<PAGE>   1

                                                                   EXHIBIT 10.12

FHA FORM 92466

                            REGULATORY AGREEMENT FOR
                          MULTIFAMILY HOUSING PROJECTS


Project No.       123-22013

Mortgagee:        RED MORTGAGE CAPITAL, INC.

Amount of Mortgage Note:  $5,782,900.00                   Date: January 29, 2001

Mortgage:  Recorded:  State:  Arizona  County: Maricopa   Date: January 29, 2001
           Concurrently Herewith
           Book  __________   Page  _____________   Instrument No.  ____________


         Originally endorsed for insurance under Section 232 pursuant to Section
223(f) of the National Housing Act.

         This Agreement entered into as of this 29th day of January, 2001,
between ARV CHANDLER VILLAS, LP, a California limited partnership whose address
is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, their
successors, heirs, and assigns (jointly and severally, hereinafter referred to
as Owners) and the undersigned Secretary of Housing and Urban Development and
his successors (hereinafter referred to as Secretary).

         In consideration of the endorsement for insurance by the Secretary of
the above described note or in consideration of the consent of the Secretary to
the transfer of the mortgaged property or the sale and conveyance of the
mortgaged property by the Secretary, and in order to comply with the
requirements of the National Housing Act, as amended, and the Regulations
adopted by the Secretary pursuant thereto, Owners agree for themselves, their
successors, heirs and assigns, that in connection with the mortgaged property
and the project operated thereon and so long as the contract of mortgage
insurance continues in effect, and during such further period of time as the
Secretary shall be the owner, holder or reinsurer of the mortgage, or during any
time the Secretary is obligated to insure a mortgage on the mortgage property:

         1.       Owners, except as limited by paragraph 17 hereof, assume and
                  agree to make promptly all payments due under the note and
                  mortgage.

         2.       (a) Owners shall establish or continue to maintain a reserve
                  fund for replacements by the allocation to such reserve fund
                  in a separate account with the mortgagee or in a safe and
                  responsible depository designated by the mortgagee,
                  concurrently with the beginning of payments towards
                  amortization of the principal of the mortgage insured or held
                  by the Secretary of an amount equal to $4,494.50 per month
                  ($3,320.17 for Realty and $1,174.33 for Major Movable
                  Equipment) unless a different date or amount is approved in
                  writing by the Secretary. An initial deposit to

<PAGE>   2
                                    -- 2 --


                  the Fund of $463,546.00 ($322,622.00 for Realty and
                  $140,924.00 for Major Movable Equipment) has been made. Such
                  fund, whether in the form of a cash deposit or invested in
                  obligations of, or fully guaranteed as to principal by, the
                  United States of America shall at all times be under the
                  control of the mortgagee. Disbursements from such fund,
                  whether for the purpose of effecting replacement of structural
                  elements and mechanical equipment of the project or for any
                  other purpose, may be made only after receiving the consent in
                  writing of the Secretary. In the event that the owner is
                  unable to make a mortgage note payment on the due date and
                  that payment cannot be made prior to the due day of the next
                  such installment or when the mortgagee has agreed to forgo
                  making an election to assign the mortgage to the Secretary
                  based on a monetary default, or to withdraw an election
                  already made, the Secretary is authorized to instruct the
                  mortgagee to withdraw funds from the reserve fund for
                  replacements to be applied to the mortgage payment in order to
                  prevent or cure the default. In addition, in the event of a
                  default in the terms of the mortgage, pursuant to which the
                  loan has been accelerated, the Secretary may apply or
                  authorize the application of the balance in such fund to the
                  amount due on the mortgage debt as accelerated.

                  (b) Where Owners are acquiring a project already subject to an
                  insured mortgage, the reserve fund for replacements to be
                  established will be equal to the amount due to be in such fund
                  under existing agreements or charter provisions at the time
                  Owners acquire such project, and payments hereunder shall
                  begin with the first payment due on the mortgage after
                  acquisition, unless some other method of establishing and
                  maintaining the fund is approved in writing by the Secretary.

