right
to enforce any provision of the Master Leases which might give rise to an
Identified Concern or Event of Default, unless such provision is omitted from
the Master Leases.  Accordingly, if there
exists an Event of Default under the Leases, and if the New Master Lease(s) contain the provisions which give rise to such Event of Default,
nothing in this MOU shall release or waive the resulting Event of Default.


 


2.                                       Miscellaneous.


 


2.1.                            Successors and Assigns.  This MOU shall be binding upon and inure to
the benefit of LTC, EHSI, Alpha, and ALC/CHAL and their respective successors
and permitted assigns.  No party may
assign either this MOU or any of its rights, interests, or obligations
hereunder without the prior written approval of the other parties hereto.


 


2.2.                            Releases and Public Announcements.  LTC shall be permitted to disclose publicly
the execution of this MOU and of the contemplated Master Leases.  The parties shall use commercially reasonable
efforts to plan and coordinate such announcements.


 


16





















 


2.3.                            Costs. 
Each party shall bear its own costs associated with the drafting, review
and execution and of this MOU, and all actions taken to prepare and execute the
Master Leases.


 


2.4.                            Amendment. 
No amendment of any provision of this MOU shall be valid unless the same
shall be in writing and signed by each of the parties.


 


2.5.                            Period of MOU and Termination.  This MOU will become effective when signed by
all parties.  If the Merger does not
become effective on or before March 31, 2005 this MOU shall be null and
void and of no further force and effect, and the parties shall be restored to
their respective positions as if this MOU had never been executed.


 


2.6.                            Governing Law.  This MOU shall be governed by and construed
in accordance with the domestic laws of the State of New York without giving
effect to any choice or conflict of law provision or rule (whether of the State
of New York or any other jurisdiction) that would result in the application of
the laws of any jurisdiction other than the State of New York.  The parties agree that the state and federal
courts situated in and for New York County shall be the exclusive forum for any
and all disputes arising hereunder or under the Master Leases, and consent to the
exclusive jurisdiction and venue of said courts for such purposes, and agree
not to seek a change of venue in the event an action is initiated in said
courts.


 


2.7.                            Each
of LTC, Inc. and Texas-LTC shall be jointly and severally liable for the
obligations and liabilities under this MOU and the Master Leases of the other
parties identified in this subparagraph 2.7.


 


2.8.                            Each
of Extendicare Health Services, Inc., Alpha Acquisition, Inc., Assisted Living
Concepts, Inc., and Carriage House Assisted Living, Inc shall be jointly and
severally liable for all of the obligations and liabilities under this MOU and
under the Master Leases and all extensions, amendments, and modifications of
the Master Leases of the other parties identified in this Section 2.8.


 


17





















 


2.9.                            Headings. 
The section headings contained in this MOU are inserted for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this MOU.


 


2.10.                      Counterparts.  This MOU may be executed in one or more
counterparts, including, without limitation, facsimile counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument


 


2.11.                      Severability.  Any term or provision of this MOU that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.


 


2.12.                      Construction.  The parties have participated jointly in the
negotiation and drafting of this MOU.  In
the event an ambiguity or question of intent or interpretation arises, this MOU
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this MOU.  Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.


 


2.13.                      Further Assurances.  Upon the terms and subject to the conditions
of this MOU, each of the parties shall use commercially reasonable efforts to
take, or cause to be taken, all action, to do, or cause to be done, all other
things necessary, proper or advisable to consummate and make effective as
promptly as practical the transactions contemplated by this MOU.


 


2.14.                      LTC
confirms that to the best of its knowledge (without having undertaken any
investigation or inquiry) it has no notice or knowledge of any existing Events
of Default under the Leases, including any circumstances that could ripen into
Events of Default upon delivery of notice, passage of time or both, excepting the


 


18





















 


Identified Concerns and the Change of Control.  In addition, LTC confirms that to the best of
its knowledge (without having undertaken any investigation or inquiry) it has
no notice or knowledge of any accrued or unpaid obligation of ALC to pay rent
or other moneys to LTC, whether under any lease or otherwise, other than
regularly accruing Minimum Rent and Additional Charges under the Leases, none
of which is delinquent or otherwise past due, or, as provided in this MOU
following execution thereof, the Master Leases. 
For purposes of this MOU, LTC’s “knowledge” is only that information
which is actually known to Wendy Simpson or to Andre Dimitriadis as of the date
of execution of this MOU.


 


2.15.                      Notices. 
All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed to have been duly given when delivered
in person, by overnight courier or facsimile to the intended recipient as set
forth below:


 


If to LTC:


 


LTC Properties, Inc.


Attn: Chief Executive Officer


22917 Pacific Coast Highway


#350


Malibu, CA 90265


Facsimile: 
(805) 981-8663


 


with
a copy to:


 


Reed Smith LLP


599 Lexington Avenue, 29th Floor


New York, NY 
10022


Attention: 
Herbert Kozlov


Facsimile: 
(212) 521-5450


 


If to EHSI or Alpha:


 


Extendicare Health Services Inc.


