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                                                                   EXHIBIT 10.12
                      Banc One Capital Funding Corporation
                                150 E. Gay Street
                                   24TH Floor
                              Columbus, Ohio 43215

                                  June 28, 1999

Retirement Inns III, LLC
245 Fisher Avenue, D-1
Costa Mesa, California 92626

                Re:     Loans in the aggregate amount of $39,703,100 (the
                        "Loans") from Banc One Capital Funding Corporation
                        ("BOCFC") to Retirements Inns II (the "Borrower"), which
                        is a direct or indirect subsidiary or affiliate of ARV
                        Assisted Living, Inc. ("ARV"), secured by first lien
                        deeds of trust on assisted living properties (the
                        "Projects")

Ladies and Gentlemen:

                This will confirm the following agreements by and among BOCFC
and Borrower with respect to the Loans:

        1.      In the engagement letter dated June 10, 1999 from BOCFC to ARV
regarding, among other things, the above-referenced Loans (the "Engagement
Letter"), ARV and the Borrower, in consideration of BOCFC making the Loans,
granted to BOCFC the last right of refusal to arrange or provide any permanent
financing to replace the Loans at or prior to the maturity thereof on July 1,
2001 (the "Maturity Date"). The Loans may be voluntarily prepaid by the Borrower
thereof only during the one hundred eighty (180) day period immediately
preceding the Maturity Date. Said last right of refusal with respect to
permanent financing to replace any Loan will be extinguished if BOCFC exercises
its option to extend the Maturity Date for such Loan as described in the
Engagement Letter and the promissory note of the Borrower of such Loan
evidencing the Loan (the "Lender Extension Option").

                The terms and conditions of such last right of refusal are as
follows:

                (a)     At any time within the one hundred eighty (180) day
                        period immediately preceding the Maturity Date, Borrower
                        may deliver to BOCFC a copy of any proposal from another
                        lender for permanent financing ("Replacement Financing")
                        to replace one or more of the Loans which Borrower
                        desires to accept (the "Replacement Loan Proposal").
                        BOCFC will have up to ten (10) days from the date of its
                        receipt of the Replacement Loan Proposal, within which
                        to exercise its last right of refusal, but not
                        obligation, by issuing an engagement letter to Borrower
                        thereby notifying Borrower that BOCFC will attempt to
                        arrange for or provide Replacement Financing for the
                        Loans


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                        described in the Replacement Loan Proposal substantially
                        upon the terms and conditions set forth in the
                        Replacement Loan Proposal. BOCFC will also have the
                        right to exercise its Lender Extension Option with
                        respect to such Loans until the ninetieth (90th) day
                        immediately preceding the Maturity Date.

                (b)     If BOCFC exercises its last right of refusal with
                        respect to the Replacement Financing for any Loan or
                        Loans, it will have a period of thirty (30) days from
                        the date BOCFC receives all requested third party
                        information, and property information and other
                        underwriting due diligence information requested from
                        Borrower, following the date of such exercise, within
                        which to issue a binding commitment for such Replacement
                        Financing. If BOCFC issues such binding commitment, it
                        will have a period of two weeks following such issuance
                        to close the Replacement Financing. If it does not issue
                        a binding commitment for such Replacement Financing
                        within such period, it will then be deemed to have
                        withdrawn the exercise of its last right of refusal with
                        respect to such Replacement Financing.

                (c)     If BOCFC does not exercise its last right of refusal
                        with respect to the Replacement Financing for any Loan
                        or Loans within the ten (10) day period referred to in
                        paragraph 1(a), or if, after exercising its last right
                        of refusal with respect to such Replacement Financing,
                        it fails to issue a binding commitment for such
                        Replacement Financing within the time period set forth
                        in paragraph 1(b), Borrower will be free to obtain such
                        Replacement Financing from the lender issuing the
                        Replacement Loan Proposal substantially upon the terms
                        and conditions set forth in the Replacement Loan
                        Proposal. Borrower shall not obtain Replacement
                        Financing for any Loan without first providing BOCFC
                        with the opportunity to exercise its last right of
                        refusal to provide such Replacement Financing in
                        accordance with paragraphs 1(a) and 1(b) hereof.

                (d)     Notwithstanding the provisions of the preceding
                        paragraphs, if after BOCFC has failed to exercise its
                        last right of refusal with respect to the Replacement
                        Financing for any Loan or Loans within the time period
                        set forth in paragraph 1(a), or failed to issue the
                        binding commitment for such Replacement Financing within
                        the time period set forth in paragraph 1(b), Borrower
                        desires to obtain such Replacement Financing from the
                        lender which submitted the Replacement Loan Proposal or
                        from another lender, upon Terms (as hereinafter defined)
                        which are materially different from the Terms set forth
                        in the Replacement Loan Proposal submitted to BOCFC with
                        respect to such Replacement Financing, then BOCFC will
                        have a continuing last right of refusal to arrange or
                        provide for such Replacement Financing upon such
                        materially different Terms and Borrower shall not obtain
                        such Replacement Financing upon such materially
                        different Terms from any other lender without first
                        providing BOCFC with notice of such materially different
                        Terms and the opportunity to exercise its last right of
                        refusal to provide such Replacement Financing upon such
                        materially different Terms in accordance



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                        with paragraphs 1(a) and (b) hereof. For purposes of
                        this paragraph 1, the "Terms" of any Replacement
                        Financing shall be: (i) the interest rate; (ii) the loan
                        amount; (iii) the term; (iv) any loan origination and
                        other fees, equity participations, options, warrants or
                        similar consideration provided to the lender; (v) the
                        collateral; and (vi) the guarantor or guarantors.

        2.      In connection with the Loans, Borrower and BOCFC have entered
into that certain Agreement to Amend or Comply, of even date herewith (the
"Agreement to Amend or Comply"), whereby the Borrower has agreed with BOCFC to,
among other things, assist and cooperate with Lender in the event Lender sells
the Loans in whole or in part. By this letter agreement, Borrower and BOCFC
agree that such Agreement to Amend and Comply shall further extend to and apply
to any refinancing of the Loans with FHA, provided, however, that such
refinancing satisfies the following conditions: (i) the interest rate of the
refinancing shall be identical to the applicable interest rate to the Loans;
(ii) no prepayment premium shall be due and payable by the Borrower to BOCFC
with respect to the refinancing of the Loans; (iii) the terms of the refinancing
shall be substantially identical to the terms of the Loans, subject to FHA
requirements; and (iv) the term of the refinancing shall be for a ten (10) year
period.

        3.      Any breach or default by Borrower in the performance of its
obligations under this letter shall constitute a default under the documents
evidencing, securing and guarantying the Loans to which Borrower is a party.

                Please indicate your agreement to the terms set forth herein by
signing a copy of this letter and returning it to the undersigned. Once signed
by all parties, this letter shall constitute a legally binding agreement among
the parties with respect to the matters set forth herein last.


                                        Very truly yours,

                                        Banc One Capital Funding Corporation

                                        By:
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                                           Michael S. Wood, Vice President


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                        Agreed this 28th day of June, 1999


                                        Retirement Inns III, LLC

                                        By:
                                           -------------------------------------
                                           Abdo H. Khoury
                                           Manager




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