         3.       Real property covered by the mortgage and this agreement is
                  described in Exhibit A attached hereto.

                  (This paragraph 4 is not applicable to cases insured under
                  Section 232).

<PAGE>   3
                                    -- 3 --


         5.       (a) If the mortgage is originally a Secretary-held purchase
                  money mortgage, or is originally endorsed for insurance under
                  any Section other than Sections 231 or 232 and is not designed
                  primarily for occupancy by elderly persons, Owners shall not
                  in selecting tenants discriminate against any person or
                  persons by reason of the fact that there are children in the
                  family.

                  (b) If the mortgage is originally endorsed for insurance under
                  Section 221, Owners shall in selecting tenants give to
                  displaced persons or families an absolute preference or
                  priority of occupancy which shall be accomplished as follows:

                           (1)      For a period of sixty (60) days from the
                                    date of original offering, unless a shorter
                                    period of time is approved in writing by the
                                    Secretary, all units shall be held for such
                                    preferred applicants, after which time any
                                    remaining unrented units may be rented to
                                    non-preferred applicants;

                           (2)      Thereafter, and on a continuing basis, such
                                    preferred applicants shall be given
                                    preference over non-preferred applicants in
                                    their placement on a waiting list to be
                                    maintained by the Owners; and

                           (3)      Through such further provisions agreed to in
                                    writing by the parties.

                  (c) Without the prior written approval of the Secretary not
                  more than 25% of the number of units in a project insured
                  under Section 231 shall be occupied by persons other than
                  elderly persons.

                  (d) All advertising or efforts to rent a project insured under
                  Section 231 shall reflect a bona fide effort of the Owners to
                  obtain occupancy by elderly persons.

         6.       Owners shall not without the prior written approval of the
                  Secretary:

                  (a) Convey, transfer, or encumber any of the mortgaged
                  property, or permit the conveyance, transfer or encumbrance of
                  such property.

<PAGE>   4
                                    -- 4 --


                  (b) Assign, transfer, dispose of, or encumber any personal
                  property of the project, including rents, or pay out any funds
                  except from surplus cash, except for reasonable operating
                  expenses and necessary repairs.

                  (c) Convey, assign, or transfer any beneficial interest in any
                  trust holding title to the property, or the interest of any
                  general partner in a partnership owning the property, or any
                  right to manage or receive the rents and profits from the
                  mortgaged property.

                  (d) Remodel, add to, reconstruct, or demolish any part of the
                  mortgaged property or subtract from any real or personal
                  property of the project.

                  (e) Make, or receive and retain, any distribution of assets or
                  any income of any kind of the project except surplus cash and
                  except on the following conditions:

                           (1)      All distributions shall be made only as of
                                    and after the end of a semiannual or annual
                                    fiscal period, and only as permitted by the
                                    law of the applicable jurisdiction;

                           (2)      No distribution shall be made from borrowed
                                    funds, prior to the completion of the
                                    project or when there is any default under
                                    this Agreement or under the note or
                                    mortgage;

                           (3)      Any distribution of any funds of the
                                    project, which the party receiving such
                                    funds is not entitled to retain hereunder,
                                    shall be held in trust separate and apart
                                    from any other funds; and

                           (4)      There shall have been compliance with all
                                    outstanding notices of requirements for
                                    proper maintenance of the project.

                  (f) Engage, except for natural persons, in any other business
                  or activity, including the operation of any other rental
                  project, or incur any liability or obligation not in
                  connection with the project.

                  (g) Require, as a condition of the occupancy or leasing of any
                  unit in the project, any consideration or deposit other than
                  the prepayment of the first month's rent plus a security
                  deposit in an amount not in excess of one month's rent to
                  guarantee the performance of the covenants of the lease. Any
                  funds collected as security deposits shall be kept separate
                  and apart from all other funds of the project in a trust
                  account the amount of which shall at all times equal or exceed
                  the aggregate of all outstanding obligations under said
                  account.