111 West Michigan Street


Milwaukee, WI 
53203-2903


Attention: 
General Counsel


Facsimile: 
(414) 908-8481


 


19





















 


with
a copy to:


 


Foley & Lardner LLP


777 East Wisconsin Avenue


Milwaukee, Wisconsin  53202-5367


Attention: 
Hugh J. O’Halloran


Facsimile: 
(414) 297-4900


 


If to ALC, Inc. or Carriage:


 


c/o
Extendicare Health Services Inc.


111 West Michigan Street


Milwaukee, WI 
53203-2903


Attention: 
General Counsel


Facsimile: 
(414) 908-8481


 


with
a copy to:


 


Foley & Lardner LLP


777 East Wisconsin Avenue


Milwaukee, Wisconsin  53202-5367


Attention: 
Hugh J. O’Halloran


Facsimile: 
(414) 297-4900


 


2.16                         Signature of ALC, Inc and Carriage.   EHSI and Alpha represent, warrant and agree
that immediately upon the consummation of the Merger they shall cause ALC, Inc.
and Carriage to execute and deliver this MOU to LTC, and that the failure for
any reason of EHSI and Alpha to do so would constitute a material breach by
them of this MOU. Accordingly, none of LTC, EHSI or Alpha shall assert that the
failure of ALC, Inc. and Carriage to execute this MOU prior to consummation of
the Merger renders this MOU unenforceable or incomplete.


 


20





















 


The parties
have executed this MOU as of the date first above written.


 


	
  LTC PROPERTIES, INC.

  	
  EXTENDICARE HEALTH SERVICES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Wendy Simpson

  	
   

  	
  By:

  	
  /s/ Richard Bertrand

  	
   

  
	
  Name:

  	
   Wendy Simpson

  	
   

  	
  Name:

  	
   Richard Bertrand

  	
   

  
	
  Title:

  	
    Vice Chairman, Chief Financial
  Officer

  	
   

  	
  Title:

  	
     Chief Financial Officer

  	
   

  
	
  and Treasurer

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  TEXAS-LTC LIMITED PARTNERSHIP

  	
  ALPHA ACQUISITION, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Wendy Simpson

  	
   

  	
  By:

  	
  /s/ Richard Bertrand

  	
   

  
	
  Name:

  	
    Wendy Simpson

  	
   

  	
  Name:

  	
   Richard Bertrand

  	
   

  
	
  Title:

  	
     Vice Chairman, Chief
  Financial Officer

  	
   

  	
  Title:

  	
     Chief Financial Officer

  	
   

  
	
  and Treasurer

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ASSISTED LIVING CONCEPTS, INC

  	
  CARRIAGE HOUSE ASSISTED LIVING, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
																												



 


21





















 


Exhibit A


 


	
  Property

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  # of

  	
   

  	
   

  	
   

  	
  2005

  	
   

  	
  2006

  	
   

  	
  2007

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  
	
  Name

  	
   

  	
  City

  	
   

  	
  State

  	
   

  	
  Count

  	
   

  	
  Units

  	
   

  	
  ALC PARTY

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  
	
  Master Lease I

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maurice

  	
   

  	
  Millville

  	
   

  	
  NJ

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Reed

  	
   

  	
  N. Denison

  	
   

  	
  IA

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annabelle

  	
   

  	
  Caldwell

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Clearwater

  	
   

  	
  Nampa

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sylvan

  	
   

  	
  Hayden

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warren

  	
   

  	
  Burley

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Caldwell

  	
   

  	
  Troy

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  River Bend

  	
   

  	
  Wheelersburg

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Seneca

  	
   

  	
  Tiffin

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Chestnut

  	
   

  	
  Newark

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Rutherford

  	
   

  	
  Fremont

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Angelina

  	
   

  	
  Jacksonville

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Harrison

  	
   

  	
  Greenville

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  41

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lakeland

  	
   

  	
  Athens

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  38

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Neches

  	
   

  	
  Lufkin

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Oakwood

  	
   

  	
  Marshall

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Alpine

  	
   

  	
  Longview

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  30

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Arbor

  	
   

  	
  S. Wichita Falls

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  50

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  18

  	
   

  	
  690

  	
   

  	
   

  	
   

  	
  $

  	
  4,500,000

  	
   

  	
  4,660,000

  	
   

  	
  4,823,200

  	
   

  	
  4,989,664

  	
   

  	
  5,089,457

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Master Lease II

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Chenowick

  	
   

  	
  Kennewick

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lexington

  	
   

  	
  Vancouver

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  44

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mountainview

  	
   

  	
  Camas

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Orchard

  	
   

  	
  Grandview

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Pioneer

  	
   

  	
  Walla Walla

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Crawford

  	
   

  	
  Kelso

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Karr

  	
   

  	
  Hoquiam

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Colonial

  	
   

