<PAGE>   1
                                                                   EXHIBIT 10.14

                            CASTLE SERVICE CO., LLC
                      c/o Castle American Enterprises, LLC
                                 405 Cedar Lane
                            Teaneck, New Jersey 07666




                                November 6, 1997

VIA FACSIMILE AND FEDERAL EXPRESS

ARV Assisted Living, Inc.
245 Fischer Avenue, D-1
Costa Mesa, California 92626
Attention: Legal Department

                        Re: PROSPECT PARK RESIDENCE, LLC

Ladies and Gentlemen:

               Reference is hereby made to that certain Operating Agreement of
Prospect Park Residence, LLC (the "Operating Agreement"), effective as of
February 23, 1996 among Castle Service Co., LLC, a New Jersey limited liability
company (formerly known as Castle Senior Living, LLC, formerly known as DKL
Ventures, LLC ("Existing Castle")) and ARV Assisted Living, Inc., a California
corporation ("ARV"). Capitalized terms used herein without definition have the
meanings assigned to such terms in the Operating Agreement.

               1. Buy-Sell Offer. In accordance with Section 14.1 of the
Operating Agreement and subject to the terms and conditions of this letter
agreement, this Paragraph shall constitute an offer, by Existing Castle, to
purchase all of the Shares owned by ARV (the "ARV Shares") for a purchase price
of $5,280,000, plus, the outstanding principal amount of the Loans (as such term
is hereinafter defined) plus interest accrued on such Loans through the Closing
(the "Purchase Price"), and an invocation of the buy-sell provisions set forth
in Section 14 of the Operating Agreement. ARV acknowledges that for purposes of
this letter agreement only, the offer set forth in this Paragraph 1 constitutes
a "Buy-Sell Offer" under Section 14.1 of the Operating Agreement and that for
purposes of the Buy-Sell Offer set forth in this Paragraph (and not for purposes
of any other Buy-Sell Offer) ARV waives any other conditions precedent to the
delivery by Existing Castle to ARV of such Buy-Sell Offer which have not yet
been satisfied; 


                                      G-1


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provided, however, that nothing set forth in this letter agreement shall relieve
Existing Castle from its obligations set forth in the second sentence of Section
14.1 of the Operating Agreement.

               2. Time Periods for Delivery of Reply Notice and Closing; Waiver
of Buy-Sell Lockout Period. Without limiting any provision of the Operating
Agreement, the parties hereto agree that for purposes of the Buy-Sell Offer set
forth in Paragraph 1 above:

                      (a) (i) notwithstanding the provisions of Section 14.2 of
the Operating Agreement, ARV shall have forty-five (45) days after the execution
by the parties hereto of this letter agreement to send the Reply Notice to
Existing Castle and (ii) notwithstanding the provisions of Section 14.3 of the
Operating Agreement, the Closing shall occur on a date selected by the
purchasing Member (the "Purchasing Member"), such date to be not more than
thirty (30) days after Existing Castle's receipt of a Reply Notice or the
expiration of the 45-day period set forth in clause (a)(i) above; and

                      (b) the provisions of Section 14.7 of the Operating
Agreement shall be of no force or effect.

               The parties hereto agree that the provisions set forth in this
Paragraph shall apply only for purposes of the Buy-Sell Offer set forth in
Paragraph 1 above, and shall not be deemed of any force or effect for purposes
of any future Buy-Sell Offers under the Operating Agreement and in any event,
upon termination of this letter agreement.