                  (h) Permit the use of the dwelling accommodations or nursing
                  facilities of the project for any purpose except the use which
                  was originally intended, or permit commercial use greater than
                  that originally approved by the Secretary.

         7.       Owners shall maintain the mortgaged premises, accommodations
                  and the grounds and equipment appurtenant thereto, in good
                  repair and condition. In the event all or

<PAGE>   5
                                    -- 5 --


                  any of the buildings covered by the mortgage shall be
                  destroyed or damaged by fire or other casualty, the money
                  derived from any insurance on the property shall be applied in
                  accordance with the terms of the mortgage.

         8.       Owners shall not file any petition in bankruptcy or for a
                  receiver or in insolvency or for reorganization or
                  composition, or make any assignment for the benefit of
                  creditors or to a trustee for creditors, or permit an
                  adjudication in bankruptcy or the taking possession of the
                  mortgaged property or any part thereof by a receiver or the
                  seizure and sale of the mortgaged property or any part hereof
                  under judicial process or pursuant to any power of sale, and
                  fail to have such adverse actions set aside within forty-five
                  (45) days.

         9.       (a) Any management contract entered into by Owners or any of
                  them involving the project shall contain a provision that, in
                  the event of default hereunder, it shall be subject to
                  termination without penalty upon written request by the
                  Secretary. Upon such request Owners shall immediately arrange
                  to terminate the contract within a period of not more than
                  thirty (30) days and shall make arrangements satisfactory to
                  the Secretary for continuing proper management of the project.

                  (b) Payment for services, supplies, or materials shall not
                  exceed the amount ordinarily paid for such services, supplies,
                  or materials in the area where the services are rendered or
                  the supplies or materials furnished.

                  (c) The mortgaged property, equipment, buildings, plans,
                  offices, apparatus, devices, books, contracts, records,
                  documents, and other papers relating thereto shall at all
                  times be maintained in reasonable condition for proper audit
                  and subject to examination and inspection at any reasonable
                  time by the Secretary or his duly authorized agents. Owners
                  shall keep copies of all written contracts or other
                  instruments which affect the mortgaged property, all or any of
                  which may be subject to inspection and examination by the
                  Secretary or his duly authorized agents.

                  (d) The books and accounts of the operations of the mortgaged
                  property and of the project shall be kept in accordance with
                  the requirements of the Secretary.

                  (e) Within sixty (60) days following the end of each fiscal
                  year the Secretary shall be furnished with a complete annual
                  financial report based upon an examination of the books and
                  records of mortgagor prepared in accordance with the
                  requirements of the Secretary, prepared and certified to by an
                  officer or responsible Owner and, when required by the
                  Secretary, prepared and certified by a Certified Public
                  Accountant, or other person acceptable to the Secretary.

                  (f) At the request of the Secretary, his agents, employees, or
                  attorneys, the Owners shall furnish monthly occupancy reports
                  and shall give specific answers to questions upon which
                  information is desired from time to time relative to income,
                  assets, liabilities, contracts, operation, and condition of
                  the property and the status of the insured mortgage.

<PAGE>   6
                                    -- 6 --


                  (g) All rents and other receipts of the project shall be
                  deposited in the name of the project in a financial
                  institution, whose deposits are insured by an agency of the
                  Federal Government. Such funds shall be withdrawn only in
                  accordance with the provisions of this Agreement for expenses
                  of the project or for distributions of surplus cash as
                  permitted by paragraph 6(e) above. Any Owner receiving funds
                  of the project other than by such distribution of surplus cash
                  shall immediately deposit such funds in the project bank
                  account and failing so to do in violation of this Agreement
                  shall hold such funds in trust. Any Owner receiving property
                  of the project in violation of this Agreement shall hold such
                  funds in trust. At such time as the Owners shall have lost
                  control and/or possession of the project, all funds held in
                  trust shall be delivered to the mortgagee to the extent that
                  the mortgage indebtedness has not been satisfied.