  	
  Battleground

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Davis

  	
   

  	
  Bullhead City

  	
   

  	
  AZ

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Jasmine

  	
   

  	
  Lake Havasu

  	
   

  	
  AZ

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Linkville

  	
   

  	
  Klamath Falls

  	
   

  	
  OR

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sawyer

  	
   

  	
  Eugene

  	
   

  	
  OR

  	
   

  	
  1

  	
   

  	
  47

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Spencer

  	
   

  	
  Newport

  	
   

  	
  OR

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Jewel

  	
   

  	
  Madison

  	
   

  	
  IN

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beardsley

  	
   

  	
  Elkhart

  	
   

  	
  IN

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Homestead

  	
   

  	
  Beatrice

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mahoney

  	
   

  	
  York

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Madison

  	
   

  	
  Norfolk

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Saunders

  	
   

  	
  Wahoo

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  19

  	
   

  	
  737

  	
   

  	
   

  	
   

  	
  4,864,785

  	
   

  	
  5,142,081

  	
   

  	
  5,424,922

  	
   

  	
  5,713,421

  	
   

  	
  5,827,689

  	
   

  
	
  Total - LTC

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  37

  	
   

  	
  1,427

  	
   

  	
   

  	
   

  	
  $

  	
  9,364,785

  	
   

  	
  $

  	
  9,802,081

  	
   

  	
  $

  	
  10,248,122

  	
   

  	
  $

  	
  10,703,085

  	
   

  	
  $

  	
  10,917,146

  	
   

  
																											



 


	
  Property

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  # of

  	
   

  	
   

  	
   

  	
  2010

  	
   

  	
  2011

  	
   

  	
  2012

  	
   

  	
  2013

  	
   

  	
  2014

  	
   

  
	
  Name

  	
   

  	
  City

  	
   

  	
  State

  	
   

  	
  Count

  	
   

  	
  Units

  	
   

  	
  ALC PARTY

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  	
  Rent

  	
   

  
	
  Master Lease I

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maurice

  	
   

  	
  Millville

  	
   

  	
  NJ

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Reed

  	
   

  	
  N. Denison

  	
   

  	
  IA

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annabelle

  	
   

  	
  Caldwell

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Clearwater

  	
   

  	
  Nampa

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sylvan

  	
   

  	
  Hayden

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warren

  	
   

  	
  Burley

  	
   

  	
  ID

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Caldwell

  	
   

  	
  Troy

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  River Bend

  	
   

  	
  Wheelersburg

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Seneca

  	
   

  	
  Tiffin

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  35

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Chestnut

  	
   

  	
  Newark

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Rutherford

  	
   

  	
  Fremont

  	
   

  	
  OH

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Angelina

  	
   

  	
  Jacksonville

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Harrison

  	
   

  	
  Greenville

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  41

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lakeland

  	
   

  	
  Athens

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  38

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Neches

  	
   

  	
  Lufkin

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Oakwood

  	
   

  	
  Marshall

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living Concepts,
  Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Alpine

  	
   

  	
  Longview

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  30

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Arbor

  	
   

  	
  S. Wichita Falls

  	
   

  	
  TX

  	
   

  	
  1

  	
   

  	
  50

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  18

  	
   

  	
  690

  	
   

  	
   

  	
   

  	
  5,191,246

  	
   

  	
  5,295,071

  	
   

  	
  5,400,973

  	
   

  	
  5,508,992

  	
   

  	
  5,619,172

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Master Lease II

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Chenowick

  	
   

  	
  Kennewick

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lexington

  	
   

  	
  Vancouver

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  44

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mountainview

  	
   

  	
  Camas

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Orchard

  	
   

  	
  Grandview

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Pioneer

  	
   

  	
  Walla Walla

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Crawford

  	
   

  	
  Kelso

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Karr

  	
   

  	
  Hoquiam

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Colonial

  	
   

  	
  Battleground

  	
   

  	
  WA

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Davis

  	
   

  	
  Bullhead City

  	
   

  	
  AZ

  	
   

  	
  1

  	
   

  	
  40

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Jasmine

  	
   

  	
  Lake Havasu

  	
   

  	
  AZ

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Linkville

  	
   

  	
  Klamath Falls

  	
   

  	
  OR

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sawyer

  	
   

  	
  Eugene

  	
   

  	
  OR

  	
   

  	
  1

  	
   

  	
  47

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Spencer

  	
   

  	
  Newport

  	
   

  	
  OR

  	
   

  	
  1

  	
   

  	
  36

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Jewel

  	
   

  	
  Madison

  	
   

  	
  IN

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beardsley

  	
   

  	
  Elkhart

  	
   

  	
  IN

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Assisted Living
  Concepts, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Homestead

  	
   

  	
  Beatrice

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mahoney

  	
   

  	
  York

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Madison

  	
   

  	
  Norfolk

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Saunders

  	
   

  	
  Wahoo

  	
   

