<PAGE>   1
                                                                    EXHIBIT 10.2

                                MULTIFAMILY NOTE

US $11,209,000.00     June 30, 2000

      FOR VALUE RECEIVED, the undersigned ("BORROWER") jointly and severally (if
more than one) promises to pay to the order of BANC ONE CAPITAL FUNDING
CORPORATION, an Ohio corporation, the principal sum of Eleven Million Two
Hundred Nine Thousand and 00/100 Dollars (US $11,209,000.00), with interest on
the unpaid principal balance at the annual rate of Eight and fifty-three
hundredths percent (8.53%).

      1.    DEFINED TERMS. As used in this Note, (i) the term "LENDER" means the
holder of this Note, and (ii) the term "INDEBTEDNESS" means the principal of,
interest on, or any other amounts due at any time under, this Note, the Security
Instrument or any other Loan Document, including prepayment premiums, late
charges, default interest, and advances to protect the security of the Security
Instrument under Section 12 of the Security Instrument. Event of Default, Key
Principal and other capitalized terms used but not defined in this Note shall
have the meanings given to such terms in the Security Instrument (as defined in
Paragraph 5).

      2.    ADDRESS FOR PAYMENT. All payments due under this Note shall be
payable at 150 E. Gay Street, 22nd Floor, Columbus, Ohio 43215, or such other
place as may be designated by written notice to Borrower from or on behalf of
Lender.

      3.    PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be
paid as follows:

      (a)   Unless disbursement of principal is made by Lender to Borrower on
the first day of the month, interest for the period beginning on the date of
disbursement and ending on and including the last day of the month in which such
disbursement is made shall be payable simultaneously with the execution of this
Note. Interest under this Note shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.

      (b)   Consecutive monthly installments of principal and interest, each in
the amount of Ninety Thousand Four Hundred Eighty Four and 63/100 Dollars (US
$90,484.63), shall be payable on the first day of each month beginning on August
1, 2000, until the entire unpaid principal balance evidenced by this Note is
fully paid. Any accrued interest remaining past due for 30 days or more shall be
added to and become part of the unpaid principal balance and shall bear interest
at the rate or rates specified in this Note, and any reference below to "accrued
interest" shall refer to accrued interest which has not become part of the
unpaid principal balance. Any remaining principal and interest shall be due and
payable on July 1, 2010 or on any earlier date on which the unpaid principal
balance of this Note becomes due and payable, by acceleration or otherwise (the
"MATURITY DATE"). The unpaid principal balance shall continue to bear interest
after the Maturity Date at the Default Rate set forth in this Note until and
including the date on which it is paid in full.

      (c)   Any regularly scheduled monthly installment of principal and
interest that is received by Lender before the date it is due shall be deemed to
have been received on the due date solely for the purpose of calculating
interest due.

      4.    APPLICATION OF PAYMENTS. If at any time Lender receives, from
Borrower or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, Lender may apply that payment to
amounts then due and payable in any manner and in any order determined by
Lender, in Lender's discretion. Borrower agrees that neither Lender's acceptance
of a payment from Borrower in an amount that is less than all amounts then due
and payable nor Lender's application of such payment shall constitute or be
deemed to constitute either a waiver of the unpaid


<PAGE>   2

amounts or an accord and satisfaction. If Lender accepts a guaranty of only a
portion of the Indebtedness, Borrower hereby waives its right under California
Civil Code Section 2822(a) to designate the portion of the Indebtedness which
shall be satisfied by any guarantor's partial payment.

      5.    SECURITY. The Indebtedness is secured, among other things, by a
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing (California) dated as of the date of this Note (the "SECURITY
INSTRUMENT"), and reference is made to the Security Instrument for other rights
of Lender concerning the collateral for the Indebtedness.

      6.    ACCELERATION. If an Event of Default has occurred and is continuing,
the entire unpaid principal balance, any accrued interest, the prepayment
premium payable under Paragraph 10, if any, and all other amounts payable under
this Note and any other Loan Document shall at once become due and payable, at
the option of Lender, without any prior notice to Borrower. Lender may exercise
this option to accelerate regardless of any prior forbearance.

      7.    LATE CHARGE. If any monthly amount payable under this Note or under
the Security Instrument or any other Loan Document is not received by Lender
within 10 days after the amount is due, Borrower shall pay to Lender,
immediately and without demand by Lender, a late charge equal to 5 percent of
such amount. Borrower acknowledges that its failure to make timely payments will
cause Lender to incur additional expenses in servicing and processing the loan
evidenced by this Note (the "LOAN"), and that it is extremely difficult and
impractical to determine those additional expenses. Borrower agrees that the
late charge payable pursuant to this Paragraph represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional expenses Lender will incur by reason of such late
payment. The late charge is payable in addition to, and not in lieu of, any
interest payable at the Default Rate pursuant to Paragraph 8.

      8.    DEFAULT RATE. So long as any monthly installment or any other
payment due under this Note remains past due for 30 days or more, interest under
this Note shall accrue on the unpaid principal balance from the earlier of the
due date of the first unpaid monthly installment or other payment due, as
applicable, at a rate (the "DEFAULT RATE") equal to the lesser of 4 percentage
points above the rate stated in the first paragraph of this Note or the maximum
interest rate which may be collected from Borrower under applicable law. If the
unpaid principal balance and all accrued interest are not paid in full on the
Maturity Date, the unpaid principal balance and all accrued interest shall bear
interest from the Maturity Date at the Default Rate. Borrower also acknowledges
that its failure to make timely payments will cause Lender to incur additional
expenses in servicing and processing the Loan, that, during the time that any
monthly installment or other payment under this Note is delinquent for more than
30 days, Lender will incur additional costs and expenses arising from its loss
of the use of the money due and from the adverse impact on Lender's ability to
meet its other obligations and to take advantage of other investment
opportunities, and that it is extremely difficult and impractical to determine
those additional costs and expenses. Borrower also acknowledges that, during the
time that any monthly installment or other payment due under this Note is
delinquent for more than 30 days, Lender's risk of nonpayment of this Note will
be materially increased and Lender is entitled to be compensated for such
increased risk. Borrower agrees that the increase in the rate of interest
payable under this Note to the Default Rate represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional costs and expenses Lender will incur by reason of the
Borrower's delinquent payment and the additional compensation Lender is entitled
to receive for the increased risks of nonpayment associated with a delinquent
loan.

      9.    LIMITS ON PERSONAL LIABILITY.

      (a)   Except as otherwise provided in this Paragraph 9, Borrower shall
have no personal liability under this Note, the Security Instrument or any other
Loan Document for the repayment of the

                                                                          Page 2


<PAGE>   3

Indebtedness or for the performance of any other obligations of Borrower under
the Loan Documents, and Lender's only recourse for the satisfaction of the
Indebtedness and the performance of such obligations shall be Lender's exercise
of its rights and remedies with respect to the Mortgaged Property and any other
collateral held by Lender as security for the Indebtedness. This limitation on
Borrower's liability shall not limit or impair Lender's enforcement of its
rights against any guarantor of the Indebtedness or any guarantor of any
obligations of Borrower.

      (b)   Borrower shall be personally liable to Lender for the repayment of a
portion of the Indebtedness equal to any loss or damage suffered by Lender as a
result of (1) failure of Borrower to pay to Lender upon demand after an Event of
Default, all Rents to which Lender is entitled under Section 3(a) of the
Security Instrument and the amount of all security deposits collected by
Borrower from tenants then in residence; (2) failure of Borrower to apply all
insurance proceeds and condemnation proceeds as required by the Security
Instrument; (3) failure of Borrower to comply with Section 14(d) or (e) of the
Security Instrument relating to the delivery of books and records, statements,
schedules and reports; (4) fraud or written material misrepresentation by
Borrower, Key Principal or any officer, director, partner, member or employee of
Borrower in connection with the application for or creation of the Indebtedness
or any request for any action or consent by Lender; or (5) failure to apply
Rents, first, to the payment of reasonable operating expenses (other than
Property management fees that are not currently payable pursuant to the terms of
an Assignment of Management Agreement or any other agreement with Lender
executed in connection with the Loan) and then to amounts ("DEBT SERVICE
AMOUNTS") payable under this Note, the Security Instrument or any other Loan
Document (except that Borrower will not be personally liable (i) to the extent
that Borrower lacks the legal right to direct the disbursement of such sums
because of a bankruptcy, receivership or similar judicial proceeding, or (ii)
with respect to Rents that are distributed in any calendar year if Borrower has
paid all operating expenses and Debt Service Amounts for that calendar year).

      (c)   Borrower shall become personally liable to Lender for the repayment
of all of the Indebtedness upon the occurrence of any of the following Events of
Default: (1) Borrower's acquisition of any property or operation of any business
not permitted by Section 33 of the Security Instrument; or (2) a Transfer that
is an Event of Default under Section 21 of the Security Instrument.

      (d)   To the extent that Borrower has personal liability under this
Paragraph 9, Lender may exercise its rights against Borrower personally without
regard to whether Lender has exercised any rights against the Mortgaged Property
or any other security, or pursued any rights against any guarantor, or pursued
any other rights available to Lender under this Note, the Security Instrument,
any other Loan Document or applicable law. If Borrower is a married person, then
Borrower agrees that Lender may look to all of Borrower's community property and
separate property to satisfy Borrower's recourse obligations under this
Paragraph 9. For purposes of this Paragraph 9, the term "MORTGAGED PROPERTY"
shall not include any funds that (1) have been applied by Borrower as required
or permitted by the Security Instrument prior to the occurrence of an Event of
Default, or (2) Borrower was unable to apply as required or permitted by the
Security Instrument because of a bankruptcy, receivership, or similar judicial
proceeding.

      10.   VOLUNTARY AND INVOLUNTARY PREPAYMENTS.

      (a)   A prepayment premium shall be payable in connection with any
prepayment made under this Note as provided below:

            (1)   Borrower may voluntarily prepay all (but not less than all) of
      the unpaid principal balance of this Note on the last Business Day of a
      calendar month if Borrower has given Lender at least 30 days prior notice
      of its intention to make such prepayment. Such prepayment shall be made by
      paying (A) the amount of principal being prepaid, (B) all accrued

                                                                          Page 3


<PAGE>   4

      interest, (C) all other sums due Lender at the time of such prepayment,
      and (D) the prepayment premium calculated pursuant to Schedule A. For all
      purposes, including the accrual of interest, any prepayment received by
      Lender on any day other than the last calendar day of the month shall be
      deemed to have been received on the last calendar day of such month. For
      purposes of this Note, a "BUSINESS DAY" means any day other than a
      Saturday, Sunday or any other day on which Lender is not open for
      business.

            (2)   Upon Lender's exercise of any right of acceleration under this
      Note, Borrower shall pay to Lender, in addition to the entire unpaid
      principal balance of this Note outstanding at the time of the
      acceleration, (A) all accrued interest and all other sums due Lender under
      this Note and the other Loan Documents, and (B) the prepayment premium
      calculated pursuant to Schedule A.

            (3)   Any application by Lender of any collateral or other security
      to the repayment of any portion of the unpaid principal balance of this
      Note prior to the Maturity Date and in the absence of acceleration shall
      be deemed to be a partial prepayment by Borrower, requiring the payment to
      Lender by Borrower of a prepayment premium. The amount of any such partial
      prepayment shall be computed so as to provide to Lender a prepayment
      premium computed pursuant to Schedule A without Borrower having to pay
      out-of-pocket any additional amounts.

      (b)   Notwithstanding the provisions of Paragraph 10(a), no prepayment
premium shall be payable with respect to (A) any prepayment made no more than 90
days before the Maturity Date, or (B) any prepayment occurring as a result of
the application of any insurance proceeds or condemnation award under the
Security Instrument.

      (c)   Schedule A is hereby incorporated by reference into this Note.

      (d)   Any required prepayment of less than the unpaid principal balance of
this Note shall not extend or postpone the due date of any subsequent monthly
installments or change the amount of such installments, unless Lender agrees
otherwise in writing.

      (e)   Borrower recognizes that any prepayment of the unpaid principal
balance of this Note, whether voluntary or involuntary or resulting from a
default by Borrower, will result in Lender's incurring loss, including
reinvestment loss, additional expense and frustration or impairment of Lender's
ability to meet its commitments to third parties. Borrower agrees to pay to
Lender upon demand damages for the detriment caused by any prepayment, and
agrees that it is extremely difficult and impractical to ascertain the extent of
such damages. Borrower therefore acknowledges and agrees that the formula for
calculating prepayment premiums set forth on Schedule A represents a reasonable
estimate of the damages Lender will incur because of a prepayment.

      (f)   Borrower further acknowledges that the prepayment premium provisions
of this Note are a material part of the consideration for the Loan, and
acknowledges that the terms of this Note are in other respects more favorable to
Borrower as a result of the Borrower's voluntary agreement to the prepayment
premium provisions.

      11.   COSTS AND EXPENSES. Borrower shall pay on demand all expenses and
costs, including fees and out-of-pocket expenses of attorneys and expert
witnesses and costs of investigation, incurred by Lender as a result of any
default under this Note or in connection with efforts to collect any amount due
under this Note, or to enforce the provisions of any of the other Loan
Documents, including those incurred in post-judgment collection efforts and in
any bankruptcy proceeding (including any action for relief from the automatic
stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure
proceeding.

                                                                          Page 4


<PAGE>   5

      12.   FORBEARANCE. Any forbearance by Lender in exercising any right or
remedy under this Note, the Security Instrument, or any other Loan Document or
otherwise afforded by applicable law, shall not be a waiver of or preclude the
exercise of that or any other right or remedy. The acceptance by Lender of any
payment after the due date of such payment, or in an amount which is less than
the required payment, shall not be a waiver of Lender's right to require prompt
payment when due of all other payments or to exercise any right or remedy with
respect to any failure to make prompt payment. Enforcement by Lender of any
security for Borrower's obligations under this Note shall not constitute an
election by Lender of remedies so as to preclude the exercise of any other right
or remedy available to Lender.

      13.   WAIVERS. Presentment, demand, notice of dishonor, protest, notice of
acceleration, notice of intent to demand or accelerate payment or maturity,
presentment for payment, notice of nonpayment, grace, and diligence in
collecting the Indebtedness are waived by Borrower, Key Principal, and all
endorsers and guarantors of this Note and all other third party obligors.

      14.   LOAN CHARGES. If any applicable law limiting the amount of interest
or other charges permitted to be collected from Borrower in connection with the
Loan is interpreted so that any interest or other charge provided for in any
Loan Document, whether considered separately or together with other charges
provided for in any other Loan Document, violates that law, and Borrower is
entitled to the benefit of that law, that interest or charge is hereby reduced
to the extent necessary to eliminate that violation. The amounts, if any,
previously paid to Lender in excess of the permitted amounts shall be applied by
Lender to reduce the unpaid principal balance of this Note. For the purpose of
determining whether any applicable law limiting the amount of interest or other
charges permitted to be collected from Borrower has been violated, all
Indebtedness that constitutes interest, as well as all other charges made in
connection with the Indebtedness that constitute interest, shall be deemed to be
allocated and spread ratably over the stated term of the Note. Unless otherwise
required by applicable law, such allocation and spreading shall be effected in
such a manner that the rate of interest so computed is uniform throughout the
stated term of the Note.

      15.   COMMERCIAL PURPOSE. Borrower represents that the Indebtedness is
being incurred by Borrower solely for the purpose of carrying on a business or
commercial enterprise, and not for personal, family or household purposes.

      16.   COUNTING OF DAYS. Except where otherwise specifically provided, any
reference in this Note to a period of "days" means calendar days, not Business
Days.

      17.   GOVERNING LAW. This Note shall be governed by the law of the
jurisdiction in which the Land is located.

      18.   CAPTIONS. The captions of the paragraphs of this Note are for
convenience only and shall be disregarded in construing this Note.

      19.   NOTICES. All notices, demands and other communications required or
permitted to be given by Lender to Borrower pursuant to this Note shall be given
in accordance with Section 31 of the Security Instrument.

      20.   CONSENT TO JURISDICTION AND VENUE. Borrower and Key Principal each
agrees that any controversy arising under or in relation to this Note shall be
litigated exclusively in the jurisdiction in which the Land is located (the
"PROPERTY JURISDICTION"). The state and federal courts and authorities with
jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over
all controversies which shall arise under or in relation to this Note. Borrower
and Key Principal each irrevocably consents

                                                                          Page 5


<PAGE>   6

to service, jurisdiction, and venue of such courts for any such litigation and
waives any other venue to which it might be entitled by virtue of domicile,
habitual residence or otherwise.

      21.   WAIVER OF TRIAL BY JURY. BORROWER, KEY PRINCIPAL AND LENDER EACH (A)
AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES, AS LENDER, KEY PRINCIPAL AND
BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL
BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW
OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY
EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL
COUNSEL.