                  (h) If the mortgage is insured under Section 232:

                           1. The Owners or lessees shall at all times maintain
                           in full force and effect from the state or other
                           licensing authority such license as may be required
                           to operate the project as a nursing home and shall
                           not lease all or part of the project except on terms
                           approved by the Secretary.

                           2. The Owners shall suitably equip the project for
                           nursing home operations.

                           3. The Owners shall execute a Security Agreement and
                           Financing Statement (or other form of chattel lien)
                           upon all items of equipment, except as the Secretary
                           may exempt, which are not incorporated as security
                           for the insured mortgage. The Security Agreement and
                           Financing Statement shall constitute a first lien
                           upon such equipment and shall run in favor of the
                           mortgagee as additional security for the insured
                           mortgage.

                           4. The Owners will not alter, or suffer or permit the
                           alteration of, the nursing home license, bed
                           authority or other operating authority of the Project
                           without the advance written approval of the
                           Secretary. In the event that any such alteration is
                           proposed, upon learning of that event the Owners will
                           advise the Secretary promptly. The Owners will insert
                           the foregoing requirements into any operating lease
                           for the Project.

                           5. The Owners will not enter into, amend, or agree to
                           the assignment of, any operating lease for all or
                           part of the Project without the advance written
                           approval of, and on terms satisfactory to, the
                           Secretary.

                  (i) If the mortgage is insured under Section 231, Owners or
                  lessees shall at all times maintain in full force and effect
                  from the state or other licensing authority such license as
                  may be required to operate the project as housing for the
                  elderly.

         10.      Owners will comply with the provisions of any Federal, State,
                  or local law prohibiting discrimination in housing on the
                  grounds of race, color, religion or creed, sex, or national
                  origin, including Title VIII of the Civil Rights Act of 1968
                  (Public

<PAGE>   7
                                    -- 7 --


                  Law 90-284; 82 Stat. 73), as amended, Executive Order 11063,
                  and all requirements imposed by or pursuant to the regulations
                  of the Department of Housing and Urban Development
                  implementing these authorities (including 24 CFR Parts 100,
                  107 and 110, and Subparts I and M of Part 200).

         11.      Upon a violation of any of the above provisions of this
                  Agreement by Owners, the Secretary may give written notice
                  thereof, to Owners, by registered or certified mail, addressed
                  to the addresses stated in this Agreement, or such other
                  addresses as may subsequently, upon appropriate written notice
                  thereof to the Secretary, be designated by the Owners as their
                  legal business address. If such violation is not corrected to
                  the satisfaction of the Secretary within thirty (30) days
                  after the date such notice is mailed or within such further
                  time as the Secretary determines is necessary to correct the
                  violation, without further notice the Secretary may declare a
                  default under this Agreement effective on the date of such
                  declaration of default and upon such default the Secretary
                  may:

                  (a)      (i)      If the Secretary holds the note - declare
                                    the whole of said indebtedness immediately
                                    due and payable and then proceed with the
                                    foreclosure of the mortgage;

                           (ii)     If said note is not held by the Secretary -
                                    notify the holder of the note of such
                                    default and request holder to declare a
                                    default under the note and mortgage, and
                                    holder after receiving such notice and
                                    request, but not otherwise, at its option,
                                    may declare the whole indebtedness due, and
                                    thereupon proceed with foreclosure of the
                                    mortgage, or assign the note and mortgage to
                                    the Secretary as provided in the
                                    Regulations;

                  (b) Collect all rents and charges in connection with the
                  operation of the project and use such collections to pay the
                  Owners' obligations under this Agreement and under the note
                  and mortgage and the necessary expenses of preserving the
                  property and operating the project.

                  (c) Take possession of the project, bring any action necessary
                  to enforce any rights of the Owners growing out of the project
                  operation, and operate the project in accordance with the
                  terms of this Agreement until such time as the Secretary in
                  his discretion determines that the Owners are again in a
                  position to operate the project in accordance with the terms
                  of this Agreement and in compliance with the requirements of
                  the note and mortgage.