  	
  NE

  	
   

  	
  1

  	
   

  	
  39

  	
   

  	
  Carriage House
  Assisted Living, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  19

  	
   

  	
  737

  	
   

  	
   

  	
   

  	
  5,944,243

  	
   

  	
  6,063,128

  	
   

  	
  6,184,390

  	
   

  	
  6,308,078

  	
   

  	
  6,434,240

  	
   

  
	
  Total - LTC

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  37

  	
   

  	
  1,427

  	
   

  	
   

  	
   

  	
  $

  	
  11,135,489

  	
   

  	
  $

  	
  11,358,199

  	
   

  	
  $

  	
  11,585,363

  	
   

  	
  $

  	
  11,817,070

  	
   

  	
  $

  	
  12,053,412

  	
   

  
																											



 


22





















 


Exhibit B


Form of
Notice of Substitution


 


1.               Date of Notice:


 


2.               A check payable to LTC Properties, Inc.
in the amount of $10,000 is attached 


 


3.               Location of Property being substituted
out of Master Lease (“Substituted Property”):


 


4.               Location of Property being substituted
into the  Master Lease (“Substitute  Property”):


 


5.               Anticipated closing date: 


 


6.               Status and list of all required licenses
necessary to operate the each of the Substituted Property and the Substitute
Property  as an assisted living facility
under applicable laws:


 


7.               State the number of assisted living
units in each  the each of the Substituted
Property and the Substitute Property: 


 


8.               For each of the Substituted Property and
the Substitute Property, measured as at the close of the fiscal quarter
immediately preceding the Notice of Substitution, the EBITDARM for each of the
trailing three (3) months and the trailing twenty-four (24) months,
respectively, were as follows. 


 


9.               For each of  the Substituted Property and the Substitute
Property identify all encumbrances, liens, encroachments, recorded building and
use restrictions, recorded easements and similar matters of record and
unrecorded leases and occupancy agreements. 
Specify which of the foregoing adversely affect the use, value or
operation of property.  Provide an
accurate title report pertaining to the Substitute Property, which title report
shall be updated by Assisted Living Concepts, Inc. to the date of closing.


 


10.         Confirm that the Substitute Property is in
compliance with all state and federal regulations, including all licensing and
operating requirements,  all state and
local building and zoning codes, and other requirements necessary to allow a
change of ownership or  necessary to
operate the Substitute Facility as an assisted living facility; 


 


11.         Confirm that the Substitute Property is in material
compliance with all applicable laws, rules or regulations governing the use,
handling, storage and disposal of hazardous substances; deliver all  Phase I Environmental reports pertaining to
the property. (Note: Prior to the closing ALC must deliver a Phase I
Environmental report dated no more than six (6) months old evidencing
compliance); 


 


12.         With respect to the Substitute Property,
provide a report as to the physical and mechanical condition and repair and
confirm that the Substitute Property shall not require any capital improvements
or repairs in excess of $30,000.  


 


23





















 


The undersigned is duly authorized to deliver
this Notice of Substitution to LTC Properties, Inc. and understands and acknowledges
that LTC Properties, Inc. shall rely on the accuracy of the information set
forth herein in LTC Properties, Inc.’s efforts to consummate the substitution
transaction contemplated hereby and by the applicable provisions of the Master
Lease. Assisted Living Concepts, Inc. agrees promptly to inform LTC Properties,
Inc. of any errors, omissions and changed circumstances with respect to the
information set forth herein. Without limitation to the foregoing, Assisted
Living Concepts, Inc. shall update LTC Properties, Inc. with respect to the
information set forth in items 6-12 three business days prior to the closing of
the substitution contemplated hereby. 


 


 


	
  ASSISTED LIVING CONCEPTS, INC

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  
	
  Title:

  	
   

  	
   

  
					



 


24





















 


EXHIBIT C


 


Fair
Market Rent Provisions


 


For purposes
of the Master Leases, Fair Market Rent shall be determined as hereinafter
described:


 


a.                                       If
LTC and ALC cannot agree on the Fair Market Rent within thirty (30) days after
the date of ALC’s notice of exercise for the third Extended Term, each party
shall, by notice to the other, appoint a disinterested and licensed M.A.I. Real
Estate Appraiser with at least five years of experience in assisted care
properties in the states in which the Leased Properties covered by the relevant
Master Lease are located (with the same type of operating license  then in effect for the relevant facilities)
to determine the Fair Market Rent.  If
any party should fail to appoint an appraiser within ten (10) days after
notice, the appraiser selected by the other party shall determine the Fair
Market Rent.  In determining the Fair
Market Rent, each appraiser shall give appropriate consideration to, among
other things, generally applicable minimum rent for tenancies of property
comparable to the Leased Properties in the areas in which the Leased Properties
are located.