                                                                          Page 6


<PAGE>   7

      ATTACHED SCHEDULES. THE FOLLOWING SCHEDULES ARE ATTACHED TO THIS NOTE:

            [X]   SCHEDULE A PREPAYMENT PREMIUM (REQUIRED)

            [X]   SCHEDULE B MODIFICATIONS TO MULTIFAMILY NOTE

      IN WITNESS WHEREOF, Borrower has signed and delivered this Note or has
caused this Note to be signed and delivered by its duly authorized
representative.


                                          BORROWER:

                                          ARV COVELL, LLC
                                          a California limited liability company



                                          By:___________________________________
                                             Name:  Abdo H.  Khoury,
                                             Title: Authorized Manager

Borrower's Employer ID Number: 33-0911962



Fannie Mae MBS/DUS [Pool] [Commitment] No.:

                                                                          Page 7


<PAGE>   8

                                          Pay to the order of FANNIE MAE,
                                          without recourse.

                                          LENDER:

                                          BANC ONE CAPITAL FUNDING CORPORATION,
                                          AN OHIO CORPORATION


                                          By:__________________________________
                                             Name:  Jennifer B.  Henson
                                             Title: Director





                                   SCHEDULE A

                               PREPAYMENT PREMIUM

      Any prepayment premium payable under Paragraph 10 of this Note shall be
computed as follows:

      (a)   If the prepayment is made during the first 9.5 years beginning on
            the date of the Note (the "YIELD MAINTENANCE PERIOD"), the
            prepayment premium shall be the greater of:

                  (i)   1% of the unpaid principal balance of this Note; or

                  (ii)  The product obtained by multiplying:

                        (A)   the amount of principal being prepaid,

                        by

                        (B)   the difference obtained by subtracting from the
                              interest rate on this Note the yield rate (the
                              "YIELD RATE") on the 6.5% U.S. Treasury Security
                              due February 1, 2010 (the "SPECIFIED U.S. TREASURY
                              SECURITY"), as the Yield Rate is reported in The
                              Wall Street Journal on the fifth Business Day
                              preceding (x) the date notice of prepayment is
                              given to Lender where prepayment is voluntary, or
                              (y) the date Lender accelerates the Loan,

                        by

                                                                          Page 8


<PAGE>   9

                        (C)   the present value factor calculated using the
                              following formula:

                                    1 - (1 + r)(-n)
                                    ---------------
                                          r
                                    [r = Yield Rate
                                     n = the number of 365-day years (or 366-day
                                         years, if applicable), and any fraction
                                         thereof, remaining between the
                                         Prepayment Date and the expiration of
                                         the Yield Maintenance Period]



                                       9
<PAGE>   10




                                    In the event that no Yield Rate is published
                                    for the Specified U.S. Treasury Security,
                                    then the nearest equivalent U.S. Treasury
                                    Security shall be selected at Lender's
                                    discretion. If the publication of such Yield
                                    Rates in The Wall Street Journal is
                                    discontinued, Lender shall determine such
                                    Yield Rates from another source selected by
                                    Lender.

                                    For purposes of subparagraph (ii)(C), the
                                    "PREPAYMENT DATE" shall be (x) in the case
                                    of a voluntary prepayment, the date on which
                                    the prepayment is made, and (y) in any other
                                    case, the date on which Lender accelerates
                                    the unpaid principal balance of this Note.

      (b)   If the prepayment is made after the expiration of the Yield
            Maintenance Period but more than 90 days before the Maturity Date,
            the prepayment premium shall be 1% of the unpaid principal balance
            of this Note.



                                                          _____________________
                                                                INITIAL(S)



                                       10
<PAGE>   11

SCHEDULE B

                              MODIFICATIONS TO NOTE
                                (SENIOR HOUSING)

      The following modifications are made to the text of the Note that precedes
this Exhibit:


      1.    Section 9(b)(3) of the Note is hereby amended to read as follows:

      2.    Failure of Borrower to comply with Sections 14(d), 14 (e), or 14 (f)
            of the Security Instrument relating to the delivery of books and
            records, statements, schedules and reports;"

      3.    Section 9(b) of the Note is hereby amended to add the following
            paragraph (6) at the end thereof:

            "Borrower's failure to renew, continue, extend, or maintain all
            permits, licenses or other certificates or other approvals required
            to legally operate the Mortgaged Property as a seniors housing
            facility, as defined in the Security Instrument;"

      4.    All capitalized terms used in this Schedule not specifically defined
            herein shall have the meanings set forth in the text of the Note
            that precedes this Schedule.


                                          BORROWER'S INITIALS: _____________



                                       11
<PAGE>   12

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

Ballard Spahr Andrews & Ingersoll, LLP
300 East Lombard Street, Suite 1900
Baltimore, Maryland 21202
Attn: Thomas A. Hauser, Esquire

================================================================================

                           MULTIFAMILY DEED OF TRUST,
                              ASSIGNMENT OF RENTS,
                      SECURITY AGREEMENT AND FIXTURE FILING
                                  (CALIFORNIA)





ATTENTION COUNTY RECORDER: THIS INSTRUMENT IS INTENDED TO BE EFFECTIVE AS A
FINANCING STATEMENT FILED AS A FIXTURE FILING



                                       12
<PAGE>   13

PURSUANT TO SECTION 9402 OF THE CALIFORNIA COMMERCIAL CODE. PORTIONS OF THE
GOODS COMPRISING A PART OF THE MORTGAGED PROPERTY ARE OR ARE TO BECOME FIXTURES
RELATED TO THE LAND DESCRIBED IN EXHIBIT A HERETO. THIS INSTRUMENT IS TO BE
FILED FOR RECORD IN THE RECORDS OF THE COUNTY WHERE DEEDS OF TRUST ON REAL
PROPERTY ARE RECORDED AND SHOULD BE INDEXED AS BOTH A DEED OF TRUST AND AS A
FINANCING STATEMENT COVERING FIXTURES. THE ADDRESSES OF BORROWER (DEBTOR) AND
LENDER (SECURED PARTY) ARE SPECIFIED IN THE FIRST PARAGRAPH ON PAGE 1 OF THIS
INSTRUMENT.



                                       13
<PAGE>   14

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

<S>   <C>
1.    DEFINITIONS   2

2.    UNIFORM COMMERCIAL CODE SECURITY AGREEMENT   6

3.    ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION   7

4.    ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY   9

5.    PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS; PREPAYMENT
      PREMIUM   11

6.    EXCULPATION   11

7.    DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES   11

8.    COLLATERAL AGREEMENTS   12

9.    APPLICATION OF PAYMENTS   12

10.   COMPLIANCE WITH LAWS   13

11.   USE OF PROPERTY   13

12.   PROTECTION OF LENDER'S SECURITY   13

13.   INSPECTION   14

14.   BOOKS AND RECORDS; FINANCIAL REPORTING   14

15.   TAXES; OPERATING EXPENSES   16

16.   LIENS; ENCUMBRANCES   16

17.   PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY   17

18.   ENVIRONMENTAL HAZARDS   17
</TABLE>


                                                                         Page i



                                       i
<PAGE>   15

<TABLE>
<CAPTION>

<S>   <C>
19.   PROPERTY AND LIABILITY INSURANCE   23

20.   CONDEMNATION   24

21.   TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER   25

22.   EVENTS OF DEFAULT   29

23.   REMEDIES CUMULATIVE   30

24.   FORBEARANCE   30

25.   LOAN CHARGES   30

26.   WAIVER OF STATUTE OF LIMITATIONS   31

27.   WAIVER OF MARSHALING   31

28.   FURTHER ASSURANCES   31

29.   ESTOPPEL CERTIFICATE   31

30.   GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE   31

31.   NOTICE   32

32.   SALE OF NOTE; CHANGE IN SERVICER   32

33.   SINGLE ASSET BORROWER   32

34.   SUCCESSORS AND ASSIGNS BOUND   32

35.   JOINT AND SEVERAL LIABILITY   33

36.   RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY   33

37.   SEVERABILITY; AMENDMENTS   33

38.   CONSTRUCTION   33

39.   LOAN SERVICING   33
</TABLE>


                                                                         Page ii



                                       ii
<PAGE>   16

<TABLE>
<CAPTION>

<S>   <C>
40.   DISCLOSURE OF INFORMATION   34

41.   NO CHANGE IN FACTS OR CIRCUMSTANCES   34

42.   SUBROGATION   34

43.   ACCELERATION; REMEDIES   34

44.   RECONVEYANCE   35

45.   SUBSTITUTE TRUSTEE   35

46.   STATEMENT OF OBLIGATION   35

47.   SPOUSE'S SEPARATE PROPERTY   35

48.   FIXTURE FILING   35

49.   ADDITIONAL PROVISION REGARDING APPLICATION OF PAYMENTS   35

50.   WAIVER OF MARSHALING; OTHER WAIVERS   36

51.   ADDITIONAL PROVISIONS CONCERNING ENVIRONMENTAL HAZARDS   36

52.   ADDITIONAL PROVISION REGARDING INSURANCE   37

53.   WAIVER OF TRIAL BY JURY   38
</TABLE>


                                                                        Page iii



                                       iii
<PAGE>   17

      MULTIFAMILY DEED OF TRUST,
                              ASSIGNMENT OF RENTS,
                             SECURITY AGREEMENT AND
                                 FIXTURE FILING

      THIS MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT
AND FIXTURE FILING (the "INSTRUMENT") is dated as of the 30th day of June, 2000,
by ARV COVELL, LLC, a limited liability company, organized and existing under
the laws of California, whose address is 245 Fischer Avenue, D-1, Costa Mesa,
California 92626, as trustor ("BORROWER"), to FIDELITY NATIONAL TITLE INSURANCE
COMPANY, as trustee ("TRUSTEE"), for the benefit of BANC ONE CAPITAL FUNDING
CORPORATION, an Ohio corporation, organized and existing under the laws of Ohio,
whose address is 150 E. Gay Street, 22nd Floor, Columbus, Ohio 43215, as
beneficiary ("LENDER").

      Borrower, in consideration of the Indebtedness and the trust created by
this Instrument, irrevocably grants, conveys and assigns to Trustee, in trust,
with power of sale, the Mortgaged Property, including the Land located in Yolo
County, State of California and described in Exhibit A attached to this
Instrument.

      TO SECURE TO LENDER the repayment of the Indebtedness evidenced by
Borrower's Multifamily Note payable to Lender, dated as of the date of this
Instrument, and maturing on July 1, 2010, in the principal amount of
$11,209,000.00, and all renewals, extensions and modifications of the
Indebtedness, the payment of all sums advanced by or on behalf of Lender to
protect the security of this Instrument under Section 12, and the performance of
the covenants and agreements of Borrower contained in the Loan Documents.

      Borrower represents and warrants that Borrower is lawfully seized of the
Mortgaged Property and has the right, power and authority to grant, convey and
assign the Mortgaged Property, and that the Mortgaged Property is unencumbered.
Borrower covenants that Borrower will warrant and defend generally the title to
the Mortgaged Property against all claims and demands, subject to any easements
and restrictions listed in a schedule of exceptions to coverage in any title
insurance policy issued to Lender contemporaneously with the execution and
recordation of this Instrument and insuring Lender's interest in the Mortgaged
Property.

      COVENANTS. Borrower and Lender covenant and agree as follows:

      1.    DEFINITIONS. The following terms, when used in this Instrument
(including when used in the above recitals), shall have the following meanings:


                                                                          Page 1

<PAGE>   18

      (a)   "BORROWER" means all persons or entities identified as "Borrower" in
the first paragraph of this Instrument, together with their successors and
assigns.

      (b)   "COLLATERAL AGREEMENT" means any separate agreement between Borrower
and Lender for the purpose of establishing replacement reserves for the
Mortgaged Property, establishing a fund to assure completion of repairs or
improvements specified in that agreement, or assuring reduction of the
outstanding principal balance of the Indebtedness if the occupancy of or income
from the Mortgaged Property does not increase to a level specified in that
agreement, or any other agreement or agreements between Borrower and Lender
which provide for the establishment of any other fund, reserve or account.

      (c)   "ENVIRONMENTAL PERMIT" means any permit, license, or other
authorization issued under any Hazardous Materials Law with respect to any
activities or businesses conducted on or in relation to the Mortgaged Property.

      (d)   "EVENT OF DEFAULT" means the occurrence of any event listed in
Section 22.

      (e)   "FIXTURES" means all property which is so attached to the Land or
the Improvements as to constitute a fixture under applicable law, including:
machinery, equipment, engines, boilers, incinerators, installed building
materials; systems and equipment for the purpose of supplying or distributing
heating, cooling, electricity, gas, water, air, or light; antennas, cable,
wiring and conduits used in connection with radio, television, security, fire
prevention, or fire detection or otherwise used to carry electronic signals;
telephone systems and equipment; elevators and related machinery and equipment;
fire detection, prevention and extinguishing systems and apparatus; security and
access control systems and apparatus; plumbing systems; water heaters, ranges,
stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers,
dryers and other appliances; light fixtures, awnings, storm windows and storm
doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors;
cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants;
swimming pools; and exercise equipment.

      (f)   "GOVERNMENTAL AUTHORITY" means any board, commission, department or
body of any municipal, county, state or federal governmental unit, or any
subdivision of any of them, that has or acquires jurisdiction over the Mortgaged
Property or the use, operation or improvement of the Mortgaged Property.


                                                                          Page 2



                                       2
<PAGE>   19

      (g)   "HAZARDOUS MATERIALS" means petroleum and petroleum products and
compounds containing them, including gasoline, diesel fuel and oil; explosives;
flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs")
and compounds containing them; lead and lead-based paint; asbestos or
asbestos-containing materials in any form that is or could become friable;
underground or above-ground storage tanks, whether empty or containing any
substance; any substance the presence of which on the Mortgaged Property is
prohibited by any federal, state or local authority; any substance that requires
special handling; and any other material or substance now or in the future
defined as a "hazardous substance," "hazardous material," "hazardous waste,"
"toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the
meaning of any Hazardous Materials Law.

      (h)   "HAZARDOUS MATERIALS LAWS" means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other governmental
requirements, administrative rulings and court judgments and decrees in effect
now or in the future and including all amendments, that relate to Hazardous
Materials and apply to Borrower or to the Mortgaged Property. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water
Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 5101, et seq., and their state analogs.

      (i)   "IMPOSITIONS" and "IMPOSITION DEPOSITS" are defined in Section 7(a).

      (j)   "IMPROVEMENTS" means the buildings, structures, improvements, and
alterations now constructed or at any time in the future constructed or placed
upon the Land, including any future replacements and additions.

      (k)   "INDEBTEDNESS" means the principal of, interest on, and all other
amounts due at any time under, the Note, this Instrument or any other Loan
Document, including prepayment premiums, late charges, default interest, and
advances as provided in Section 12 to protect the security of this Instrument.

      (l)   [Intentionally omitted.]

      (m)   "KEY PRINCIPAL" means the natural person(s) or entity identified as
such at the foot of this Instrument, and any person or entity who becomes a Key
Principal after the date of this Instrument and is identified as such in an
amendment or supplement to this Instrument.

      (n)   "LAND" means the land described in Exhibit A.

      (o)   "LEASES" means all present and future leases, subleases, licenses,
concessions or grants or other possessory interests now or hereafter in force,
whether oral or written, covering or affecting


                                                                          Page 3


<PAGE>   20

the Mortgaged Property, or any portion of the Mortgaged Property (including
proprietary leases or occupancy agreements if Borrower is a cooperative housing
corporation), and all modifications, extensions or renewals.

      (p)   "LENDER" means the entity identified as "Lender" in the first
paragraph of this Instrument and its successors and assigns, or any subsequent
holder of the Note.

      (q)   "LOAN DOCUMENTS" means the Note, this Instrument, all guaranties,
all indemnity agreements, all Collateral Agreements, O&M Programs, and any other
documents now or in the future executed by Borrower, Key Principal, any
guarantor or any other person in connection with the loan evidenced by the Note,
as such documents may be amended from time to time.

      (r)   "LOAN SERVICER" means the entity that from time to time is
designated by Lender to collect payments and deposits and receive notices under
the Note, this Instrument and any other Loan Document, and otherwise to service
the loan evidenced by the Note for the benefit of Lender. Unless Borrower
receives notice to the contrary, the Loan Servicer is the entity identified as
"Lender" in the first paragraph of this Instrument.