                  (d) Apply to any court, state or Federal, for specific
                  performance of this Agreement, for an injunction against any
                  violation of the Agreement, for the appointment of a receiver
                  to take over and operate the project in accordance with the
                  terms of the Agreement, or for such other relief as may be
                  appropriate, since the injury to the Secretary arising from a
                  default under any of the terms of this Agreement would be
                  irreparable and the amount of damage would be difficult to
                  ascertain.

<PAGE>   8
                                    -- 8 --


         12.      As security for the payment due under this Agreement to the
                  reserve fund for replacements, and to secure the Secretary
                  because of his liability under the endorsement of the note for
                  insurance, and as security for the other obligations under
                  this Agreement, the Owners respectively assign, pledge and
                  mortgage to the Secretary their rights to the rents, profits,
                  income and charges of whatsoever sort which they may receive
                  or be entitled to receive from the operation of the mortgaged
                  property, subject, however, to any assignment of rents in the
                  insured mortgage referred to herein. Until a default is
                  declared under this Agreement, however, permission is granted
                  to Owners to collect and retain under the provisions of this
                  Agreement such rents, profits, income, and charges, but upon
                  default this permission is terminated as to all rents due or
                  collected thereafter.

         13.      As used in this Agreement the term:

                  (a) "Mortgage" includes "Deed of Trust", "Chattel Mortgage",
                  "Security Instrument", and any other security for the note
                  identified herein, and endorsed for insurance or held by the
                  Secretary;

                  (b) "Mortgagee" refers to the holder of the mortgage
                  identified herein, its successors and assigns;

                  (c) "Owners" refers to the persons named in the first
                  paragraph hereof and designated as Owners, their successors,
                  heirs and assigns;

                  (d) "Mortgaged Property" includes all property, real, personal
                  or mixed, covered by the mortgage or mortgages securing the
                  note endorsed for insurance or held by the Secretary;

                  (e) "Project" includes the mortgaged property and all its
                  other assets of whatsoever nature or wheresoever situate, used
                  in or owned by the business conducted on said mortgaged
                  property, which business is providing housing and other
                  activities as are incidental thereto;

                  (f) "Surplus Cash" means any cash remaining after:

                           (1)      the payment of:

                                    (i)      All sums due or currently required
                                             to be paid under the terms of any
                                             mortgage or note insured or held by
                                             the Secretary;

                                    (ii)     All amounts required to be
                                             deposited in the reserve fund for
                                             replacements;

                                    (iii)    All obligations of the project
                                             other than the insured mortgage
                                             unless funds for payment are set
                                             aside or deferment of payment has
                                             been approved by the Secretary; and

<PAGE>   9
                                    -- 9 --


                           (2)      the segregation of:

                                    (i)      An amount equal to the aggregate of
                                             all special funds required to be
                                             maintained by the project; and

                                    (ii)     All tenant security deposits held.

                  (g) "Distribution" means any withdrawal or taking of cash or
                  any assets of the project, including the segregation of cash
                  or assets for subsequent withdrawal within the limitations of
                  Paragraph 6(e) hereof, and excluding payment for reasonable
                  expenses incident to the operation and maintenance of the
                  project.

                  (h) "Default" means a default declared by the Secretary when a
                  violation of this Agreement is not corrected to his
                  satisfaction within the time allowed by this Agreement or such
                  further time as may be allowed by the Secretary after written
                  notice;

                  (i) "Section" refers to a Section of the National Housing Act,
                  as amended.

                  (j) "Displaced persons or families" shall mean a family or
                  families, or a person, displaced from an urban renewal area,
                  or as the result of government action, or as a result of a
                  major disaster as determined by the President pursuant to the
                  Disaster Relief Act of 1970.

                  (k) "Elderly person" means any person, married or single, who
                  is sixty-two years of age or over.

         14.      This instrument shall bind, and the benefits shall inure to,
                  the respective Owners, their heirs, legal representatives,
                  executors, administrators, successors in office or interest,
                  and assigns, and to the Secretary and his successors so long
                  as the contract of mortgage insurance continues in effect, and
                  during such further time as the Secretary shall be the owner,
                  holder, or reinsurer of the mortgage, or obligated to reinsure
                  the mortgage.