 


b.                                      If
the two appraisers selected pursuant to the foregoing paragraph cannot agree
upon the Fair Market Rent within forty-five (45) days, they shall immediately
give written notice of such inability (“Notice of Disagreement”) to both LTC
and ALC setting forth the Fair Market Rent determinations of each of the
appraisers.  If the determinations of
each of the two appraisers of the Fair Market Rent at the commencement of such
third Extended Term differ by less than ten percent (10%) of the lower
determination, the Fair Market Rent shall be fixed at an amount equal to the
average of the two determinations.


 


c.                                       If
the determinations of each of the two appraisers selected pursuant to Paragraph
a. above differ by ten percent (10%) or more of the lower determination with
respect to the Fair Market Rent to be paid at the commencement of such third
Extended Term, then within thirty (30) days after the giving of the Notice of
Disagreement, the two appraisers shall appoint a third disinterested and
licensed M.A.I. Real Estate Appraiser with at least 5 years of experience in
the states in which the Leased Properties covered by the relevant Master Lease
are located (with the same type of operating license then in effect for the
relevant facilities).  If the parties
cannot then agree on the Fair Market Rent, the third appraiser shall determine
the Fair Market Rent, and in so doing, shall give appropriate consideration to
those items described in Paragraph a. above. 
The third appraiser shall not select a Fair Market Rent either (a)
higher than the highest of the two appraisals made pursuant to Paragraph a.
above; or (b) lower than the lowest of the two appraisals made pursuant to
Paragraph a. above.  If the first two
appraisers cannot agree on the selection of a third appraiser within such
thirty (30) days, or if the first two appraisers fail to provide a Notice of
Disagreement (as stated above in Paragraph b. above), then the Fair Market Rent
shall be determined by a third appraiser selected by the American Arbitration
Association (or such other organization at LTC’s election) upon application by
LTC.


 


d.                                      During
the time before the determination of the Fair Market Rent, ALC shall continue
to pay Minimum Rent at the same rate as paid immediately preceding the subject
Extended Term; provided, however, that, once the adjusted Fair Market Rent is
determined, the Minimum Rent owed by ALC at the adjusted Fair Market Rent rate
shall be effective retroactively as of the first day of such Extended
Term.  If, after the Minimum Rent for the
third Extended Term is adjusted and applied retroactively as of the first day
of such Extended Term, it is determined that additional Minimum Rent is due
LTC, the aggregate amount of any such additional Minimum Rent shall be paid to
LTC within thirty (30) days of the determination of the adjusted Fair Market
Rent for such Extended Term.


 


e.                                       Each
of the parties shall pay the fees of the appraiser that it selects pursuant to
Paragraph a. above, and shall equally share the cost of the third appraiser, if
necessary, and shall equally share the cost of arbitration (excluding attorneys’
fees), if necessary.


 


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EXHIBIT D


 


(Per Section 1.2.5)


 


ARTICLE XIII


 


13.1.                        Property Insurance Requirements.  Subject to the provisions of Section 13.6,
during the Term, Lessee shall at all times keep the Leased Property, and all
property located in or on the Leased Property, including Lessee’s Personal
Property, insured with the kinds and amounts of insurance described below and
any additional insurance reasonably required by Lessor to protect its interest
in the Leased Property.  This insurance
shall be written by companies authorized to do insurance business in the States
in which the Leased Property is located. 
The policies must name Lessor as an additional insured and/or loss
payee, as applicable. Losses shall be payable to Lessor or Lessee as provided
in Article XIV.  In addition, upon
Lessor’s written request, the policies shall name as an additional insured
and/or loss payee, as applicable, the holder (“Facility Mortgagee”) of any
mortgage, deed of trust or other security agreement and any other Encumbrance
placed on the Leased Property in accordance with the provisions of Article XXXII
and expressly including, without limitation, the Existing Encumbrances (a “Facility
Mortgage”) by way of a standard form of mortgagee’s loss payable endorsement.
Any loss adjustment shall require the written consent of Lessor, Lessee, and
each Facility Mortgagee.  Evidence of
insurance shall be deposited with Lessor and, if requested, with any Facility
Mortgagee.  If any provision of any
Facility Mortgage requires deposits of premiums for insurance to be made with
such Facility Mortgagee, Lessee shall either pay to Lessor monthly the amounts
required and Lessor shall transfer such amounts to each Facility Mortgagee, or,
pursuant to written direction by Lessor, Lessee shall make such deposits
directly with such Facility Mortgagee. 
The policies on the Leased Property, including the Leased Improvements,
Fixtures and Lessee’s Personal Property, shall insure against the following
risks:


 