      (s)   "MORTGAGED PROPERTY" means all of Borrower's present and future
right, title and interest in and to all of the following:

            (1)   the Land;

            (2)   the Improvements;

            (3)   the Fixtures;

            (4)   the Personalty;

            (5)   all current and future rights, including air rights,
                        development rights, zoning rights and other similar
                        rights or interests, easements, tenements,
                        rights-of-way, strips and gores of land, streets,
                        alleys, roads, sewer rights, waters, watercourses, and
                        appurtenances related to or benefitting the Land or the
                        Improvements, or both, and all rights-of-way, streets,
                        alleys and roads which may have been or may in the
                        future be vacated;

            (6)   all proceeds paid or to be paid by any insurer of the Land,
                        the Improvements, the Fixtures, the Personalty or any
                        other part of the Mortgaged Property, whether or not
                        Borrower obtained the insurance pursuant to Lender's
                        requirement;

            (7)   all awards, payments and other compensation made or to be made
                        by any municipal, state or federal authority with
                        respect to the Land, the Improvements, the Fixtures, the
                        Personalty or any other part of the


                                                                          Page 4


<PAGE>   21

                        Mortgaged Property, including any awards or settlements
                        resulting from condemnation proceedings or the total or
                        partial taking of the Land, the Improvements, the
                        Fixtures, the Personalty or any other part of the
                        Mortgaged Property under the power of eminent domain or
                        otherwise and including any conveyance in lieu thereof;

            (8)   all contracts, options and other agreements for the sale of
                        the Land, the Improvements, the Fixtures, the Personalty
                        or any other part of the Mortgaged Property entered into
                        by Borrower now or in the future, including cash or
                        securities deposited to secure performance by parties of
                        their obligations;

            (9)   all proceeds from the conversion, voluntary or involuntary, of
                        any of the above into cash or liquidated claims, and the
                        right to collect such proceeds;

            (10)  all Rents and Leases;

            (11)  all earnings, royalties, accounts receivable, issues and
                        profits from the Land, the Improvements or any other
                        part of the Mortgaged Property, and all undisbursed
                        proceeds of the loan secured by this Instrument and, if
                        Borrower is a cooperative housing corporation,
                        maintenance charges or assessments payable by
                        shareholders or residents;

            (12)  all Imposition Deposits;

            (13)  all refunds or rebates of Impositions by any municipal, state
                        or federal authority or insurance company (other than
                        refunds applicable to periods before the real property
                        tax year in which this Instrument is dated);

            (14)  all tenant security deposits which have not been forfeited by
                        any tenant under any Lease; and

            (15)  all names under or by which any of the above Mortgaged
                        Property may be operated or known, and all trademarks,
                        trade names, and goodwill relating to any of the
                        Mortgaged Property.

      (t)   "NOTE" means the Multifamily Note described on page 1 of this
Instrument, including the Acknowledgment and Agreement of Key Principal to
Personal Liability for Exceptions to Non-Recourse Liability (if any), and all
schedules, riders, allonges and addenda, as such Multifamily Note may be amended
from time to time.

      (u)   "O&M PROGRAM" is defined in Section 18(a).


                                                                          Page 5


<PAGE>   22

      (v)   "PERSONALTY" means all furniture, furnishings, equipment, machinery,
building materials, appliances, goods, supplies, tools, books, records (whether
in written or electronic form), computer equipment (hardware and software) and
other tangible personal property (other than Fixtures) which are used now or in
the future in connection with the ownership, management or operation of the Land
or the Improvements or are located on the Land or in the Improvements, and any
operating agreements relating to the Land or the Improvements, and any surveys,
plans and specifications and contracts for architectural, engineering and
construction services relating to the Land or the Improvements and all other
intangible property and rights relating to the operation of, or used in
connection with, the Land or the Improvements, including all governmental
permits relating to any activities on the Land.

      (w)   "PROPERTY JURISDICTION" is defined in Section 30(a).

      (x)   "RENTS" means all rents (whether from residential or non-residential
space), revenues and other income of the Land or the Improvements, including
parking fees, laundry and vending machine income and fees and charges for food,
health care and other services provided at the Mortgaged Property, whether now
due, past due, or to become due, and deposits forfeited by tenants.

      (y)   "TAXES" means all taxes, assessments, vault rentals and other
charges, if any, general, special or otherwise, including all assessments for
schools, public betterments and general or local improvements, which are levied,
assessed or imposed by any public authority or quasi-public authority, and
which, if not paid, will become a lien, on the Land or the Improvements.

      (z)   "TRANSFER" means (A) a sale, assignment, transfer or other
disposition (whether voluntary, involuntary or by operation of law); (B) the
granting, creating or attachment of a lien, encumbrance or security interest
(whether voluntary, involuntary or by operation of law); (C) the issuance or
other creation of an ownership interest in a legal entity, including a
partnership interest, interest in a limited liability company or corporate
stock; (D) the withdrawal, retirement, removal or involuntary resignation of a
partner in a partnership or a member or manager in a limited liability company;
or (E) the merger, dissolution, liquidation, or consolidation of a legal entity.
"Transfer" does not include (i) a conveyance of the Mortgaged Property at a
judicial or non-judicial foreclosure sale under this Instrument or (ii) the
Mortgaged Property becoming part of a bankruptcy estate by operation of law
under the United States Bankruptcy Code. For purposes of defining the term
"Transfer," the term "partnership" shall mean a general partnership, a limited
partnership, a joint venture and a limited liability partnership, and the term
"partner" shall mean a general partner, a limited partner and a joint venturer.

      2.    UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also
a security agreement under the Uniform Commercial Code for any of the Mortgaged
Property which, under applicable law, may be subject to a security interest
under the Uniform Commercial Code, whether acquired now or in the future, and
all products and cash and non-cash


                                                                          Page 6


<PAGE>   23

proceeds thereof (collectively, "UCC COLLATERAL"), and Borrower hereby grants to
Lender a security interest in the UCC Collateral. Borrower shall execute and
deliver to Lender, upon Lender's request, financing statements, continuation
statements and amendments, in such form as Lender may require to perfect or
continue the perfection of this security interest. Borrower shall pay all filing
costs and all costs and expenses of any record searches for financing statements
that Lender may require. Without the prior written consent of Lender, Borrower
shall not create or permit to exist any other lien or security interest in any
of the UCC Collateral. If an Event of Default has occurred and is continuing,
Lender shall have the remedies of a secured party under the Uniform Commercial
Code, in addition to all remedies provided by this Instrument or existing under
applicable law. In exercising any remedies, Lender may exercise its remedies
against the UCC Collateral separately or together, and in any order, without in
any way affecting the availability of Lender's other remedies. This Instrument
constitutes a financing statement with respect to any part of the Mortgaged
Property which is or may become a Fixture.

      3.    ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION.

      (a)   As part of the consideration for the Indebtedness, Borrower
absolutely and unconditionally assigns and transfers to Lender all Rents. It is
the intention of Borrower to establish a present, absolute and irrevocable
transfer and assignment to Lender of all Rents and to authorize and empower
Lender to collect and receive all Rents without the necessity of further action
on the part of Borrower. Promptly upon request by Lender, Borrower agrees to
execute and deliver such further assignments as Lender may from time to time
require. Borrower and Lender intend this assignment of Rents to be immediately
effective and to constitute an absolute present assignment and not an assignment
for additional security only. For purposes of giving effect to this absolute
assignment of Rents, and for no other purpose, Rents shall not be deemed to be a
part of the "Mortgaged Property," as that term is defined in Section 1(s).
However, if this present, absolute and unconditional assignment of Rents is not
enforceable by its terms under the laws of the Property Jurisdiction, then the
Rents shall be included as a part of the Mortgaged Property and it is the
intention of the Borrower that in this circumstance this Instrument create and
perfect a lien on Rents in favor of Lender, which lien shall be effective as of
the date of this Instrument.

      (b)   After the occurrence of an Event of Default, Borrower authorizes
Lender to collect, sue for and compromise Rents and directs each tenant of the
Mortgaged Property to pay all Rents to, or as directed by, Lender. However,
until the occurrence of an Event of Default, Lender hereby grants to Borrower a
revocable license to collect and receive all Rents, to hold all Rents in trust
for the benefit of Lender and to apply all Rents to pay the installments of
interest and principal then due and payable under the Note and the other amounts
then due and payable under the other Loan Documents, including Imposition
Deposits, and to pay the current costs and expenses of managing, operating and
maintaining the Mortgaged Property, including utilities, Taxes and insurance
premiums (to the extent not included in Imposition Deposits), tenant
improvements and other capital expenditures. So long as no Event of Default has
occurred and is continuing,


                                                                          Page 7


<PAGE>   24

the Rents remaining after application pursuant to the preceding sentence may be
retained by Borrower free and clear of, and released from, Lender's rights with
respect to Rents under this Instrument. From and after the occurrence of an
Event of Default, and without the necessity of Lender entering upon and taking
and maintaining control of the Mortgaged Property directly, or by a receiver,
Borrower*s license to collect Rents shall automatically terminate and Lender
shall without notice be entitled to all Rents as they become due and payable,
including Rents then due and unpaid. Borrower shall pay to Lender upon demand
all Rents to which Lender is entitled. At any time after the occurrence of an
Event of Default, Lender may give, and Borrower hereby irrevocably authorizes
Lender to give, notice to all tenants of the Mortgaged Property instructing them
to pay all Rents to Lender; provided, however, that the giving of any such
notice by Lender shall not affect, in any way, Lender's entitlement to the Rents
as of the date on which the Event of Default occurs. No tenant shall be
obligated to inquire further as to the occurrence or continuance of an Event of
Default, and no tenant shall be obligated to pay to Borrower any amounts which
are actually paid to Lender in response to such a notice. Any such notice by
Lender shall be delivered to each tenant personally, by mail or by delivering
such demand to each rental unit. Borrower shall not interfere with and shall
cooperate with Lender's collection of such Rents.

      (c)   Borrower represents and warrants to Lender that Borrower has not
executed any prior assignment of Rents (other than an assignment of Rents
securing indebtedness that will be paid off and discharged with the proceeds of
the loan evidenced by the Note), that Borrower has not performed, and Borrower
covenants and agrees that it will not perform, any acts and has not executed,
and shall not execute, any instrument which would prevent Lender from exercising
its rights under this Section 3, and that at the time of execution of this
Instrument there has been no anticipation or prepayment of any Rents for more
than two months prior to the due dates of such Rents. Borrower shall not collect
or accept payment of any Rents more than two months prior to the due dates of
such Rents.

      (d)   If an Event of Default has occurred and is continuing, Lender may,
regardless of the adequacy of Lender's security or the solvency of Borrower and
even in the absence of waste, enter upon and take and maintain full control of
the Mortgaged Property in order to perform all acts that Lender in its
discretion determines to be necessary or desirable for the operation and
maintenance of the Mortgaged Property, including the execution, cancellation or
modification of Leases, the collection of all Rents, the making of repairs to
the Mortgaged Property and the execution or termination of contracts providing
for the management, operation or maintenance of the Mortgaged Property, for the
purposes of enforcing the assignment of Rents pursuant to Section 3(a),
protecting the Mortgaged Property or the security of this Instrument, or for
such other purposes as Lender in its discretion may deem necessary or desirable.
Alternatively, if an Event of Default has occurred and is continuing, regardless
of the adequacy of Lender's security, without regard to Borrower*s solvency and
without the necessity of giving prior notice (oral or written) to Borrower,
Lender may apply to any court having jurisdiction for the appointment of a
receiver for the Mortgaged Property to take any or all of the actions set forth
in the preceding sentence. If Lender elects to seek the appointment of a
receiver for the Mortgaged Property at


                                                                          Page 8


<PAGE>   25

any time after an Event of Default has occurred and is continuing, Borrower, by
its execution of this Instrument, expressly consents to the appointment of such
receiver, including the appointment of a receiver ex parte if permitted by
applicable law. Lender or the receiver, as the case may be, shall be entitled to
receive a reasonable fee for managing the Mortgaged Property. Immediately upon
appointment of a receiver or immediately upon the Lender's entering upon and
taking possession and control of the Mortgaged Property, Borrower shall
surrender possession of the Mortgaged Property to Lender or the receiver, as the
case may be, and shall deliver to Lender or the receiver, as the case may be,
all documents, records (including records on electronic or magnetic media),
accounts, surveys, plans, and specifications relating to the Mortgaged Property
and all security deposits and prepaid Rents. In the event Lender takes
possession and control of the Mortgaged Property, Lender may exclude Borrower
and its representatives from the Mortgaged Property. Borrower acknowledges and
agrees that the exercise by Lender of any of the rights conferred under this
Section 3 shall not be construed to make Lender a mortgagee-in-possession of the
Mortgaged Property so long as Lender has not itself entered into actual
possession of the Land and Improvements.

      (e)   If Lender enters the Mortgaged Property, Lender shall be liable to
account only to Borrower and only for those Rents actually received. Lender
shall not be liable to Borrower, anyone claiming under or through Borrower or
anyone having an interest in the Mortgaged Property, by reason of any act or
omission of Lender under this Section 3, and Borrower hereby releases and
discharges Lender from any such liability to the fullest extent permitted by
law.

      (f)   If the Rents are not sufficient to meet the costs of taking control
of and managing the Mortgaged Property and collecting the Rents, any funds
expended by Lender for such purposes shall become an additional part of the
Indebtedness as provided in Section 12.

      (g)   Any entering upon and taking of control of the Mortgaged Property by
Lender or the receiver, as the case may be, and any application of Rents as
provided in this Instrument shall not cure or waive any Event of Default or
invalidate any other right or remedy of Lender under applicable law or provided
for in this Instrument.

      4.    ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY.

      (a)   As part of the consideration for the Indebtedness, Borrower
absolutely and unconditionally assigns and transfers to Lender all of Borrower's
right, title and interest in, to and under the Leases, including Borrower's
right, power and authority to modify the terms of any such Lease, or extend or
terminate any such Lease. It is the intention of Borrower to establish a
present, absolute and irrevocable transfer and assignment to Lender of all of
Borrower's right, title and interest in, to and under the Leases. Borrower and
Lender intend this assignment of the Leases to be immediately effective and to
constitute an absolute present assignment and not an assignment for additional
security only. For purposes of giving effect to this absolute assignment of the
Leases, and for no other purpose, the Leases shall not be deemed to be a part of
the "Mortgaged Property," as that term is defined in Section 1(s). However, if
this


                                                                          Page 9


<PAGE>   26

present, absolute and unconditional assignment of the Leases is not enforceable
by its terms under the laws of the Property Jurisdiction, then the Leases shall
be included as a part of the Mortgaged Property and it is the intention of the
Borrower that in this circumstance this Instrument create and perfect a lien on
the Leases in favor of Lender, which lien shall be effective as of the date of
this Instrument.

      (b)   Until the occurrence of an Event of Default, Borrower shall have all
rights, power and authority granted to Borrower under any Lease (except as
otherwise limited by this Section or any other provision of this Instrument),
including the right, power and authority to modify the terms of any Lease or
extend or terminate any Lease. Upon the occurrence of an Event of Default, the
permission given to Borrower pursuant to the preceding sentence to exercise all
rights, power and authority under Leases shall automatically terminate. Borrower
shall comply with and observe Borrower's obligations under all Leases, including
Borrower's obligations pertaining to the maintenance and disposition of tenant
security deposits.

      (c)   Borrower acknowledges and agrees that the exercise by Lender, either
directly or by a receiver, of any of the rights conferred under this Section 4
shall not be construed to make Lender a mortgagee-in-possession of the Mortgaged
Property so long as Lender has not itself entered into actual possession of the
Land and the Improvements. The acceptance by Lender of the assignment of the
Leases pursuant to Section 4(a) shall not at any time or in any event obligate
Lender to take any action under this Instrument or to expend any money or to
incur any expenses. Lender shall not be liable in any way for any injury or
damage to person or property sustained by any person or persons, firm or
corporation in or about the Mortgaged Property. Prior to Lender's actual entry
into and taking possession of the Mortgaged Property, Lender shall not (i) be
obligated to perform any of the terms, covenants and conditions contained in any
Lease (or otherwise have any obligation with respect to any Lease); (ii) be
obligated to appear in or defend any action or proceeding relating to the Lease
or the Mortgaged Property; or (iii) be responsible for the operation, control,
care, management or repair of the Mortgaged Property or any portion of the
Mortgaged Property. The execution of this Instrument by Borrower shall
constitute conclusive evidence that all responsibility for the operation,
control, care, management and repair of the Mortgaged Property is and shall be
that of Borrower, prior to such actual entry and taking of possession.

      (d)   From and after the occurrence of an Event of Default, and without
the necessity of Lender entering upon and taking and maintaining control of the
Mortgaged Property directly, by a receiver, or by any other manner or proceeding
permitted by the laws of the Property Jurisdiction, Lender immediately shall
have all rights, powers and authority granted to Borrower under any Lease,
including the right, power and authority to modify the terms of any such Lease,
or extend or terminate any such Lease.