         15.      Owners warrant that they have not, and will not, execute any
                  other agreement with provisions contradictory of, or in
                  opposition to, the provisions hereof, and that, in any event,
                  the requirements of this Agreement are paramount and
                  controlling as to the rights and obligations set forth and
                  supersede any other requirements in conflict therewith.

         16.      The invalidity of any clause, part or provision of this
                  Agreement shall not affect the validity or the remaining
                  portions thereof.

         17.      The following Owners: ARV Chandler Villas, L.P., and all
                  present and future general and limited partners thereof, do
                  not assume personal liability for payments due under the note
                  and mortgage, or for the payments to the reserve for
                  replacements, or for matters not under their control, provided
                  that said Owners shall remain liable under this Agreement only
                  with respect to the matters hereinafter stated; namely:

<PAGE>   10
                                    -- 10 --


                  (a) for funds or property of the project coming into their
                  hands which, by the provisions hereof, they are not entitled
                  to retain; and

                  (b) for their own acts and deeds or acts and deeds of others
                  which they have authorized in violation of the provisions
                  hereof.

(To be executed with formalities for recording a deed to real estate)


               [SIGNATURES AND NOTARIES APPEAR ON FOLLOWING PAGES]

<PAGE>   11
                                    -- 11 --


         All references herein to the terms "nursing home" or nursing homes"
shall mean and include the terms "assisted living facility" and "assisted living
facilities."

         See Rider I attached hereto and made a part hereof.

         IN WITNESS WHEREOF, the parties hereto have set their hands and seals
on the date first hereinabove written.

                            ARV CHANDLER VILLAS, L.P.
                            a California limited partnership

                            By: American Retirement Villas Properties III, L.P.
                                a California limited partnership
                                General Partner

                                By:  ARV Assisted Living, Inc.
                                     a Delaware corporation
                                     General Partner


                                     By:
                                          --------------------------------------
                                          Douglas Armstrong
                                          Vice President



                            SECRETARY OF HOUSING AND URBAN
                            DEVELOPMENT ACTING BY AND
                            THROUGH THE FEDERAL HOUSING
                            COMMISSIONER


                            By:
                                -------------------------------------
                                Authorized Agent

<PAGE>   12
                                    -- 12 --


                                 ACKNOWLEDGMENTS


State of Arizona             ]
                             ]:  ss
County of Maricopa           ]

         Before me, ______________________________, of the State and County
aforementioned, personally appeared Douglas Armstrong, known to me (or
satisfactorily proven to me) to be the person who executed the foregoing
instrument and who, upon oath, acknowledged himself to be the Vice President of
ARV Assisted Living, Inc., a Delaware corporation, the General Partner of
American Retirement Villas Properties III, L.P., a California limited
partnership, the General Partner of ARV CHANDLER VILLAS, L.P., a California
limited partnership, and that he as such General Partner, executed the foregoing
instrument for the purposes therein contained, by signing his name on behalf of
the said ARV CHANDLER VILLAS, L.P.

         WITNESS my hand and seal, as of this ____ day of January ___, 2001.


                                               _________________________________
[SEAL]                                                   Notary Public

My Commission Expires:  ______________________________




State of Arizona             ]
                             ]:  ss
County of Maricopa           ]


         On this ___ day of January, 2001, before me personally appeared
____________________________ to me personally known, who, being by me duly
sworn, did say that he/she is the Authorized Agent of the SECRETARY OF HOUSING
AND URBAN DEVELOPMENT, who executed the foregoing instrument, and that said
instrument was signed and sealed on behalf of said SECRETARY OF HOUSING AND
URBAN DEVELOPMENT the day and year first above written for the purposes therein
contained.

         WITNESS my hand and seal, as of this ____ day of January ___, 2001.


                                               _________________________________
[SEAL]                                                   Notary Public

My Commission Expires:  ______________________________