13.1.1                  Insurance
against loss or damage by fire, casualty and other hazards as now are or
subsequently may be covered by an “all risk” policy or a policy covering “special”
causes of loss, with such endorsements as Lessor (or a Facility Mortgagee) may
from time to time reasonably require and which are customarily required by
institutional lenders of similar properties similarly situated, including,
without limitation, building ordinance law, lightning, windstorm, civil
commotion, hail, riot, strike, water damage, sprinkler leakage, collapse,
malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling
objects and weight of snow, ice or sleet, and covering the Leased Property in
an amount equal to 100% of the full insurable replacement value of the Leased
Property (exclusive of footings and foundations below the lowest basement
floor) without deduction for depreciation. 
The determination of the replacement cost amount shall be adjusted
annually to comply with the requirements of the insurer issuing the coverage
or, at Lessor’s (or a Facility Mortgagee’s) election, by reference to such
indexes, appraisals or information as Lessor’s (or a Facility Mortgagee’s)
determines in its reasonable discretion, and, unless the insurance required by
this paragraph shall be effected by blanket and/or umbrella policies in
accordance with the requirements of this Lease, the policy shall include
inflation guard coverage that ensures that the policy limits will be increased
over time to reflect the effect of inflation. 
Each policy shall, subject to Lessor’s (or a Facility Mortgagee’s)
approval, contain (i) a replacement cost endorsement, without deduction for
depreciation, (ii) either an agreed amount endorsement or a waiver of any co-insurance


 


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provisions,
and (iii) an ordinance or law coverage or enforcement endorsement if the
Improvements or the use of the Property constitutes any legal nonconforming
structures or uses, and shall provide for deductibles in such amounts as Lessor
(or a Facility Mortgagee) may permit in its sole discretion.;


 


13.1.2                  If the Leased
Property contains steam boilers, steam pipes, steam engines, steam turbines or
other high pressure vessels, insurance covering the major components of the
central heating, air conditioning and ventilating systems, boilers, other
pressure vessels, high pressure piping and machinery, elevators and escalators,
if any, and other similar equipment installed in the Leased Improvements, in an
amount equal to one hundred percent (100%) of the full replacement cost of the
Leased Improvements, which policies shall insure against physical damage to and
loss of occupancy and use of the Leased Improvements arising out of an accident
or breakdown covered thereunder;


 


13.1.3                  Business and
rental interruption insurance (i) covering the same perils of loss as are
required to be covered by the property insurance required under Section 13.1.1
and 13.1.2 above, (ii) in an amount equal to the projected annual net income
from the Leased Property plus carrying costs and extraordinary expenses of the
Leased Property for a period of twelve (12) months, based upon Lessee’s
reasonable estimate thereof as approved by Lessor (or a Facility Mortgagee),
(iii) including either an agreed amount endorsement or a waiver of any
co-insurance provisions, so as to prevent Lessee, Lessor and any other insured
thereunder from being a co-insurer, and (iv) providing that any covered loss
thereunder shall be payable to Lessor;


 


13.1.4                  During the
period of any new construction on the Leased Property, a so called “Builder’s
All-Risk Completed Value” or “Course of Construction” insurance policy in
non-reporting form for any improvements under construction, including, without
limitation, for demolition and increased cost of construction or renovation, in
an amount equal to 100% of the estimated replacement cost value on the date of
completion, including “soft cost” coverage, and Workers’ Compensation Insurance
covering all persons engaged in such construction, in an amount at least equal
to the minimum required by law.  In
addition, each contractor and subcontractor shall be required to provide
Facility Mortgagee with a certificate of insurance for (i) workers’
compensation insurance covering all persons engaged by such contractor or
subcontractor in such construction in an amount at least equal to the minimum
required by law, and (ii) general liability insurance showing minimum limits of
at least $5,000,000, including coverage for products and completed
operations.  Each contractor and
subcontractor also shall cover Lessee and Lessor (and any Facility Mortgagee)
as an additional insured under such liability policy and shall indemnify and
hold Lessee and Lessor (and any Facility Mortgagee) harmless from and against
any and all claims, damages, liabilities, costs and expenses arising out of,
relating to or otherwise in connection with its performance of such
construction;


 


13.1.5.               Replacement
Cost.  The term “full replacement cost”
as used herein, shall mean the actual replacement cost of the Leased Property
requiring replacement from time to time including an increased cost of
construction endorsement, less exclusions provided in the standard form of fire
insurance policy.  In the event either
party believes that full replacement cost (the then replacement cost less such exclusions)
has increased or decreased at any time during the Term, it shall have the right
to have such full replacement cost redetermined;


 


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13.1.6.               Additional
Insurance.  In addition to the insurance
described above, Lessee shall maintain such additional insurance as may be
reasonably required from time to time by Lessor or any Facility Mortgagee; and


 


13.1.7.               Waiver of
Subrogation.  All insurance policies
carried by either party covering any part of the Leased Property, the Fixtures,
the Facilities, or Lessee’s Personal Property including without limitation,
contents, fire and casualty insurance, shall expressly waive any right of
subrogation on the part of the insurer against the other party.  The parties hereto agree that their policies
will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to
do so.


 


13.2.                        Other Insurance Requirements.  Subject to the provisions of Section 13.6,
during the Term, Lessee shall at all times keep the Leased Property, and all
property located in or on the Leased Property, including Lessee’s Personal
Property, insured with the kinds and amounts of insurance described below.