      (e)   Borrower shall, promptly upon Lender's request, deliver to Lender an
executed copy of each residential Lease then in effect. All Leases for
residential dwelling units shall be on forms approved by Lender, shall be for
initial terms of at least six months and not more than two years,


                                                                         Page 10


<PAGE>   27

and shall not include options to purchase. If customary in the applicable
market, residential Leases with terms of less than six months may be permitted
with Lender's prior written consent.

      (f)   Borrower shall not lease any portion of the Mortgaged Property for
non-residential use except with the prior written consent of Lender and Lender's
prior written approval of the Lease agreement. Borrower shall not modify the
terms of, or extend or terminate, any Lease for non-residential use (including
any Lease in existence on the date of this Instrument) without the prior written
consent of Lender. Borrower shall, without request by Lender, deliver an
executed copy of each non-residential Lease to Lender promptly after such Lease
is signed. All non-residential Leases, including renewals or extensions of
existing Leases, shall specifically provide that (1) such Leases are subordinate
to the lien of this Instrument (unless waived in writing by Lender); (2) the
tenant shall attorn to Lender and any purchaser at a foreclosure sale, such
attornment to be self-executing and effective upon acquisition of title to the
Mortgaged Property by any purchaser at a foreclosure sale or by Lender in any
manner; (3) the tenant agrees to execute such further evidences of attornment as
Lender or any purchaser at a foreclosure sale may from time to time request; (4)
the Lease shall not be terminated by foreclosure or any other transfer of the
Mortgaged Property; (5) after a foreclosure sale of the Mortgaged Property,
Lender or any other purchaser at such foreclosure sale may, at Lender's or such
purchaser's option, accept or terminate such Lease; and (6) the tenant shall,
upon receipt after the occurrence of an Event of Default of a written request
from Lender, pay all Rents payable under the Lease to Lender.

      (g)   Borrower shall not receive or accept Rent under any Lease (whether
residential or non-residential) for more than two months in advance.

      5.    PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS;
PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance
with the terms of the Note and the other Loan Documents and shall perform,
observe and comply with all other provisions of the Note and the other Loan
Documents. Borrower shall pay a prepayment premium in connection with certain
prepayments of the Indebtedness, including a payment made after Lender's
exercise of any right of acceleration of the Indebtedness, as provided in the
Note.

      6.    EXCULPATION. Borrower's personal liability for payment of the
Indebtedness and for performance of the other obligations to be performed by it
under this Instrument is limited in the manner, and to the extent, provided in
the Note.

      7.    DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES.

      (a)   Borrower shall deposit with Lender on the day monthly installments
of principal or interest, or both, are due under the Note (or on another day
designated in writing by Lender), until the Indebtedness is paid in full, an
additional amount sufficient to accumulate with Lender the entire sum required
to pay, when due (1) any water and sewer charges which, if not paid, may


                                                                         Page 11


<PAGE>   28

result in a lien on all or any part of the Mortgaged Property, (2) the premiums
for fire and other hazard insurance, rent loss insurance and such other
insurance as Lender may require under Section 19, (3) Taxes, and (4) amounts for
other charges and expenses which Lender at any time reasonably deems necessary
to protect the Mortgaged Property, to prevent the imposition of liens on the
Mortgaged Property, or otherwise to protect Lender's interests, all as
reasonably estimated from time to time by Lender. The amounts deposited under
the preceding sentence are collectively referred to in this Instrument as the
"IMPOSITION DEPOSITS". The obligations of Borrower for which the Imposition
Deposits are required are collectively referred to in this Instrument as
"IMPOSITIONS". The amount of the Imposition Deposits shall be sufficient to
enable Lender to pay each Imposition before the last date upon which such
payment may be made without any penalty or interest charge being added. Lender
shall maintain records indicating how much of the monthly Imposition Deposits
and how much of the aggregate Imposition Deposits held by Lender are held for
the purpose of paying Taxes, insurance premiums and each other obligation of
Borrower for which Imposition Deposits are required. Any waiver by Lender of the
requirement that Borrower remit Imposition Deposits to Lender may be revoked by
Lender, in Lender's discretion, at any time upon notice to Borrower.

      (b)   Imposition Deposits shall be held in an institution (which may be
Lender, if Lender is such an institution) whose deposits or accounts are insured
or guaranteed by a federal agency. Lender shall not be obligated to open
additional accounts or deposit Imposition Deposits in additional institutions
when the amount of the Imposition Deposits exceeds the maximum amount of the
federal deposit insurance or guaranty. Lender shall apply the Imposition
Deposits to pay Impositions so long as no Event of Default has occurred and is
continuing. Unless applicable law requires, Lender shall not be required to pay
Borrower any interest, earnings or profits on the Imposition Deposits. Borrower
hereby pledges and grants to Lender a security interest in the Imposition
Deposits as additional security for all of Borrower's obligations under this
Instrument and the other Loan Documents. Any amounts deposited with Lender under
this Section 7 shall not be trust funds, nor shall they operate to reduce the
Indebtedness, unless applied by Lender for that purpose under Section 7(e).

      (c)   If Lender receives a bill or invoice for an Imposition, Lender shall
pay the Imposition from the Imposition Deposits held by Lender. Lender shall
have no obligation to pay any Imposition to the extent it exceeds Imposition
Deposits then held by Lender. Lender may pay an Imposition according to any
bill, statement or estimate from the appropriate public office or insurance
company without inquiring into the accuracy of the bill, statement or estimate
or into the validity of the Imposition.

      (d)   If at any time the amount of the Imposition Deposits held by Lender
for payment of a specific Imposition exceeds the amount reasonably deemed
necessary by Lender, the excess shall be credited against future installments of
Imposition Deposits. If at any time the amount of the Imposition Deposits held
by Lender for payment of a specific Imposition is less than the amount
reasonably estimated by Lender to be necessary, Borrower shall pay to Lender the
amount of the deficiency within 15 days after notice from Lender.


                                                                         Page 12


<PAGE>   29

      (e)   If an Event of Default has occurred and is continuing, Lender may
apply any Imposition Deposits, in any amounts and in any order as Lender
determines, in Lender's discretion, to pay any Impositions or as a credit
against the Indebtedness. Upon payment in full of the Indebtedness, Lender shall
refund to Borrower any Imposition Deposits held by Lender.

      8.    COLLATERAL AGREEMENTS. Borrower shall deposit with Lender such
amounts as may be required by any Collateral Agreement and shall perform all
other obligations of Borrower under each Collateral Agreement.

      9.    APPLICATION OF PAYMENTS. If at any time Lender receives, from
Borrower or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, then Lender may apply that
payment to amounts then due and payable in any manner and in any order
determined by Lender, in Lender's discretion. Neither Lender's acceptance of an
amount which is less than all amounts then due and payable nor Lender's
application of such payment in the manner authorized shall constitute or be
deemed to constitute either a waiver of the unpaid amounts or an accord and
satisfaction. Notwithstanding the application of any such amount to the
Indebtedness, Borrower's obligations under this Instrument and the Note shall
remain unchanged.

      10.   COMPLIANCE WITH LAWS. Borrower shall comply with all laws,
ordinances, regulations and requirements of any Governmental Authority and all
recorded lawful covenants and agreements relating to or affecting the Mortgaged
Property, including all laws, ordinances, regulations, requirements and
covenants pertaining to health and safety, construction of improvements on the
Mortgaged Property, fair housing, zoning and land use, and Leases. Borrower also
shall comply with all applicable laws that pertain to the maintenance and
disposition of tenant security deposits. Borrower shall at all times maintain
records sufficient to demonstrate compliance with the provisions of this Section
10. Borrower shall take appropriate measures to prevent, and shall not engage in
or knowingly permit, any illegal activities at the Mortgaged Property that could
endanger tenants or visitors, result in damage to the Mortgaged Property, result
in forfeiture of the Mortgaged Property, or otherwise materially impair the lien
created by this Instrument or Lender's interest in the Mortgaged Property.
Borrower represents and warrants to Lender that no portion of the Mortgaged
Property has been or will be purchased with the proceeds of any illegal
activity.

      11.   USE OF PROPERTY. Unless required by applicable law, Borrower shall
not (a) except for any change in use approved by Lender, allow changes in the
use for which all or any part of the Mortgaged Property is being used at the
time this Instrument was executed, (b) convert any individual dwelling units or
common areas to commercial use, (c) initiate or acquiesce in a change in the
zoning classification of the Mortgaged Property, or (d) establish any
condominium or cooperative regime with respect to the Mortgaged Property.

      12.   PROTECTION OF LENDER'S SECURITY.


                                                                         Page 13


<PAGE>   30

      (a)   If Borrower fails to perform any of its obligations under this
Instrument or any other Loan Document, or if any action or proceeding is
commenced which purports to affect the Mortgaged Property, Lender's security or
Lender's rights under this Instrument, including eminent domain, insolvency,
code enforcement, civil or criminal forfeiture, enforcement of Hazardous
Materials Laws, fraudulent conveyance or reorganizations or proceedings
involving a bankrupt or decedent, then Lender at Lender's option may make such
appearances, disburse such sums and take such actions as Lender reasonably deems
necessary to perform such obligations of Borrower and to protect Lender's
interest, including (1) payment of fees and out-of-pocket expenses of attorneys,
accountants, inspectors and consultants, (2) entry upon the Mortgaged Property
to make repairs or secure the Mortgaged Property, (3) procurement of the
insurance required by Section 19, and (4) payment of amounts which Borrower has
failed to pay under Sections 15 and 17.

      (b)   Any amounts disbursed by Lender under this Section 12, or under any
other provision of this Instrument that treats such disbursement as being made
under this Section 12, shall be added to, and become part of, the principal
component of the Indebtedness, shall be immediately due and payable and shall
bear interest from the date of disbursement until paid at the "DEFAULT RATE", as
defined in the Note.

      (c)   Nothing in this Section 12 shall require Lender to incur any expense
or take any action.

      13.   INSPECTION. Lender, its agents, representatives, and designees may
make or cause to be made entries upon and inspections of the Mortgaged Property
(including environmental inspections and tests) during normal business hours, or
at any other reasonable time.

      14.   BOOKS AND RECORDS; FINANCIAL REPORTING.

      (a)   Borrower shall keep and maintain at all times at the Mortgaged
Property or the management agent's offices, and upon Lender's request shall make
available at the Mortgaged Property, complete and accurate books of account and
records (including copies of supporting bills and invoices) adequate to reflect
correctly the operation of the Mortgaged Property, and copies of all written
contracts, Leases, and other instruments which affect the Mortgaged Property.
The books, records, contracts, Leases and other instruments shall be subject to
examination and inspection at any reasonable time by Lender.

      (b)   Borrower shall furnish to Lender all of the following:

            (1)   within 120 days after the end of each fiscal year of Borrower,
                        a statement of income and expenses for Borrower's
                        operation of the Mortgaged Property for that fiscal
                        year, a statement of changes in financial position of
                        Borrower relating to the Mortgaged Property for that
                        fiscal year and, when requested by Lender, a balance
                        sheet showing all assets and liabilities of


                                                                         Page 14


<PAGE>   31

                        Borrower relating to the Mortgaged Property as of the
                        end of that fiscal year;

            (2)   within 120 days after the end of each fiscal year of Borrower,
                        and at any other time upon Lender's request, a rent
                        schedule for the Mortgaged Property showing the name of
                        each tenant, and for each tenant, the space occupied,
                        the lease expiration date, the rent payable for the
                        current month, the date through which rent has been
                        paid, and any related information requested by Lender;

            (3)   within 120 days after the end of each fiscal year of Borrower,
                        and at any other time upon Lender's request, an
                        accounting of all security deposits held pursuant to all
                        Leases, including the name of the institution (if any)
                        and the names and identification numbers of the accounts
                        (if any) in which such security deposits are held and
                        the name of the person to contact at such financial
                        institution, along with any authority or release
                        necessary for Lender to access information regarding
                        such accounts;

            (4)   within 120 days after the end of each fiscal year of Borrower,
                        and at any other time upon Lender's request, a statement
                        that identifies all owners of any interest in Borrower
                        and the interest held by each, if Borrower is a
                        corporation, all officers and directors of Borrower, and
                        if Borrower is a limited liability company, all managers
                        who are not members;

            (5)   upon Lender's request, a monthly property management report
                        for the Mortgaged Property, showing the number of
                        inquiries made and rental applications received from
                        tenants or prospective tenants and deposits received
                        from tenants and any other information requested by
                        Lender; and

            (6)   upon Lender's request, a balance sheet, a statement of income
                        and expenses for Borrower and a statement of changes in
                        financial position of Borrower for Borrower's most
                        recent fiscal year; and

            (7)   if required by Lender, a statement of income and expense for
                        the Mortgaged Property for the prior month or quarter.

      (c)   Each of the statements, schedules and reports required by Section
14(b) shall be certified to be complete and accurate by an individual having
authority to bind Borrower, and shall be in such form and contain such detail as
Lender may reasonably require. Lender also may require that any statements,
schedules or reports be audited at Borrower's expense by independent certified
public accountants acceptable to Lender.


                                                                         Page 15


<PAGE>   32

      (d)   If Borrower fails to provide in a timely manner the statements,
schedules and reports required by Section 14(b), Lender shall have the right to
have Borrower's books and records audited, at Borrower's expense, by independent
certified public accountants selected by Lender in order to obtain such
statements, schedules and reports, and all related costs and expenses of Lender
shall become immediately due and payable and shall become an additional part of
the Indebtedness as provided in Section 12.

      (e)   If an Event of Default has occurred and is continuing, Borrower
shall deliver to Lender upon written demand all books and records relating to
the Mortgaged Property or its operation.

      (f)   Borrower authorizes Lender to obtain a credit report on Borrower at
any time.

      (g)   If an Event of Default has occurred and Lender has not previously
required Borrower to furnish a quarterly statement of income and expense for the
Mortgaged Property, Lender may require Borrower to furnish such a statement
within 45 days after the end of each fiscal quarter of Borrower following such
Event of Default.


                                                                         Page 16


<PAGE>   33

      15.   TAXES; OPERATING EXPENSES.

      (a)   Subject to the provisions of Section 15(c) and Section 15(d),
Borrower shall pay, or cause to be paid, all Taxes when due and before the
addition of any interest, fine, penalty or cost for nonpayment.

      (b)   Subject to the provisions of Section 15(c), Borrower shall pay the
expenses of operating, managing, maintaining and repairing the Mortgaged
Property (including insurance premiums, utilities, repairs and replacements)
before the last date upon which each such payment may be made without any
penalty or interest charge being added.

      (c)   As long as no Event of Default exists and Borrower has timely
delivered to Lender any bills or premium notices that it has received, Borrower
shall not be obligated to pay Taxes, insurance premiums or any other individual
Imposition to the extent that sufficient Imposition Deposits are held by Lender
for the purpose of paying that specific Imposition. If an Event of Default
exists, Lender may exercise any rights Lender may have with respect to
Imposition Deposits without regard to whether Impositions are then due and
payable. Lender shall have no liability to Borrower for failing to pay any
Impositions to the extent that any Event of Default has occurred and is
continuing, insufficient Imposition Deposits are held by Lender at the time an
Imposition becomes due and payable or Borrower has failed to provide Lender with
bills and premium notices as provided above.

      (d)   Borrower, at its own expense, may contest by appropriate legal
proceedings, conducted diligently and in good faith, the amount or validity of
any Imposition other than insurance premiums, if (1) Borrower notifies Lender of
the commencement or expected commencement of such proceedings, (2) the Mortgaged
Property is not in danger of being sold or forfeited, (3) Borrower deposits with
Lender reserves sufficient to pay the contested Imposition, if requested by
Lender, and (4) Borrower furnishes whatever additional security is required in
the proceedings or is reasonably requested by Lender, which may include the
delivery to Lender of the reserves established by Borrower to pay the contested
Imposition.

      (e)   Borrower shall promptly deliver to Lender a copy of all notices of,
and invoices for, Impositions, and if Borrower pays any Imposition directly,
Borrower shall promptly furnish to Lender receipts evidencing such payments.

      16.   LIENS; ENCUMBRANCES. Borrower acknowledges that, to the extent
provided in Section 21, the grant, creation or existence of any mortgage, deed
of trust, deed to secure debt, security interest or other lien or encumbrance (a
"LIEN") on the Mortgaged Property (other than the lien of this Instrument) or on
certain ownership interests in Borrower, whether voluntary, involuntary or by
operation of law, and whether or not such Lien has priority over the lien of
this Instrument, is a "TRANSFER" which constitutes an Event of Default.