               3. Loans to the LLC. The parties hereto acknowledge that (i) ARV
has made certain loans to the LLC (collectively, the "ARV Loans") and (ii)
Existing Castle has made certain loans to the LLC (collectively, the "Existing
Castle Loans; the Existing Castle Loans and the ARV Loans are, collectively, the
"Loans"). All Loans bear interest at the rate of nine percent (9%) per annum
compounded annually (the "Interest Rate"). As of September 30, 1997, the
outstanding balance of the ARV Loans, including interest accrued thereon at the
Interest Rate, equals $16,039,651.15 and the outstanding balance of the Existing
Castle Loans, including interest accrued thereon at the Interest Rate, equals
$61,305.59. It is understood that the outstanding balance of each Loan on
September 30, 1997, shall include accrued interest thereon at the Interest Rate
and each such Loan, together with such interest, shall accrue interest at the
Interest Rate through the Closing and shall be included in the Purchase Price.
The parties agree that if ARV is the Purchasing Member, the ARV Loans, plus
interest accrued thereon through the Closing, at the Interest Rate, shall 


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be deducted from the Purchase Price payable to Existing Castle at the Closing to
the extent said ARV Loans have not theretofore been repaid to ARV by the LLC,
and if Existing Castle is the Purchasing Member, the Existing Castle Loans, plus
interest accrued thereon through the Closing, at the Interest Rate, shall be
deducted from the Purchase Price payable to Existing Castle at the Closing to
the extent said Existing Castle Loans have not theretofore been repaid to
Existing Castle by the LLC. Other than as expressly set forth in this letter
agreement, any Loan made by any Member or by an affiliate of any Member, to the
LLC after the date hereof shall be evidenced by a promissory note substantially
in the form annexed hereto as Exhibit A, with such changes thereto as shall be
acceptable to the Members and such Loan shall accrue interest at (A) the
Interest Rate, from the date such Loan is made, to and including the maturity
date of the note evidencing such Loan and (B) if such Loan is not repaid on or
prior to the maturity date set forth in the note evidencing such Loan, at the
default rate of interest set forth in such note from the day immediately
succeeding the maturity date of such note, to and including the date such Loan
is repaid, in full, to the lender thereunder.

               4. The Project Management Fee. The parties hereto acknowledge
that ARV shall be paid a management fee in the amount set forth in Section 4.6.1
of the Operating Agreement for the period commencing August 1, 1997, through the
Closing (the "Management Fee"). If Existing Castle is the Purchasing Member, the
Management Fee shall be paid by Existing Castle, in full, to ARV at the Closing,
simultaneously with the payment of the Purchase Price to the extent said
Management Fee has not theretofore been paid to ARV by the LLC.

               5. The Construction Management Fee. The parties hereto agree that
notwithstanding the provisions of Section 4.6.2 of the Operating Agreement,
Existing Castle shall, at Closing, be paid a construction management fee (the
"Construction Management Fee") of four percent (4%) of the hard construction
costs of the construction of the Project, subject to the holdback provided in
Paragraph 8, if any. The parties hereto agree that (a) the total amount of the
Construction Management Fee shall be $425,000.00, and (b) the Construction
Management Fee shall accrue interest at the Interest Rate from October 1, 1997,
through the Closing, it being understood that subject to Paragraph 7(b), the
portion of the Construction Management Fee, if any, constituting the Punchlist
Holdback (as such term is hereinafter defined) shall not bear interest after the
Closing. If ARV is the Purchasing Member, the Construction Management Fee, less
the Punchlist Holdback, if any, shall be paid by ARV to Existing Castle at the
Closing, simultaneously with the payment of the Purchase Price, to the extent
such Construction Management Fee has not theretofore been paid to Existing
Castle by the LLC.

               6. Start-Up Losses; Construction Costs. (a) Until the earlier to
occur of (i) the Closing and (ii) December 31, 1997, ARV shall, from time to
time loan to the LLC such sums, not to exceed $400,000, as may reasonably be
required in connection with the operation of the business pursuant to its
obligations under the Operating Agreement, with interest accruing on such loans
at the rate of 9% per annum, compounded annually, and the LLC shall execute and
deliver to ARV a promissory note in respect of each such loan (each such loan, a
"Start-up Loan"), substantially in the form of Exhibit A annexed to this 


<PAGE>   4
letter agreement. Should any sums beyond the $400,000 referenced in the
foregoing sentence be used for operation of the Project, such sums shall be the
sole responsibility of the Purchasing Member; any sums advanced by ARV pursuant
to this sentence shall be deemed ARV loans, and any sums advanced by Existing
Castle pursuant to this sentence shall be deemed Existing Castle Loans.