 


13.2.1.               Commercial general
liability insurance under a policy containing “Comprehensive General Liability
Form” of coverage (or a comparably worded form of coverage) and the “Broad Form
CGL” endorsement (or a policy which otherwise incorporates the language of such
endorsement), which policy shall include, without limitation, coverage against
claims for personal injury, bodily injury, death and property damage liability
without respect to the Leased Property and the operations related thereto,
whether on or off the Leased Property, and the following coverages: Employee as
Additional Insured, Product Liability/Completed Operations; Broad Form
Contractual Liability, Independent Contractor, Personal Injury and Advertising
Injury Protection, Medical Payment (with a minimum limit of $5,000 per person),
Broad Form Cross Suits Liability Endorsement, where applicable, hired and
non-owned automobile coverage (including rented and leased vehicles), and, if
any alcoholic beverages shall be sold, manufactured or distributed in the
Leased Property, liquor liability coverage, all of which shall be in such
amounts as Lessor may from time to time reasonably require, but not less than
One Million Dollars ($1,000,000) per occurrence, Three Million Dollars ($3,000,000)
per Facility, and a policy aggregate limit of Ten Million Dollars ($10,000,000).  If such policy shall cover more than one
Facility, such limits shall apply on a “per location” basis, subject to the policy
aggregate limit of Ten Million Dollars ($10,000,000).  Such liability policy shall delete the
contractual exclusion under the personal injury coverage, if possible, and if
available, shall include the following endorsements: Notice of Accident, Knowledge
of Occurrence, and Unintentional Error and Omission;


 


13.2.2                  Professional
liability insurance coverage in an amount equal to not less than One Million
Dollars ($1,000,000) per occurrence and Five Million Dollars ($5,000,000) in
the aggregate;


 


13.2.3                  Flood insurance
in an amount equal to the full insurable value of the Leased Property or the
maximum amount available, whichever is less, if the Leased Property is located
in an area designated by the Secretary of Housing and Urban Development or the
Federal Emergency Management Agency as having special flood hazards; and


 


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13.2.4                  Workers’
compensation insurance (including self-insurance and Texas non-subscription
coverage) and/or other similar insurance which may be required by governmental
authorities or applicable legal requirements in an amount at least equal to the
minimum required by law, and employer’s liability insurance with a limit of One
Hundred Thousand Dollars ($100,000) per accident and per disease per employee,
and Five Hundred Thousand Dollars ($500,000) in the aggregate for disease
arising in connection with the operation of the Leased Property.


 


13.2.5                  Additional
Insurance.  In addition to the insurance
described above, Lessee shall maintain such additional insurance as may be
reasonably required from time to time by Lessor or any Facility Mortgagee and
shall further at all times maintain, to the extent required by applicable law,
worker’s compensation insurance coverage (including self-insurance and Texas
non-subscription coverage) for all persons employed by Lessee (or its agent or
operator) on the Leased Property; and


 


13.3.                        Form
Satisfactory, etc.  All of the policies
of insurance referred to in this Article XIII shall be written in a form
reasonably satisfactory to Lessor and by insurance companies reasonably
satisfactory to Lessor (and, as applicable, any Facility Mortgagee).  Subject to the foregoing, Lessor agrees that
it will not unreasonably withhold or delay its approval as to the form of the
policies of insurance or as to the insurance companies selected by Lessee.  Lessee shall pay all of the premiums
therefor, and deliver such policies or certificates thereof to Lessor prior to
their effective date (and, with respect to any renewal policy, prior to the
expiration of the existing policy), and in the event of the failure of Lessee
either to effect such insurance as herein called for or to pay the premiums
therefor, or to deliver such policies or certificates thereof to Lessor at the
times required, Lessor shall be entitled, but shall have no obligation, to
effect such insurance and pay the premiums therefor, which premiums shall be
repayable by Lessee to Lessor upon written demand therefor, and failure to
repay the same shall constitute an Event of Default within the meaning of Section 16.1.  Each insurer mentioned in this Article XIII
shall agree, by endorsement on the policy or policies issued by it, or by
independent instrument furnished to Lessor, that it will give to Lessor (and to
any Facility Mortgagee, if required by the same) thirty (30) days’ written
notice before the policy or policies in questions shall be altered, allowed to
expire or canceled.


 


13.4.                        Increase
in Limits.  In the event that a Facility
Mortgagee shall at any time reasonably determine the limits of the personal
injury or property damage, or public liability insurance then carried to be
insufficient, Lessee shall thereafter carry the insurance with increased limits
until further change pursuant to the provisions of this Section; provided that
if Lessor desires to increase the limits of insurance, and such is not pursuant
to the request of a Facility Mortgagee, then Lessor may not demand an increase
in limits above the limits generally consistent with the requirements of owners
of long term care properties in the state in which the applicable Facility is
located.