                                                                         Page 17


<PAGE>   34

      17.   PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY.

      (a)   Borrower (1) shall not commit waste or permit impairment or
deterioration of the Mortgaged Property, (2) shall not abandon the Mortgaged
Property, (3) shall restore or repair promptly, in a good and workmanlike
manner, any damaged part of the Mortgaged Property to the equivalent of its
original condition, or such other condition as Lender may approve in writing,
whether or not insurance proceeds or condemnation awards are available to cover
any costs of such restoration or repair, (4) shall keep the Mortgaged Property
in good repair, including the replacement of Personalty and Fixtures with items
of equal or better function and quality, (5) shall provide for professional
management of the Mortgaged Property by a residential rental property manager
satisfactory to Lender under a contract approved by Lender in writing, and (6)
shall give notice to Lender of and, unless otherwise directed in writing by
Lender, shall appear in and defend any action or proceeding purporting to affect
the Mortgaged Property, Lender's security or Lender's rights under this
Instrument. Borrower shall not (and shall not permit any tenant or other person
to) remove, demolish or alter the Mortgaged Property or any part of the
Mortgaged Property except in connection with the replacement of tangible
Personalty.

      (b)   If, in connection with the making of the loan evidenced by the Note
or at any later date, Lender waives in writing the requirement of Section
17(a)(5) above that Borrower enter into a written contract for management of the
Mortgaged Property and if, after the date of this Instrument, Borrower intends
to change the management of the Mortgaged Property, Lender shall have the right
to approve such new property manager and the written contract for the management
of the Mortgaged Property and require that Borrower and such new property
manager enter into an Assignment of Management Agreement on a form approved by
Lender. If required by Lender (whether before or after an Event of Default),
Borrower will cause any Affiliate of Borrower to whom fees are payable for the
management of the Mortgaged Property to enter into an agreement with Lender, in
a form approved by Lender, providing for subordination of those fees and such
other provisions as Lender may require. "Affiliate of Borrower" means any
corporation, partnership, joint venture, limited liability company, limited
liability partnership, trust or individual controlled by, under common control
with, or which controls Borrower (the term "control" for these purposes shall
mean the ability, whether by the ownership of shares or other equity interests,
by contract or otherwise, to elect a majority of the directors of a corporation,
to make management decisions on behalf of, or independently to select the
managing partner of, a partnership, or otherwise to have the power independently
to remove and then select a majority of those individuals exercising managerial
authority over an entity, and control shall be conclusively presumed in the case
of the ownership of 50% or more of the equity interests).

      18.   ENVIRONMENTAL HAZARDS.


                                                                         Page 18


<PAGE>   35

      (a)   Except for matters covered by a written program of operations and
maintenance approved in writing by Lender (an "O&M PROGRAM") or matters
described in Section 18(b), Borrower shall not cause or permit any of the
following:

            (1)   the presence, use, generation, release, treatment, processing,
                        storage (including storage in above ground and
                        underground storage tanks), handling, or disposal of any
                        Hazardous Materials on or under the Mortgaged Property
                        or any other property of Borrower that is adjacent to
                        the Mortgaged Property;

            (2)   the transportation of any Hazardous Materials to, from, or
                        across the Mortgaged Property;

            (3)   any occurrence or condition on the Mortgaged Property or any
                        other property of Borrower that is adjacent to the
                        Mortgaged Property, which occurrence or condition is or
                        may be in violation of Hazardous Materials Laws; or

            (4)   any violation of or noncompliance with the terms of any
                        Environmental Permit with respect to the Mortgaged
                        Property or any property of Borrower that is adjacent to
                        the Mortgaged Property.

      The matters described in clauses (1) through (4) above are referred to
collectively in this Section 18 as "PROHIBITED ACTIVITIES OR CONDITIONS".

      (b)   Prohibited Activities and Conditions shall not include the safe and
lawful use and storage of quantities of (1) pre-packaged supplies, cleaning
materials and petroleum products customarily used in the operation and
maintenance of comparable multifamily properties, (2) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by tenants and occupants of residential dwelling units in
the Mortgaged Property; and (3) petroleum products used in the operation and
maintenance of motor vehicles from time to time located on the Mortgaged
Property's parking areas, so long as all of the foregoing are used, stored,
handled, transported and disposed of in compliance with Hazardous Materials
Laws.

      (c)   Borrower shall take all commercially reasonable actions (including
the inclusion of appropriate provisions in any Leases executed after the date of
this Instrument) to prevent its employees, agents, and contractors, and all
tenants and other occupants from causing or permitting any Prohibited Activities
or Conditions. Borrower shall not lease or allow the sublease or use of all or
any portion of the Mortgaged Property to any tenant or subtenant for
nonresidential use by any user that, in the ordinary course of its business,
would cause or permit any Prohibited Activity or Condition.


                                                                         Page 19


<PAGE>   36

      (d)   If an O&M Program has been established with respect to Hazardous
Materials, Borrower shall comply in a timely manner with, and cause all
employees, agents, and contractors of Borrower and any other persons present on
the Mortgaged Property to comply with the O&M Program. All costs of performance
of Borrower's obligations under any O&M Program shall be paid by Borrower, and
Lender's out-of-pocket costs incurred in connection with the monitoring and
review of the O&M Program and Borrower's performance shall be paid by Borrower
upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower
fails to pay promptly shall become an additional part of the Indebtedness as
provided in Section 12.

      (e)   Borrower represents and warrants to Lender that, except as
previously disclosed by Borrower to Lender in writing:

            (1)   Borrower has not at any time engaged in, caused or permitted
                        any Prohibited Activities or Conditions;

            (2)   to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, no Prohibited Activities or Conditions
                        exist or have existed;

            (3)   except to the extent previously disclosed by Borrower to
                        Lender in writing, the Mortgaged Property does not now
                        contain any underground storage tanks, and, to the best
                        of Borrower's knowledge after reasonable and diligent
                        inquiry, the Mortgaged Property has not contained any
                        underground storage tanks in the past. If there is an
                        underground storage tank located on the Property which
                        has been previously disclosed by Borrower to Lender in
                        writing, that tank complies with all requirements of
                        Hazardous Materials Laws;

            (4)   Borrower has complied with all Hazardous Materials Laws,
                        including all requirements for notification regarding
                        releases of Hazardous Materials. Without limiting the
                        generality of the foregoing, Borrower has obtained all
                        Environmental Permits required for the operation of the
                        Mortgaged Property in accordance with Hazardous
                        Materials Laws now in effect and all such Environmental
                        Permits are in full force and effect;

            (5)   no event has occurred with respect to the Mortgaged Property
                        that constitutes, or with the passing of time or the
                        giving of notice would constitute, noncompliance with
                        the terms of any Environmental Permit;

            (6)   there are no actions, suits, claims or proceedings pending or,
                        to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, threatened that involve the Mortgaged
                        Property and allege, arise out of, or relate to any
                        Prohibited Activity or Condition; and


                                                                         Page 20


<PAGE>   37

            (7)   Borrower has not received any complaint, order, notice of
                        violation or other communication from any Governmental
                        Authority with regard to air emissions, water
                        discharges, noise emissions or Hazardous Materials, or
                        any other environmental, health or safety matters
                        affecting the Mortgaged Property or any other property
                        of Borrower that is adjacent to the Mortgaged Property.

      The representations and warranties in this Section 18 shall be continuing
representations and warranties that shall be deemed to be made by Borrower
throughout the term of the loan evidenced by the Note, until the Indebtedness
has been paid in full.

      (f)   Borrower shall promptly notify Lender in writing upon the occurrence
of any of the following events:

            (1)   Borrower's discovery of any Prohibited Activity or Condition;

            (2)   Borrower's receipt of or knowledge of any complaint, order,
                        notice of violation or other communication from any
                        Governmental Authority or other person with regard to
                        present or future alleged Prohibited Activities or
                        Conditions or any other environmental, health or safety
                        matters affecting the Mortgaged Property or any other
                        property of Borrower that is adjacent to the Mortgaged
                        Property; and

            (3)   any representation or warranty in this Section 18 becomes
                        untrue after the date of this Instrument.

      Any such notice given by Borrower shall not relieve Borrower of, or result
in a waiver of, any obligation under this Instrument, the Note, or any other
Loan Document.

      (g)   Borrower shall pay promptly the costs of any environmental
inspections, tests or audits ("ENVIRONMENTAL INSPECTIONS") required by Lender in
connection with any foreclosure or deed in lieu of foreclosure, or as a
condition of Lender's consent to any Transfer under Section 21, or required by
Lender following a reasonable determination by Lender that Prohibited Activities
or Conditions may exist. Any such costs incurred by Lender (including the fees
and out-of-pocket costs of attorneys and technical consultants whether incurred
in connection with any judicial or administrative process or otherwise) which
Borrower fails to pay promptly shall become an additional part of the
Indebtedness as provided in Section 12. The results of all Environmental
Inspections made by Lender shall at all times remain the property of Lender and
Lender shall have no obligation to disclose or otherwise make available to
Borrower or any other party such results or any other information obtained by
Lender in connection with its Environmental Inspections. Lender hereby reserves
the right, and Borrower hereby expressly authorizes Lender, to make available to
any party, including any prospective bidder at a foreclosure sale of the
Mortgaged Property, the results of any Environmental Inspections made by Lender
with respect


                                                                         Page 21


<PAGE>   38

to the Mortgaged Property. Borrower consents to Lender notifying any party
(either as part of a notice of sale or otherwise) of the results of any of
Lender's Environmental Inspections. Borrower acknowledges that Lender cannot
control or otherwise assure the truthfulness or accuracy of the results of any
of its Environmental Inspections and that the release of such results to
prospective bidders at a foreclosure sale of the Mortgaged Property may have a
material and adverse effect upon the amount which a party may bid at such sale.
Borrower agrees that Lender shall have no liability whatsoever as a result of
delivering the results of any of its Environmental Inspections to any third
party, and Borrower hereby releases and forever discharges Lender from any and
all claims, damages, or causes of action, arising out of, connected with or
incidental to the results of, the delivery of any of Lender's Environmental
Inspections.

      (h)   If any investigation, site monitoring, containment, clean-up,
restoration or other remedial work ("REMEDIAL WORK") is necessary to comply with
any Hazardous Materials Law or order of any Governmental Authority that has or
acquires jurisdiction over the Mortgaged Property or the use, operation or
improvement of the Mortgaged Property under any Hazardous Materials Law,
Borrower shall, by the earlier of (1) the applicable deadline required by
Hazardous Materials Law or (2) 30 days after notice from Lender demanding such
action, begin performing the Remedial Work, and thereafter diligently prosecute
it to completion, and shall in any event complete the work by the time required
by applicable Hazardous Materials Law. If Borrower fails to begin on a timely
basis or diligently prosecute any required Remedial Work, Lender may, at its
option, cause the Remedial Work to be completed, in which case Borrower shall
reimburse Lender on demand for the cost of doing so. Any reimbursement due from
Borrower to Lender shall become part of the Indebtedness as provided in Section
12.

      (i)   Borrower shall cooperate with any inquiry by any Governmental
Authority and shall comply with any governmental or judicial order which arises
from any alleged Prohibited Activity or Condition.

      (j)   Borrower shall indemnify, hold harmless and defend (i) Lender, (ii)
any prior owner or holder of the Note, (iii) the Loan Servicer, (iv) any prior
Loan Servicer, (v) the officers, directors, shareholders, partners, employees
and trustees of any of the foregoing, and (vi) the heirs, legal representatives,
successors and assigns of each of the foregoing (collectively, the
"INDEMNITEES") from and against all proceedings, claims, damages, penalties and
costs (whether initiated or sought by Governmental Authorities or private
parties), including fees and out-of-pocket expenses of attorneys and expert
witnesses, investigatory fees, and remediation costs, whether incurred in
connection with any judicial or administrative process or otherwise, arising
directly or indirectly from any of the following:

            (1)   any breach of any representation or warranty of Borrower in
                        this Section 18;

            (2)   any failure by Borrower to perform any of its obligations
                        under this Section 18;

            (3)   the existence or alleged existence of any Prohibited Activity
                        or Condition;


                                                                         Page 22


<PAGE>   39

            (4)   the presence or alleged presence of Hazardous Materials on or
                        under the Mortgaged Property or any property of Borrower
                        that is adjacent to the Mortgaged Property; and

            (5)   the actual or alleged violation of any Hazardous Materials
                        Law.

      (k)   Counsel selected by Borrower to defend Indemnitees shall be subject
to the approval of those Indemnitees. However, any Indemnitee may elect to
defend any claim or legal or administrative proceeding at the Borrower's
expense.

      (l)   Borrower shall not, without the prior written consent of those
Indemnitees who are named as parties to a claim or legal or administrative
proceeding (a "CLAIM"), settle or compromise the Claim if the settlement (1)
results in the entry of any judgment that does not include as an unconditional
term the delivery by the claimant or plaintiff to Lender of a written release of
those Indemnitees, satisfactory in form and substance to Lender; or (2) may
materially and adversely affect Lender, as determined by Lender in its
discretion.

      (m)   Lender agrees that the indemnity under this Section 18 shall be
limited to the assets of Borrower and Lender shall not seek to recover any
deficiency from any natural persons who are general partners of Borrower.

      (n)   Borrower shall, at its own cost and expense, do all of the
following:

            (1)   pay or satisfy any judgment or decree that may be entered
                        against any Indemnitee or Indemnitees in any legal or
                        administrative proceeding incident to any matters
                        against which Indemnitees are entitled to be indemnified
                        under this Section 18;

            (2)   reimburse Indemnitees for any expenses paid or incurred in
                        connection with any matters against which Indemnitees
                        are entitled to be indemnified under this Section 18;
                        and

            (3)   reimburse Indemnitees for any and all expenses, including fees
                        and out-of-pocket expenses of attorneys and expert
                        witnesses, paid or incurred in connection with the
                        enforcement by Indemnitees of their rights under this
                        Section 18, or in monitoring and participating in any
                        legal or administrative proceeding.

      (o)   In any circumstances in which the indemnity under this Section 18
applies, Lender may employ its own legal counsel and consultants to prosecute,
defend or negotiate any claim or legal or administrative proceeding and Lender,
with the prior written consent of Borrower (which shall not be unreasonably
withheld, delayed or conditioned), may settle or compromise any action or


                                                                         Page 23


<PAGE>   40

legal or administrative proceeding. Borrower shall reimburse Lender upon demand
for all costs and expenses incurred by Lender, including all costs of
settlements entered into in good faith, and the fees and out-of-pocket expenses
of such attorneys and consultants.

      (p)   The provisions of this Section 18 shall be in addition to any and
all other obligations and liabilities that Borrower may have under applicable
law or under other Loan Documents, and each Indemnitee shall be entitled to
indemnification under this Section 18 without regard to whether Lender or that
Indemnitee has exercised any rights against the Mortgaged Property or any other
security, pursued any rights against any guarantor, or pursued any other rights
available under the Loan Documents or applicable law. If Borrower consists of
more than one person or entity, the obligation of those persons or entities to
indemnify the Indemnitees under this Section 18 shall be joint and several. The
obligation of Borrower to indemnify the Indemnitees under this Section 18 shall
survive any repayment or discharge of the Indebtedness, any foreclosure
proceeding, any foreclosure sale, any delivery of any deed in lieu of
foreclosure, and any release of record of the lien of this Instrument.

      19.   PROPERTY AND LIABILITY INSURANCE.

      (a)   Borrower shall keep the Improvements insured at all times against
such hazards as Lender may from time to time require, which insurance shall
include but not be limited to coverage against loss by fire and allied perils,
general boiler and machinery coverage, and business income coverage. Lender's
insurance requirements may change from time to time throughout the term of the
Indebtedness. If Lender so requires, such insurance shall also include sinkhole
insurance, mine subsidence insurance, earthquake insurance, and, if the
Mortgaged Property does not conform to applicable zoning or land use laws,
building ordinance or law coverage. If any of the Improvements is located in an
area identified by the Federal Emergency Management Agency (or any successor to
that agency) as an area having special flood hazards, and if flood insurance is
available in that area, Borrower shall insure such Improvements against loss by
flood.

      (b)   All premiums on insurance policies required under Section 19(a)
shall be paid in the manner provided in Section 7, unless Lender has designated
in writing another method of payment. All such policies shall also be in a form
approved by Lender. All policies of property damage insurance shall include a
non-contributing, non-reporting mortgage clause in favor of, and in a form
approved by, Lender. Lender shall have the right to hold the original policies
or duplicate original policies of all insurance required by Section 19(a).
Borrower shall promptly deliver to Lender a copy of all renewal and other
notices received by Borrower with respect to the policies and all receipts for
paid premiums. At least 30 days prior to the expiration date of a policy,
Borrower shall deliver to Lender the original (or a duplicate original) of a
renewal policy in form satisfactory to Lender.