               (b) ARV shall, from time to time (but no more often than once in
any calendar month) loan to the LLC such sums as may reasonably be required in
connection with the construction of the Project, with interest accruing on such
loans at the rate of 9% per annum, compounded annually, and the LLC shall
execute and deliver to ARV a promissory note in respect of each such loan (each
such loan, a "Construction Loan"), substantially in the form of Exhibit A
annexed to this letter agreement. Each request for a Construction Loan shall be
in writing and shall be accompanied by (i) a description of the work performed
which is the subject of such request, the parties which performed such work and
the actual cost thereof, and also certifying that upon receipt of such payment,
such work and materials will be free and clear of mechanics', materialmens', and
similar liens, and (ii) such waivers of liens and such other evidences of cost,
payment and performance as ARV may reasonably require.

               (c) The parties hereto agree that (i) each Start-up Loan and each
Construction Loan, except for any funds provided by Existing Castle, shall
constitute an "ARV Loan", as defined in this letter agreement, (ii) if the
transactions contemplated by this letter agreement are not consummated in
accordance with the terms of this letter agreement, then ARV shall not be
obligated to make any other loans or Capital Contributions to the LLC, other
than as expressly set forth in the Operating Agreement and (iii) no Start-up
Loan shall be applied by the LLC to the cost of construction of the Project.

               7. Punchlist Items. (a) The parties hereto have heretofore agreed
upon a list of final punchlist items required to be completed in connection with
the construction of the Project (the "Punchlist Items"), a copy of which is
annexed hereto as Exhibit B. The parties acknowledge that certain mechanic's
liens in favor of (i) Higdon Elevator in the amount of $8,052.99, (ii) Bruce
Supply Company in the amount of $26,957.26 and (iii) Nordic Craft in the amount
of approximately $100,000.00 have been filed as a result of certain disputes
between these contractors and the LLC. The parties shall cooperate in all
respects in order to arrange for the LLC to obtain appropriate surety bonds or
full lien releases upon payment or settlement with respect to such mechanic's
liens. Such claims shall be disposed of by the LLC in such manner as the parties
shall reasonably approve. The resolution of the claims evidenced by such
mechanic's liens shall be deemed additional Punchlist Items. The parties hereto
agree that the Punchlist Items shall constitute the only items in respect of the
construction of the Project which remain incomplete on the date hereof, subject
to latent defects. The parties hereto (A) shall 


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cooperate with each other so as to cause the completion of the Punchlist Items
prior to the Closing and (B) acknowledge that subject to the terms of Paragraph
7(b) and the terms of any contracts between the LLC and any contractor
performing work in connection with construction of the Project, the cost of
completion of the Punchlist Items shall be payable by the LLC.