 


13.5.                        Blanket
Policy.  Notwithstanding anything to the
contrary contained in this Article XIII, Lessee’s obligations to carry the
insurance provided for herein may be brought within the coverage of a so-called
blanket policy or policies of insurance carried and maintained by Lessee;
provided, however, that the coverage afforded Lessor will not be reduced or
diminished or otherwise be different from that which would exist under a
separate policy


 


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meeting all
other requirements of this Lease by reason of the use of such blanket policy of
insurance, and provided further that the requirements of this Article XIII
shall be met in any such blanket policy.


 


13.6.                        No
Separate Insurance. Lessee shall not on Lessee’s own initiative or pursuant to
the request or requirement of any third party take out separate insurance
concurrent in form or contributing in the event of loss with that required in
this Article, to be furnished or which may reasonably be required to be
furnished, by Lessee or increase the amount of any then existing insurance by
securing any additional policy or additional policies, unless all parties having
an insurable interest in the subject matter of the insurance, including in all
cases Lessor and all Facility Mortgagees are included therein as additional
insureds, and the loss is payable under said insurance in the same manner as
losses are payable under the Lease. 
Lessee shall immediately notify Lessor of the taking out of any such
separate insurance or of the increasing of any of the amount of the then
existing insurance.


 


13.7.                        Continuous
Coverage.  Prior to the Commencement
Date, Lessee was the tenant and operator of the Leased Property, and prior to
that, Lessee was the owner and operator of the Leased Property.  Therefore, Lessee already has in place
insurance with respect to the Leased Property. 
Lessee shall assure that there is no gap in the insurance coverage
provided in connection with the Leased Property at or after the Commencement
Date, and therefore, the insurance provided by Lessee shall be continuous, with
the types and amounts of coverage, described herein to be applicable on the Commencement
Date.  To the extent there is not full,
complete and continuous coverage for all issues, no matter when arising,
claimed or occurring, Lessee shall, at its sole cost, obtain such insurance.


 


ARTICLE XIV


 


14.1.                                Insurance
Proceeds.  All proceeds payable
by reason of any loss of or damage to the Leased Property, or any portion
thereof, which is insured under any policy of insurance required by Article XIII of the Lease shall be
paid to Lessee.  Such amounts shall be
applied to the reconstruction or repair, as the case may be, of any damage to
or destruction of the Leased Property, or any portion thereof, unless Lessee
exercises its right of substitution under Section     .  The funds shall be disbursed based upon work
performed.  Any excess proceeds of
insurance remaining after the completion of the restoration or reconstruction
of the Leased Property shall go to Lessee. 
All salvage resulting from any risk covered by insurance shall belong to
Lessor except that any salvage relating to Lessee’s Personal Property shall
belong to Lessee.


 


14.2.                               Reconstruction in the Event of Damage or Destruction
Covered by Insurance Proceeds. Subject to Lessee’s right of
substitution, as provided by Section       ,
if during the Term, the Leased Property is totally or partially destroyed by a
risk covered by the insurance described in Article XIII
and whether or not any Facility thereby is rendered Unsuitable for its Primary
Intended Use, Lessee shall restore the Leased Property to substantially the
same condition as existed immediately before the damage or destruction.  Lessee shall be entitled to the insurance
proceeds for the purpose of such repair and restoration.


 


14.3                                 Reconstruction in the Event of Damage or Destruction
Not Covered bv Insurance. 
Subject to Lessee’s right of substitution, as provided by Section       ,
if during the Term, the Leased Property is damaged or destroyed irrespective of
the extent of the damage from a risk not fully covered by the insurance
described in Article XIII,
whether or not such


 


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damage renders any portion of the Leased Property Unsuitable for Its
Primary Intended Use, Lessee shall restore the damaged Leased Property to
substantially the same condition it was in immediately before such damage or
destruction and such damage or destruction shall not terminate this Lease nor
result in any reduction in Rent (including without limitation Minimum Rent).


 


14.4.                              Lessee’s Property.  All insurance proceeds payable by reason of
any loss of or damage to any of Lessee’s Personal Property shall be paid to
Lessee.  Lessee shall hold such insurance
proceeds in trust to pay the cost of repairing or replacing damaged Lessee’s
Personal Property, unless Lessee exercises its right of substitution under Section     .


 


14.5.                               Restoration of Lessee’s Property.  Without limiting Lessee’s obligation to
restore the Leased Property as provided in Sections
14.2 and 14.3,
Lessee shall also restore all alterations and improvements made by Lessee,
including Lessee’s Personal Property but only to the extent that Lessee’s
Personal Property is necessary to the operation of the Leased Property for its
Primary Intended Use in accordance with applicable Legal Requirements.


 


14.6.                               No Abatement of Rent.  This Lease shall remain in full force and
effect and Lessee’s obligation to make rental payments and to pay all other
charges required by this Lease shall not be abated during the pendency of
repair or restoration.


 


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