                                                                         Page 24


<PAGE>   41

      (c)   Borrower shall maintain at all times commercial general liability
insurance, workers' compensation insurance and such other liability, errors and
omissions and fidelity insurance coverages as Lender may from time to time
require.

      (d)   All insurance policies and renewals of insurance policies required
by this Section 19 shall be in such amounts and for such periods as Lender may
from time to time require, and shall be issued by insurance companies
satisfactory to Lender.

      (e)   Borrower shall comply with all insurance requirements and shall not
permit any condition to exist on the Mortgaged Property that would invalidate
any part of any insurance coverage that this Instrument requires Borrower to
maintain.

      (f)   In the event of loss, Borrower shall give immediate written notice
to the insurance carrier and to Lender. Borrower hereby authorizes and appoints
Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and
compromise any claims under policies of property damage insurance, to appear in
and prosecute any action arising from such property damage insurance policies,
to collect and receive the proceeds of property damage insurance, and to deduct
from such proceeds Lender's expenses incurred in the collection of such
proceeds. This power of attorney is coupled with an interest and therefore is
irrevocable. However, nothing contained in this Section 19 shall require Lender
to incur any expense or take any action. Lender may, at Lender's option, (1)
hold the balance of such proceeds to be used to reimburse Borrower for the cost
of restoring and repairing the Mortgaged Property to the equivalent of its
original condition or to a condition approved by Lender (the "RESTORATION"), or
(2) apply the balance of such proceeds to the payment of the Indebtedness,
whether or not then due. To the extent Lender determines to apply insurance
proceeds to Restoration, Lender shall do so in accordance with Lender's
then-current policies relating to the restoration of casualty damage on similar
multifamily properties.

      (g)   Lender shall not exercise its option to apply insurance proceeds to
the payment of the Indebtedness if all of the following conditions are met: (1)
no Event of Default (or any event which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default) has occurred and
is continuing; (2) Lender determines, in its discretion, that there will be
sufficient funds to complete the Restoration; (3) Lender determines, in its
discretion, that the rental income from the Mortgaged Property after completion
of the Restoration will be sufficient to meet all operating costs and other
expenses, Imposition Deposits, deposits to reserves and loan repayment
obligations relating to the Mortgaged Property; (4) Lender determines, in its
discretion, that the Restoration will be completed before the earlier of (A) one
year before the maturity date of the Note or (B) one year after the date of the
loss or casualty; and (5) upon Lender's request, Borrower provides Lender
evidence of the availability during and after the Restoration of the insurance
required to be maintained by Borrower pursuant to this Section 19.

      (h)   If the Mortgaged Property is sold at a foreclosure sale or Lender
acquires title to the Mortgaged Property, Lender shall automatically succeed to
all rights of Borrower in and to any


                                                                         Page 25


<PAGE>   42

insurance policies and unearned insurance premiums and in and to the proceeds
resulting from any damage to the Mortgaged Property prior to such sale or
acquisition.

      20.   CONDEMNATION.

      (a)   Borrower shall promptly notify Lender of any action or proceeding
relating to any condemnation or other taking, or conveyance in lieu thereof, of
all or any part of the Mortgaged Property, whether direct or indirect (a
"CONDEMNATION"). Borrower shall appear in and prosecute or defend any action or
proceeding relating to any Condemnation unless otherwise directed by Lender in
writing. Borrower authorizes and appoints Lender as attorney-in-fact for
Borrower to commence, appear in and prosecute, in Lender's or Borrower's name,
any action or proceeding relating to any Condemnation and to settle or
compromise any claim in connection with any Condemnation. This power of attorney
is coupled with an interest and therefore is irrevocable. However, nothing
contained in this Section 20 shall require Lender to incur any expense or take
any action. Borrower hereby transfers and assigns to Lender all right, title and
interest of Borrower in and to any award or payment with respect to (i) any
Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to
the Mortgaged Property caused by governmental action that does not result in a
Condemnation.

      (b)   Lender may apply such awards or proceeds, after the deduction of
Lender's expenses incurred in the collection of such amounts, at Lender's
option, to the restoration or repair of the Mortgaged Property or to the payment
of the Indebtedness, with the balance, if any, to Borrower. Unless Lender
otherwise agrees in writing, any application of any awards or proceeds to the
Indebtedness shall not extend or postpone the due date of any monthly
installments referred to in the Note, Section 7 of this Instrument or any
Collateral Agreement, or change the amount of such installments. Borrower agrees
to execute such further evidence of assignment of any awards or proceeds as
Lender may require.

      21.   TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER.

      (a)   The occurrence of any of the following events shall constitute an
Event of Default under this Instrument:

            (1)   a Transfer of all or any part of the Mortgaged Property or any
                        interest in the Mortgaged Property;

            (2)   a Transfer of a Controlling Interest in Borrower;

            (3)   a Transfer of a Controlling Interest in any entity which owns,
                        directly or indirectly through one or more intermediate
                        entities, a Controlling Interest in Borrower;


                                                                         Page 26


<PAGE>   43

            (4)   a Transfer of all or any part of Key Principal's ownership
                        interests (other than limited partnership interests) in
                        Borrower, or in any other entity which owns, directly or
                        indirectly through one or more intermediate entities, an
                        ownership interest in Borrower;

            (5)   if Key Principal is an entity, (A) a Transfer of a Controlling
                        Interest in Key Principal, or (B) a Transfer of a
                        Controlling Interest in any entity which owns, directly
                        or indirectly through one or more intermediate entities,
                        a Controlling Interest in Key Principal;

            (6)   if Borrower or Key Principal is a trust, the termination or
                        revocation of such trust; and

            (7)   a conversion of Borrower from one type of legal entity into
                        another type of legal entity, whether or not there is a
                        Transfer.

      Lender shall not be required to demonstrate any actual impairment of its
security or any increased risk of default in order to exercise any of its
remedies with respect to an Event of Default under this Section 21.

      (b)   The occurrence of any of the following events shall not constitute
an Event of Default under this Instrument, notwithstanding any provision of
Section 21(a) to the contrary:

            (1)   a Transfer to which Lender has consented;

            (2)   a Transfer that occurs by devise, descent, or by operation of
                        law upon the death of a natural person;

            (3)   the grant of a leasehold interest in an individual dwelling
                        unit for a term of two years or less not containing an
                        option to purchase;

            (4)   a Transfer of obsolete or worn out Personalty or Fixtures that
                        are contemporaneously replaced by items of equal or
                        better function and quality, which are free of liens,
                        encumbrances and security interests other than those
                        created by the Loan Documents or consented to by Lender;

            (5)   the grant of an easement, if before the grant Lender
                        determines that the easement will not materially affect
                        the operation or value of the Mortgaged Property or
                        Lender's interest in the Mortgaged Property, and
                        Borrower pays to Lender, upon demand, all costs and
                        expenses incurred by Lender in connection with reviewing
                        Borrower's request; and


                                                                         Page 27


<PAGE>   44

            (6)   the creation of a tax lien or a mechanic's, materialman's or
                        judgment lien against the Mortgaged Property which is
                        bonded off, released of record or otherwise remedied to
                        Lender's satisfaction within 30 days of the date of
                        creation.

      (c)   Lender shall consent, without any adjustment to the rate at which
the Indebtedness secured by this Instrument bears interest or to any other
economic terms of the Indebtedness, to a Transfer that would otherwise violate
this Section 21 if, prior to the Transfer, Borrower has satisfied each of the
following requirements:

            (1)   the submission to Lender of all information required by Lender
                        to make the determination required by this Section
                        21(c);

            (2)   the absence of any Event of Default;

            (3)   the transferee meets all of the eligibility, credit,
                        management and other standards (including any standards
                        with respect to previous relationships between Lender
                        and the transferee and the organization of the
                        transferee) customarily applied by Lender at the time of
                        the proposed Transfer to the approval of borrowers in
                        connection with the origination or purchase of similar
                        mortgages, deeds of trust or deeds to secure debt on
                        multifamily properties;

            (4)   the Mortgaged Property, at the time of the proposed Transfer,
                        meets all standards as to its physical condition that
                        are customarily applied by Lender at the time of the
                        proposed Transfer to the approval of properties in
                        connection with the origination or purchase of similar
                        mortgages on multifamily properties;

            (5)   in the case of a Transfer of all or any part of the Mortgaged
                        Property, or direct or indirect ownership interests in
                        Borrower or Key Principal (if an entity), if transferor
                        or any other person has obligations under any Loan
                        Document, the execution by the transferee or one or more
                        individuals or entities acceptable to Lender of an
                        assumption agreement (including, if applicable, an
                        Acknowledgment and Agreement of Key Principal to
                        Personal Liability for Exceptions to Non-Recourse
                        Liability) that is acceptable to Lender and that, among
                        other things, requires the transferee to perform all
                        obligations of transferor or such person set forth in
                        such Loan Document, and may require that the transferee
                        comply with any provisions of this Instrument or any
                        other Loan Document which previously may have been
                        waived by Lender;


                                                                         Page 28


<PAGE>   45

            (6)   if a guaranty has been executed and delivered in connection
                        with the Note, this Instrument or any of the other Loan
                        Documents, the Borrower causes one or more individuals
                        or entities acceptable to Lender to execute and deliver
                        to Lender a guaranty in a form acceptable to Lender; and

            (7)   Lender's receipt of all of the following:

                  (A)   a non-refundable review fee in the amount of $3,000 and
                              a transfer fee equal to 1 percent of the
                              outstanding Indebtedness immediately prior to the
                              Transfer.

                  (B)   In addition, Borrower shall be required to reimburse
                              Lender for all of Lender's out-of-pocket costs
                              (including reasonable attorneys' fees) incurred in
                              reviewing the Transfer request, to the extent such
                              expenses exceed $3,000.

      (d)   For purposes of this Section, the following terms shall have the
meanings set forth below:

            (1)   "INITIAL OWNERS" means, with respect to Borrower or any other
                        entity, the persons or entities who on the date of the
                        Note own the aggregate 100% of the ownership interests
                        in Borrower or that entity.

            (2)   A Transfer of a "CONTROLLING INTEREST" shall mean, with
                        respect to any entity, the following:

                        (i)   if such entity is a general partnership or a joint
                              venture, a Transfer of any general partnership
                              interest or joint venture interest which would
                              cause the Initial Owners to own less than 51% of
                              all general partnership or joint venture interests
                              in such entity;

                        (ii)  if such entity is a limited partnership, a
                              Transfer of any general partnership interest;

                        (iii) if such entity is a limited liability company or a
                              limited liability partnership, a Transfer of any
                              membership or other ownership interest which would
                              cause the Initial Owners to own less than 51% of
                              all membership or other ownership interests in
                              such entity;

                        (iv)  if such entity is a corporation (other than a
                              Publicly-Held Corporation) with only one class of
                              voting stock, a Transfer of any voting stock which
                              would cause the Initial Owners to own less than
                              51% of voting stock in such corporation;


                                                                         Page 29


<PAGE>   46

                        (v)   if such entity is a corporation (other than a
                              Publicly-Held Corporation) with more than one
                              class of voting stock, a Transfer of any voting
                              stock which would cause the Initial Owners to own
                              less than a sufficient number of shares of voting
                              stock having the power to elect the majority of
                              directors of such corporation; and

                        (vi)  if such entity is a trust, the removal,
                              appointment or substitution of a trustee of such
                              trust other than (A) in the case of a land trust,
                              or (B) if the trustee of such trust after such
                              removal, appointment or substitution is a trustee
                              identified in the trust agreement approved by
                              Lender.

            (3)   "PUBLICLY-HELD CORPORATION" shall mean a corporation the
                        outstanding voting stock of which is registered under
                        Section 12(b) or 12(g) of the Securities and Exchange
                        Act of 1934, as amended.

      22.   EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an Event of Default under this Instrument:

      (a)   any failure by Borrower to pay or deposit when due any amount
required by the Note, this Instrument or any other Loan Document;

      (b)   any failure by Borrower to maintain the insurance coverage required
by Section 19;

      (c)   any failure by Borrower to comply with the provisions of Section 33;

      (d)   fraud or material misrepresentation or material omission by
Borrower, or any of its officers, directors, trustees, general partners or
managers, Key Principal or any guarantor in connection with (A) the application
for or creation of the Indebtedness, (B) any financial statement, rent roll, or
other report or information provided to Lender during the term of the
Indebtedness, or (C) any request for Lender's consent to any proposed action,
including a request for disbursement of funds under any Collateral Agreement;

      (e)   any Event of Default under Section 21;

      (f)   the commencement of a forfeiture action or proceeding, whether civil
or criminal, which, in Lender's reasonable judgment, could result in a
forfeiture of the Mortgaged Property or otherwise materially impair the lien
created by this Instrument or Lender's interest in the Mortgaged Property;


                                                                         Page 30


<PAGE>   47

      (g)   any failure by Borrower to perform any of its obligations under this
Instrument (other than those specified in Sections 22(a) through (f)), as and
when required, which continues for a period of 30 days after notice of such
failure by Lender to Borrower, but no such notice or grace period shall apply in
the case of any such failure which could, in Lender's judgment, absent immediate
exercise by Lender of a right or remedy under this Instrument, result in harm to
Lender, impairment of the Note or this Instrument or any other security given
under any other Loan Document;

      (h)   any failure by Borrower to perform any of its obligations as and
when required under any Loan Document other than this Instrument which continues
beyond the applicable cure period, if any, specified in that Loan Document; and

      (i)   any exercise by the holder of any other debt instrument secured by a
mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a
right to declare all amounts due under that debt instrument immediately due and
payable.

      23.   REMEDIES CUMULATIVE. Each right and remedy provided in this
Instrument is distinct from all other rights or remedies under this Instrument
or any other Loan Document or afforded by applicable law, and each shall be
cumulative and may be exercised concurrently, independently, or successively, in
any order.

      24.   FORBEARANCE.

      (a)   Lender may (but shall not be obligated to) agree with Borrower, from
time to time, and without giving notice to, or obtaining the consent of, or
having any effect upon the obligations of, any guarantor or other third party
obligor, to take any of the following actions: extend the time for payment of
all or any part of the Indebtedness; reduce the payments due under this
Instrument, the Note, or any other Loan Document; release anyone liable for the
payment of any amounts under this Instrument, the Note, or any other Loan
Document; accept a renewal of the Note; modify the terms and time of payment of
the Indebtedness; join in any extension or subordination agreement; release any
Mortgaged Property; take or release other or additional security; modify the
rate of interest or period of amortization of the Note or change the amount of
the monthly installments payable under the Note; and otherwise modify this
Instrument, the Note, or any other Loan Document.

      (b)   Any forbearance by Lender in exercising any right or remedy under
the Note, this Instrument, or any other Loan Document or otherwise afforded by
applicable law, shall not be a waiver of or preclude the exercise of any other
right or remedy. The acceptance by Lender of payment of all or any part of the
Indebtedness after the due date of such payment, or in an amount which is less
than the required payment, shall not be a waiver of Lender's right to require
prompt payment when due of all other payments on account of the Indebtedness or
to exercise any remedies for any failure to make prompt payment. Enforcement by
Lender of any security for the Indebtedness shall not constitute an election by
Lender of remedies so as to preclude the


                                                                         Page 31


<PAGE>   48

exercise of any other right available to Lender. Lender's receipt of any awards
or proceeds under Sections 19 and 20 shall not operate to cure or waive any
Event of Default.

      25.   LOAN CHARGES. If any applicable law limiting the amount of interest
or other charges permitted to be collected from Borrower is interpreted so that
any charge provided for in any Loan Document, whether considered separately or
together with other charges levied in connection with any other Loan Document,
violates that law, and Borrower is entitled to the benefit of that law, that
charge is hereby reduced to the extent necessary to eliminate that violation.
The amounts, if any, previously paid to Lender in excess of the permitted
amounts shall be applied by Lender to reduce the principal of the Indebtedness.
For the purpose of determining whether any applicable law limiting the amount of
interest or other charges permitted to be collected from Borrower has been
violated, all Indebtedness which constitutes interest, as well as all other
charges levied in connection with the Indebtedness which constitute interest,
shall be deemed to be allocated and spread over the stated term of the Note.
Unless otherwise required by applicable law, such allocation and spreading shall
be effected in such a manner that the rate of interest so computed is uniform
throughout the stated term of the Note.

      26.   WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the right
to assert any statute of limitations as a bar to the enforcement of the lien of
this Instrument or to any action brought to enforce any Loan Document.

      27.   WAIVER OF MARSHALING. Notwithstanding the existence of any other
security interests in the Mortgaged Property held by Lender or by any other
party, Lender shall have the right to determine the order in which any or all of
the Mortgaged Property shall be subjected to the remedies provided in this
Instrument, the Note, any other Loan Document or applicable law. Lender shall
have the right to determine the order in which any or all portions of the
Indebtedness are satisfied from the proceeds realized upon the exercise of such
remedies. Borrower and any party who now or in the future acquires a security
interest in the Mortgaged Property and who has actual or constructive notice of
this Instrument waives any and all right to require the marshaling of assets or
to require that any of the Mortgaged Property be sold in the inverse order of
alienation or that any of the Mortgaged Property be sold in parcels or as an
entirety in connection with the exercise of any of the remedies permitted by
applicable law or provided in this Instrument.

      28.   FURTHER ASSURANCES. Borrower shall execute, acknowledge, and
deliver, at its sole cost and expense, all further acts, deeds, conveyances,
assignments, estoppel certificates, financing statements, transfers and
assurances as Lender may require from time to time in order to better assure,
grant, and convey to Lender the rights intended to be granted, now or in the
future, to Lender under this Instrument and the Loan Documents.

      29.   ESTOPPEL CERTIFICATE. Within 10 days after a request from Lender,
Borrower shall deliver to Lender a written statement, signed and acknowledged by
Borrower, certifying to Lender or any person designated by Lender, as of the
date of such statement, (i) that the Loan


                                                                         Page 32


<PAGE>   49

Documents are unmodified and in full force and effect (or, if there have been
modifications, that the Loan Documents are in full force and effect as modified
and setting forth such modifications); (ii) the unpaid principal balance of the
Note; (iii) the date to which interest under the Note has been paid; (iv) that
Borrower is not in default in paying the Indebtedness or in performing or
observing any of the covenants or agreements contained in this Instrument or any
of the other Loan Documents (or, if the Borrower is in default, describing such
default in reasonable detail); (v) whether or not there are then existing any
setoffs or defenses known to Borrower against the enforcement of any right or
remedy of Lender under the Loan Documents; and (vi) any additional facts
requested by Lender.

      30.   GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

      (a)   This Instrument, and any Loan Document which does not itself
expressly identify the law that is to apply to it, shall be governed by the laws
of the jurisdiction in which the Land is located (the "PROPERTY JURISDICTION").

      (b)   Borrower agrees that any controversy arising under or in relation to
the Note, this Instrument, or any other Loan Document shall be litigated
exclusively in the Property Jurisdiction. The state and federal courts and
authorities with jurisdiction in the Property Jurisdiction shall have exclusive
jurisdiction over all controversies which shall arise under or in relation to
the Note, any security for the Indebtedness, or any other Loan Document.
Borrower irrevocably consents to service, jurisdiction, and venue of such courts
for any such litigation and waives any other venue to which it might be entitled
by virtue of domicile, habitual residence or otherwise.

      31.   NOTICE.

      (a)   All notices, demands and other communications ("NOTICE") under or
concerning this Instrument shall be in writing. Each notice shall be addressed
to the intended recipient at its address set forth in this Instrument, and shall
be deemed given on the earliest to occur of (1) the date when the notice is
received by the addressee; (2) the first Business Day after the notice is
delivered to a recognized overnight courier service, with arrangements made for
payment of charges for next Business Day delivery; or (3) the third Business Day
after the notice is deposited in the United States mail with postage prepaid,
certified mail, return receipt requested. As used in this Section 31, the term
"Business Day" means any day other than a Saturday, a Sunday or any other day on
which Lender is not open for business.

      (b)   Any party to this Instrument may change the address to which notices
intended for it are to be directed by means of notice given to the other party
in accordance with this Section 31. Each party agrees that it will not refuse or
reject delivery of any notice given in accordance with this Section 31, that it
will acknowledge, in writing, the receipt of any notice upon request by the
other party and that any notice rejected or refused by it shall be deemed for
purposes of this


                                                                         Page 33


<PAGE>   50

Section 31 to have been received by the rejecting party on the date so refused
or rejected, as conclusively established by the records of the U.S. Postal
Service or the courier service.

      (c)   Any notice under the Note and any other Loan Document which does not
specify how notices are to be given shall be given in accordance with this
Section 31.

      32.   SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest in
the Note (together with this Instrument and the other Loan Documents) may be
sold one or more times without prior notice to Borrower. A sale may result in a
change of the Loan Servicer. There also may be one or more changes of the Loan
Servicer unrelated to a sale of the Note. If there is a change of the Loan
Servicer, Borrower will be given notice of the change.

      33.   SINGLE ASSET BORROWER. Until the Indebtedness is paid in full,
Borrower (a) shall not acquire any real or personal property other than the
Mortgaged Property and personal property related to the operation and
maintenance of the Mortgaged Property; (b) shall not operate any business other
than the management and operation of the Mortgaged Property; and (c) shall not
maintain its assets in a way difficult to segregate and identify.

      34.   SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the
rights granted by this Instrument shall inure to, the respective successors and
assigns of Lender and Borrower. However, a Transfer not permitted by Section 21
shall be an Event of Default.

      35.   JOINT AND SEVERAL LIABILITY. If more than one person or entity signs
this Instrument as Borrower, the obligations of such persons and entities shall
be joint and several.

      36.   RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY.

      (a)   The relationship between Lender and Borrower shall be solely that of
creditor and debtor, respectively, and nothing contained in this Instrument
shall create any other relationship between Lender and Borrower.

      (b)   No creditor of any party to this Instrument and no other person
shall be a third party beneficiary of this Instrument or any other Loan
Document. Without limiting the generality of the preceding sentence, (1) any
arrangement (a "SERVICING ARRANGEMENT") between the Lender and any Loan Servicer
for loss sharing or interim advancement of funds shall constitute a contractual
obligation of such Loan Servicer that is independent of the obligation of
Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third
party beneficiary of any Servicing Arrangement, and (3) no payment by the Loan
Servicer under any Servicing Arrangement will reduce the amount of the
Indebtedness.

      37.   SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any
provision of this Instrument shall not affect the validity or enforceability of
any other provision, and all other provisions shall remain in full force and
effect. This Instrument contains the entire


                                                                         Page 34


<PAGE>   51

agreement among the parties as to the rights granted and the obligations assumed
in this Instrument. This Instrument may not be amended or modified except by a
writing signed by the party against whom enforcement is sought.

      38.   CONSTRUCTION. The captions and headings of the sections of this
Instrument are for convenience only and shall be disregarded in construing this
Instrument. Any reference in this Instrument to an "Exhibit" or a "Section"
shall, unless otherwise explicitly provided, be construed as referring,
respectively, to an Exhibit attached to this Instrument or to a Section of this
Instrument. All Exhibits attached to or referred to in this Instrument are
incorporated by reference into this Instrument. Any reference in this Instrument
to a statute or regulation shall be construed as referring to that statute or
regulation as amended from time to time. Use of the singular in this Agreement
includes the plural and use of the plural includes the singular. As used in this
Instrument, the term "including" means "including, but not limited to."

      39.   LOAN SERVICING. All actions regarding the servicing of the loan
evidenced by the Note, including the collection of payments, the giving and
receipt of notice, inspections of the Property, inspections of books and
records, and the granting of consents and approvals, may be taken by the Loan
Servicer unless Borrower receives notice to the contrary. If Borrower receives
conflicting notices regarding the identity of the Loan Servicer or any other
subject, any such notice from Lender shall govern.

      40.   DISCLOSURE OF INFORMATION. Lender may furnish information regarding
Borrower or the Mortgaged Property to third parties with an existing or
prospective interest in the servicing, enforcement, evaluation, performance,
purchase or securitization of the Indebtedness, including trustees, master
servicers, special servicers, rating agencies, and organizations maintaining
databases on the underwriting and performance of multifamily mortgage loans.
Borrower irrevocably waives any and all rights it may have under applicable law
to prohibit such disclosure, including any right of privacy.

      41.   NO CHANGE IN FACTS OR CIRCUMSTANCES. All information in the
application for the loan submitted to Lender (the "LOAN APPLICATION") and in all
financial statements, rent rolls, reports, certificates and other documents
submitted in connection with the Loan Application are complete and accurate in
all material respects. There has been no material adverse change in any fact or
circumstance that would make any such information incomplete or inaccurate.

      42.   SUBROGATION. If, and to the extent that, the proceeds of the loan
evidenced by the Note are used to pay, satisfy or discharge any obligation of
Borrower for the payment of money that is secured by a pre-existing mortgage,
deed of trust or other lien encumbering the Mortgaged Property (a "PRIOR LIEN"),
such loan proceeds shall be deemed to have been advanced by Lender at Borrower's
request, and Lender shall automatically, and without further action on its part,
be subrogated to the rights, including lien priority, of the owner or holder of
the obligation secured by the Prior Lien, whether or not the Prior Lien is
released.


                                                                         Page 35


<PAGE>   52

      43.   ACCELERATION; REMEDIES. If an Event of Default has occurred and is
continuing, Lender, at Lender's option, may declare the Indebtedness to be
immediately due and payable without further demand, and may invoke the power of
sale and any other remedies permitted by California law or provided in this
Instrument or in any other Loan Document. Borrower acknowledges that the power
of sale granted in this Instrument may be exercised by Lender without prior
judicial hearing. Lender shall be entitled to collect all costs and expenses
incurred in pursuing such remedies, including attorneys' fees, costs of
documentary evidence, abstracts and title reports.

      If the power of sale is invoked, Lender shall execute a written notice of
the occurrence of an Event of Default and of Lender's election to cause the
Mortgaged Property to be sold and shall cause the notice to be recorded in each
county in which the Mortgaged Property or some part of the Mortgaged Property is
located. Trustee shall give notice of default and notice of sale and shall sell
the Mortgaged Property according to California law. Trustee may sell the
Mortgaged Property at the time and place and under the terms designated in the
notice of sale in one or more parcels and in such order as Trustee may
determine. Trustee may postpone the sale of all or any part of the Mortgaged
Property by public announcement at the time and place of any previously
scheduled sale. Lender or Lender's designee may purchase the Mortgaged Property
at any sale.

      At the sale, Lender shall be entitled to credit bid, or to instruct
Trustee, on behalf of Lender to credit bid, up to and including the entire
amount of the Indebtedness plus Trustee's fees and expenses. Trustee shall
deliver to the purchaser at the sale, within a reasonable time, but in any event
within 10 calendar days, after the sale, a deed conveying the Mortgaged Property
so sold without any express or implied covenant or warranty. The recitals in
Trustee's deed shall be prima facie evidence of the truth of the statements made
in those recitals. Trustee shall apply the proceeds of the sale in the following
order: (a) to all costs and expenses of exercising the power of sale, including
the payment of Trustee's fees and attorneys' fees and costs of title evidence;
(b) to the Indebtedness in such order as Lender, in Lender's discretion,
directs; and (c) the excess, if any, to the person or persons legally entitled
to the excess.

      44.   RECONVEYANCE. Upon payment of the Indebtedness, Lender shall request
Trustee to reconvey the Mortgaged Property and shall surrender this Instrument
and the Note to Trustee. Trustee shall reconvey the Mortgaged Property without
warranty to the person or persons legally entitled to the Mortgaged Property.
Such person or persons shall pay Trustee's reasonable costs incurred in so
reconveying the Mortgaged Property.

      45.   SUBSTITUTE TRUSTEE. Lender, at Lender's option, may from time to
time, by a written instrument, appoint a successor trustee, which instrument,
when executed and acknowledged by Lender and recorded in the office of the
Recorder of the county or counties where the Mortgaged Property is situated,
shall be conclusive proof of proper substitution of the successor trustee. The
successor trustee shall, without conveyance of the Mortgaged Property, succeed
to all the title, power and duties conferred upon the Trustee in this Instrument
and by California law. The instrument of substitution shall contain the name of
the original Lender,


                                                                         Page 36


<PAGE>   53

Trustee and Borrower under this Instrument, the book and page where this
Instrument is recorded, and the name and address of the successor trustee. If
notice of default has been recorded, this power of substitution cannot be
exercised until after the costs, fees and expenses of the then acting Trustee
have been paid to such Trustee, who shall endorse receipt of those costs, fees
and expenses upon the instrument of substitution. The procedure provided for
substitution of trustee in this Instrument shall govern to the exclusion of all
other provisions for substitution, statutory or otherwise.

      46.   STATEMENT OF OBLIGATION. Lender may collect a fee not to exceed the
maximum allowed by applicable law for furnishing the statement of obligation as
provided in Section 2943 of the Civil Code of California.

      47.   SPOUSE'S SEPARATE PROPERTY. Each Borrower who is a married person
expressly agrees that recourse may be had against his or her community property
and separate property.

      48.   FIXTURE FILING. This Instrument is also a fixture filing under the
Uniform Commercial Code of California.

      49.   ADDITIONAL PROVISION REGARDING APPLICATION OF PAYMENTS. In addition
to the provisions of Section 9, Borrower further agrees that, if Lender accepts
a guaranty of only a portion of the Indebtedness, Borrower waives its right
under California Civil Code Section 2822(a), to designate the portion of the
Indebtedness which shall be satisfied by a guarantor's partial payment.

      50.   WAIVER OF MARSHALING; OTHER WAIVERS. To the extent permitted by law,
Borrower waives (i) the benefit of all present or future laws providing for any
appraisement before sale of any portion of the Mortgaged Property, (ii) all
rights of redemption, valuation, appraisement, stay of execution, notice of
election to mature or declare due the whole of the Indebtedness and marshalling
in the event of foreclosure of the lien created by this Instrument, (iii) all
rights and remedies which Borrower may have or be able to assert by reason of
the laws of the State of California pertaining to the rights and remedies of
sureties, (iv) the right to assert any statute of limitations as a bar to the
enforcement of the lien of this Instrument or to any action brought to enforce
the Note or any other obligation secured by this Instrument, and (v) any rights,
legal or equitable, to require marshaling of assets or to require upon
foreclosure sales in a particular order, including any rights under California
Civil Code Sections 2899 and 3433. Lender shall have the right to determine the
order in which any or all of the Mortgaged Property shall be subjected to the
remedies provided by this Instrument. Lender shall have the right to determine
the order in which any or all portions of the Indebtedness are satisfied from
the proceeds realized upon the exercise of the remedies provided by this
Instrument. By signing this Instrument, Borrower does not waive its rights under
Section 2924c of the California Civil Code.


                                                                         Page 37


<PAGE>   54

      51.   ADDITIONAL PROVISIONS CONCERNING ENVIRONMENTAL HAZARDS. In addition
to the provisions of Section 18:

      (a)   Except for matters covered by an O&M Program or matters described in
Section 18(b), Borrower shall not cause or permit any lien (whether or not such
lien has priority over the lien created by this Instrument) upon the Mortgaged
Property imposed pursuant to any Hazardous Materials Laws. Any such lien shall
be considered a Prohibited Activity or Condition.

      (b)   Borrower represents and warrants to Lender that, except as
previously disclosed by Borrower to Lender in writing:

            (1)   at the time of acquiring the Mortgaged Property, Borrower
                        undertook all appropriate inquiry into the previous
                        ownership and uses of the Mortgaged Property consistent
                        with good commercial or customary practice and no
                        evidence or indication came to light which would suggest
                        that the Mortgaged Property has been or is now being
                        used for any Prohibited Activities or Conditions; and

            (2)   the Mortgaged Property has not been designated as "hazardous
                        waste property" or "border zone property" pursuant to
                        Section 25220, et seq., of the California Health and
                        Safety Code.

      The representations and warranties in this Section 51(b) shall be
continuing representations and warranties that shall be deemed to be made by
Borrower throughout the term of the loan evidenced by the Note, until the
Indebtedness has been paid in full.

      (c)   Without limiting any of the remedies provided in this Instrument,
Borrower acknowledges and agrees that each of the provisions in Section 18 and
in this Section 51 is an environmental provision (as defined in Section
736(f)(2) of the California Code of Civil Procedure) made by Borrower relating
to the real property security (the "ENVIRONMENTAL PROVISIONS"), and that
Borrower's failure to comply with any of the Environmental Provisions will be a
breach of contract that will entitle Lender to pursue the remedies provided by
Section 736 of the California Code of Civil Procedure ("SECTION 736") for the
recovery of damages and for the enforcement of the Environmental Provisions.
Pursuant to Section 736, Lender's action for recovery of damages or enforcement
of the Environmental Provisions shall not constitute an action within the
meaning of Section 726(a) of the California Code of Civil Procedure or
constitute a money judgment for a deficiency or a deficiency judgment within the
meaning of Sections 580a, 580b, 580d, or 726(b) of the California Code of Civil
Procedure.

      (d)   Any reference in this Instrument or in any other Loan Document to
Section 18 of this Instrument shall be construed as referring together to
Section 18 and this Section 51.


                                                                         Page 38


<PAGE>   55

      52.   ADDITIONAL PROVISION REGARDING INSURANCE. In addition to the
provisions of Section 19, Borrower further agrees that to the extent that
Borrower obtains any form of property damage insurance for the Mortgaged
Property or any portion thereof that insures perils not required to be insured
against by Lender, such policy of property damage insurance shall include a
standard mortgagee clause and shall name Lender as loss payee and, within 10
days following Borrower's purchase of such additional insurance, Borrower shall
cause to be delivered to Lender a duplicate original policy of insurance with
respect to such policy. Any insurance proceeds payable to Borrower under such
policy shall be additional security for the Indebtedness and Lender shall have
the same rights to such policy and proceeds as it has with respect to insurance
policies required by Lender pursuant to Section 19 (except that Lender shall not
require that the premium for such additional insurance be included among the
Imposition Deposits).

      53.   WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (A) COVENANTS AND
AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS INSTRUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER
THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY
WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN
THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH
PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.


                                                                         Page 39


<PAGE>   56

      ATTACHED EXHIBITS. The following Exhibits are attached to this Instrument:


            [ ]   Exhibit A   Description of the Land (required).

            [ ]   Exhibits B-1, B-2, B-3   Modifications to Instrument


      IN WITNESS WHEREOF, Borrower has signed and delivered this Instrument or
has caused this Instrument to be signed and delivered by its duly authorized
representative.

                                                       BORROWER:

                                          ARV COVELL, LLC
                                          a California limited liability company



                                          By:___________________________________
                                          Name:  Abdo H.  Khoury,
                                          Title: Authorized Manager

Borrower's Employer ID Number: 33-0911962

Fannie Mae MBS\DUS Commitment No.:


                                                                         Page 40


<PAGE>   57

                                 ACKNOWLEDGMENT


STATE OF CALIFORNIA

COUNTY OF ORANGE

      On _____________, 2000, before me, _________________ a Notary Public in
and for said state, personally appeared ABDO H. KHOURY, personally known to me
or proved to me on the basis of satisfactory evidence to be the person(s) whose
names(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her their signature(s) on the instrument, the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.

      WITNESS my hand and official seal.



                                          ______________________________________
                                          Notary Public

[SEAL]


                                                                         Page 41


<PAGE>   58

                                  KEY PRINCIPAL

KEY PRINCIPAL

NAME:                        ARV Assisted Living Inc.

ADDRESS:                     245 Fischer Avenue, D-1
                             Costa Mesa, California 92626


                                                                         Page 42


<PAGE>   59

EXHIBIT A

                            [DESCRIPTION OF THE LAND]



                                                                          Page 1


<PAGE>   60

EXHIBIT B

                           MODIFICATIONS TO INSTRUMENT

The following modifications are made to the text of the Instrument that precedes
this Exhibit:


                                                                        Page A-1



                                       1
<PAGE>   61

                       EXCEPTIONS TO NON-RECOURSE GUARANTY

      This Exceptions to Non-Recourse Guaranty ("GUARANTY") is entered into as
of June 30, 2000, by the undersigned (the "KEY PRINCIPAL" whether one or more),
for the benefit of BANC ONE CAPITAL FUNDING CORPORATION, and/or any subsequent
holder of the Note (the "LENDER").

                                    RECITALS

      A.    ARV COVELL, LLC (the "BORROWER") has requested that Lender make a
loan to Borrower in the amount of $11,209,000.00 (the "LOAN"). The Loan will be
evidenced by a Multifamily Note from Borrower to Lender dated as of the date of
this Guaranty (the "NOTE"). The Note will be secured by a Multifamily Deed of
Trust, Assignment of Rents, Security Agreement and Fixture Filing (California)
dated the same date as the Note (the "SECURITY INSTRUMENT"), encumbering the
real property described in the Security Instrument (the "PROPERTY").

      B.    Key Principal has an economic interest in Borrower or will otherwise
obtain a material financial benefit from the Loan.

      C.    As a condition to making the Loan to Borrower, Lender requires that
the Key Principal execute this Guaranty.

      NOW, THEREFORE, in order to induce Lender to make the Loan to Borrower,
and in consideration thereof, Key Principal agrees as follows:

      1.    "Indebtedness" and other capitalized terms used but not defined in
this Guaranty shall have the meanings assigned to them in the Security
Instrument.

      2.    Key Principal hereby absolutely, unconditionally and irrevocably
guarantees to Lender the full and prompt payment when due, whether at maturity
or earlier, by reason of acceleration or otherwise, and at all times thereafter,
of all amounts for which Borrower is personally liable under Paragraph 9 of the
Note.

      3.    The obligations of Key Principal under this Guaranty shall survive
any foreclosure proceeding, any foreclosure sale, any delivery of any deed in
lieu of foreclosure, and any release of record of the Security Instrument.

      4.    Key Principal's obligations under this Guaranty constitute an
unconditional guaranty of payment and not merely a guaranty of collection. If
Key Principal (or any Key Principal, if more than one) is a married person, Key
Principal (or each such married Key Principal, if more than one) agrees that
Lender may look to all of Key Principal's community property and separate
property to satisfy Key Principal's obligations under this Guaranty.

      5.    The obligations of Key Principal under this Guaranty shall be
performed without demand by Lender and shall be unconditional irrespective of
the genuineness, validity, regularity or enforceability of the Note, the
Security Instrument, or any other Loan Document, and without regard to


                                                                        Page A-2



                                       2
<PAGE>   62

any other circumstance which might otherwise constitute a legal or equitable
discharge of a surety or a guarantor. Key Principal hereby waives any and all
benefits and defenses under California Civil Code SECTION 2810 and agrees that
by doing so Key Principal shall be liable even if Borrower had no liability at
the time of execution of the Note, the Security Instrument or any other Loan
Document, or thereafter ceases to be liable. Key Principal hereby waives any and
all benefits and defenses under California Civil Code SECTION 2809 and agrees
that by doing so Key Principal's liability may be larger in amount and more
burdensome than that of Borrower. Key Principal hereby waives the benefit of all
principles or provisions of law, statutory or otherwise, which are or might be
in conflict with the terms of this Guaranty and agrees that Key Principal's
obligations shall not be affected by any circumstances, whether or not referred
to in this Guaranty, which might otherwise constitute a legal or equitable
discharge of a surety or a guarantor. Key Principal hereby waives the benefits
of any right of discharge under any and all statutes or other laws relating to
guarantors or sureties and any other rights of sureties and guarantors
thereunder. Without limiting the generality of the foregoing, Key Principal
hereby waives, to the fullest extent permitted by law, diligence in collecting
the Indebtedness, presentment, demand for payment, protest, all notices with
respect to the Note and this Guaranty which may be required by statute, rule of
law or otherwise to preserve Lender's rights against Key Principal under this
Guaranty, including notice of acceptance, notice of any amendment of the Loan
Documents, notice of the occurrence of any default or Event of Default, notice
of intent to accelerate, notice of acceleration, notice of dishonor, notice of
foreclosure, notice of protest, and notice of the incurring by Borrower of any
obligation or indebtedness. Key Principal also waives, to the fullest extent
permitted by law, all rights to require Lender to (a) proceed against Borrower
or any other guarantor of Borrower's payment or performance with respect to the
Indebtedness (an "OTHER GUARANTOR"), (b) if Borrower or any guarantor is a
partnership, proceed against any general partner of Borrower or the guarantor,
(c) proceed against or exhaust any collateral held by Lender to secure the
repayment of the Indebtedness, or (d) pursue any other remedy it may now or
hereafter have against Borrower, or, if Borrower is a partnership, any general
partner of Borrower, including any and all benefits under California Civil Code
Sections 2845, 2849 and 2850.

      6.    Key Principal understands that the exercise by Lender of certain
rights and remedies contained in the Security Instrument (such as a nonjudicial
foreclosure sale) may affect or eliminate Key Principal's right of subrogation
against Borrower and that Key Principal may therefore incur a partially or
totally nonreimbursable liability under this Guaranty. Nevertheless, Key
Principal hereby authorizes and empowers Lender to exercise, in its sole and
absolute discretion, any right or remedy, or any combination thereof, which may
then be available, since it is the intent and purpose of Key Principal that the
obligations under this Guaranty shall be absolute, independent and unconditional
under any and all circumstances. Key Principal expressly waives any defense
(which defense, if Key Principal had not given this waiver, Key Principal might
otherwise have) to a judgment against Key Principal by reason of a nonjudicial
foreclosure. Without limiting the generality of the foregoing, Key Principal
hereby expressly waives any and all benefits under (i) California Code of Civil
Procedure SECTION 580a (which Section, if Key Principal had not given this
waiver, would otherwise limit Key Principal's liability after a nonjudicial
foreclosure sale to the difference between the obligations of Key Principal
under this Guaranty and the fair market value of the property or interests sold
at such nonjudicial foreclosure sale), (ii) California Code of Civil Procedure
SECTIONS 580b and 580d (which Sections, if Key Principal had not given this
waiver, would otherwise limit Lender's right to recover a deficiency judgment
with respect to purchase money obligations and after a nonjudicial foreclosure
sale, respectively), and (iii) California Code of Civil Procedure SECTION 726
(which Section, if Key Principal had not given this waiver, among other things,
would otherwise require Lender to exhaust all of its security before a personal
judgment could be obtained for a deficiency). Notwithstanding any


                                                                        Page A-3



                                       3
<PAGE>   63

foreclosure of the lien of the Security Instrument, whether by the exercise of
the power of sale contained in the Security Instrument, by an action for
judicial foreclosure or by Lender's acceptance of a deed in lieu of foreclosure,
Key Principal shall remain bound under this Guaranty.

      7.    In accordance with SECTION 2856 of the California Civil Code, Key
Principal also waives any right or defense based upon an election of remedies by
Lender, even though such election (e.g., nonjudicial foreclosure with respect to
any collateral held by Lender to secure repayment of the Indebtedness) destroys
or otherwise impairs the subrogation rights of Key Principal or the right of Key
Principal (after payment of the obligations guaranteed by Key Principal under
this Guaranty) to proceed against Borrower for reimbursement, or both, by
operation of SECTION 580d of the Code of Civil Procedure or otherwise.

      8.    In accordance with SECTION 2856 of the California Civil Code, Key
Principal waives any and all other rights and defenses available to Key
Principal by reason of SECTIONS 2787 through 2855, inclusive, of the California
Civil Code, including any and all rights or defenses Key Principal may have by
reason of protection afforded to Borrower with respect to any of the obligations
of Key Principal under this Guaranty pursuant to the antideficiency or other
laws of the State of California limiting or discharging Borrower's Indebtedness,
including SECTIONS 580a, 580b, 580d, and 726 of the California Code of Civil
Procedure.

      9.    In accordance with SECTION 2856 of the California Civil Code, Key
Principal agrees to withhold the exercise of any and all subrogation and
reimbursement rights against Borrower, against any other person, and against any
collateral or security for the Indebtedness, including any such rights pursuant
to SECTIONS 2847 and 2848 of the California Civil Code, until the Indebtedness
has been indefeasibly paid and satisfied in full, all obligations owed to Lender
under the Loan Documents have been fully performed, and Lender has released,
transferred or disposed of all of its right, title and interest in such
collateral or security.

      10.   At any time or from time to time and any number of times, without
notice to Key Principal and without affecting the liability of Key Principal,
(a) the time for payment of the principal of or interest on the Indebtedness may
be extended or the Indebtedness may be renewed in whole or in part; (b) the time
for Borrower's performance of or compliance with any covenant or agreement
contained in the Note, the Security Instrument or any other Loan Document,
whether presently existing or hereinafter entered into, may be extended or such
performance or compliance may be waived; (c) the maturity of the Indebtedness
may be accelerated as provided in the Note, the Security Instrument, or any
other Loan Document; (d) the Note, the Security Instrument, or any other Loan
Document may be modified or amended by Lender and Borrower in any respect,
including an increase in the principal amount; and (e) any security for the
Indebtedness may be modified, exchanged, surrendered or otherwise dealt with or
additional security may be pledged or mortgaged for the Indebtedness.

      11.   If more than one person executes this Guaranty, the obligations of
those persons under this Guaranty shall be joint and several. Lender, in its
discretion, may (a) bring suit against Key Principal, or any one or more of the
persons constituting Key Principal, and any Other Guarantor, jointly and
severally, or against any one or more of them; (b) compromise or settle with any
one or more of the persons constituting Key Principal, or any Other Guarantor,
for such consideration as Lender may deem proper; (c) release one or more of the
persons constituting Key Principal, or any Other Guarantor, from liability; and
(d) otherwise deal with Key Principal and any Other Guarantor, or any one or
more of them, in any manner, and no such action shall impair the rights of
Lender to collect


                                                                        Page A-4



                                       4
<PAGE>   64

from Key Principal any amount guaranteed by Key Principal under this Guaranty.
Nothing contained in this paragraph shall in any way affect or impair the rights
or obligations of Key Principal with respect to any Other Guarantor.

      12.   Any indebtedness of Borrower held by Key Principal now or in the
future is and shall be subordinated to the Indebtedness and any such
indebtedness of Borrower shall be collected, enforced and received by Key
Principal, as trustee for Lender, but without reducing or affecting in any
manner the liability of Key Principal under the other provisions of this
Guaranty.

      13.   Key Principal shall have no right of, and hereby waives any claim
for, subrogation or reimbursement against Borrower or any general partner of
Borrower by reason of any payment by Key Principal under this Guaranty, whether
such right or claim arises at law or in equity or under any contract or statute,
until the Indebtedness has been paid in full and there has expired the maximum
possible period thereafter during which any payment made by Borrower to Lender
with respect to the Indebtedness could be deemed a preference under the United
States Bankruptcy Code.

      14.   If any payment by Borrower is held to constitute a preference under
any applicable bankruptcy, insolvency, or similar laws, or if for any other
reason Lender is required to refund any sums to Borrower, such refund shall not
constitute a release of any liability of Key Principal under this Guaranty. It
is the intention of Lender and Key Principal that Key Principal's obligations
under this Guaranty shall not be discharged except by Key Principal's
performance of such obligations and then only to the extent of such performance.

      15.   Key Principal shall from time to time, upon request by Lender,
deliver to Lender such financial statements as Lender may reasonably require.

      16.   Lender may assign its rights under this Guaranty in whole or in part
and, upon any such assignment, all the terms and provisions of this Guaranty
shall inure to the benefit of such assignee to the extent so assigned. The terms
used to designate any of the parties herein shall be deemed to include the
heirs, legal representatives, successors and assigns of such parties.

      17.   This Guaranty and the other Loan Documents represent the final
agreement between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements. There are no unwritten oral
agreements between the parties. All prior or contemporaneous agreements,
understandings, representations, and statements, oral or written, are merged
into this Guaranty and the other Loan Documents. Key Principal acknowledges that
it has received a copy of the Note and all other Loan Documents. Neither this
Guaranty nor any of its provisions may be waived, modified, amended, discharged,
or terminated except by an agreement in writing signed by the party against
which the enforcement of the waiver, modification, amendment, discharge, or
termination is sought, and then only to the extent set forth in that agreement.

      18.   Key Principal agrees that any controversy arising under or in
relation to this Guaranty shall be litigated exclusively in the jurisdiction
where the Land is located (the "PROPERTY JURISDICTION"). The state and federal
courts and authorities with jurisdiction in the Property Jurisdiction shall have
exclusive jurisdiction over all controversies which shall arise under or in
relation to this Guaranty, the Note, the Security Instrument or any other Loan
Document. Key Principal irrevocably consents to service, jurisdiction, and venue
of such courts for any such litigation and


                                                                        Page A-5



                                       5
<PAGE>   65

waives any other venue to which it might be entitled by virtue of domicile,
habitual residence or otherwise.

      19.   Key Principal (or each Key Principal, if more than one) agrees to
notify Lender (in the manner for giving notices provided in Section 31 of the
Security Instrument) of any change in Key Principal's address within 10 Business
Days after such change of address occurs.

      20.   KEY PRINCIPAL AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY
JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS GUARANTY OR THE RELATIONSHIP
BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY
AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE
EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO
TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH
THE BENEFIT OF COMPETENT LEGAL COUNSEL.

      IN WITNESS WHEREOF, Key Principal has signed and delivered this Guaranty
or has caused this Guaranty to be signed and delivered by its duly authorized
representative.


                                          KEY PRINCIPAL

                                          ARV ASSISTED LIVING, INC., a Delaware
                                          corporation


                                          ______________________________________
                                          Name:     Abdo H. Khoury
                                          Title:    Senior Vice President
                                          Address:  245 Fischer Avenue, D-1
                                                    Costa Mesa, California 92626
                                          Social Security/Employer ID No.:
                                                    33-0160968


                                                                        Page A-6



                                       6