                      (b) If the Punchlist Items have not been completed on or
prior to the Closing, then (i) Existing Castle shall, solely in its capacity as
construction manager of the Project, cause the Punchlist Items to be completed,
to ARV's reasonable satisfaction, as soon after the Closing as shall be
practicable and (ii) at the Closing, a portion of the Construction Management
Fee (the "Punchlist Holdback") equal to 150% of the estimated cost to complete
the Punchlist Items (less any holdbacks due to subcontractors directly
responsible for completing such incompleted Punchlist Item), shall be held by
Fried, Frank, Harris, Shriver, & Jacobson, in escrow, in an interest-bearing
account, until the completion, to the reasonable satisfaction of ARV of the
Punchlist Items; provided, however, that if the parties hereto disagree as to
whether the Punchlist Items have been substantially completed, then such parties
shall immediately request that Fried, Frank, Harris, Shriver & Jacobson and
Goodwin, Procter & Hoar, LLP, within five (5) days after such request, select an
independent architect (the "Architect"), licensed by the State of New York,
certified by the American Institute of Architects and having its offices located
in the City of New York, to determine, on an expedited basis, whether such
Punchlist Items have been substantially completed. The LLC shall pay,
immediately upon rendering of an invoice therefor by such Architect, the fees
and expenses of such Architect, it being understood that ARV shall not be
required to make any loans to the LLC in which the proceeds thereof would be
used to pay such Architect's fees and expenses. For purposes of this Paragraph
7(b) the Punchlist Items shall be deemed to be "substantially completed" if such
items are completed, other than with respect to minor details or adjustments
which do not materially interfere with the use or occupancy of the Project. If
the Punchlist Items are not completed, to ARV's or the Architect's reasonable
satisfaction, as applicable, in timely fashion, ARV on behalf of the LLC shall
have the right to cause the Punchlist Items to be completed at the earliest
possible date. Although the LLC shall at all times shall bear the cost of
completing the Punchlist Items, Existing Castle shall be liable to the LLC to
the extent of the Punchlist Holdback for any additional third party costs or
expenses which may be incurred by ARV on behalf of the LLC in coordinating and
supervising the completion of such Punchlist Items, as a result of the failure
of Existing Castle to coordinate and supervise the completion of such Punchlist
Items in timely fashion (including, without limitation, construction management,
architect's and any other third party fees and expenses incurred by ARV on
behalf of the LLC in connection with the completion of such Punchlist Items).
When the Punchlist Items have been completed, the entire Punchlist Holdback


<PAGE>   6
shall be paid over to Existing Castle, less the costs and expenses described in
the immediately preceding sentence.

               8. Payment of Transfer Taxes; Transfer Tax Indemnity. The parties
hereto agree that any state or city transfer taxes payable in connection with
the sale to the Purchasing Member of the non-Purchasing Member's Shares shall be
payable, at the Closing, by the non-Purchasing Member and the parties shall each
complete, execute and deliver such transfer tax returns as may be required by
applicable law at the Closing. The parties hereto agree that the non-Purchasing
Member shall indemnify and hold the Purchasing Member harmless from and against
all loss, cost and expense such Purchasing Member may incur in connection with
any transfer or similar tax or imposition payable in connection with the sale to
the Purchasing Member of the non-Purchasing Member's Shares, including, without
limitation, the taxes described in the immediately preceding sentence.

               9. Delivery of Certain Documentation. (a) Existing Castle
represents and warrants to ARV that on or prior to the date hereof, true,
correct and complete copies of the following documents have been delivered to
ARV:

                           (i) (A) estoppel certificates, (B) rent commencement
certificates, (C) leases and (D) any other agreements between Existing Castle or
the LLC and all tenants, in each case, from all tenants at the Project and
described on Exhibit C annexed hereto;

                           (ii) a list, to Existing Castle's knowledge, of all
contractors performing work in connection with the construction of the Project;
and

                           (iii) to Existing Castle's knowledge, all contracts
relating to the construction of the Project, a list of which shall be annexed
hereto as Exhibit D-1 within five (5) days after the date hereof.

                      (b) If ARV is the Purchasing Member, Existing Castle shall
deliver to ARV, on or prior to the Closing, originals of each of the following
documents:

                           (i) all contracts in Existing Castle's possession or
control, relating to the construction of the Project;

                           (ii) all existing affidavits in Existing Castle's
possession or control, delivered by each contractor in respect of the
construction of the Project and relating to the LLC's J51 application for real
estate tax exemption in respect of the Project and any other affidavits or other
original documentation in Existing Castle's possession and control, required to
be submitted to any governmental authority by the LLC in connection with the
filing of such J51 application;


<PAGE>   7
                           (iii) all existing final and interim lien waivers in
Existing Castle's possession or control, executed and acknowledged by each
contractor performing work in connection with the construction of the Project;
and

                           (iv) all books and records of the LLC which are
maintained by Existing Castle and are in Existing Castle's possession, in each
case, in its capacity as a Member.

                      (c) ARV represents and warrants to Existing Castle that on
or prior to the date hereof, true, correct and complete copies of the following
documents have been delivered to Existing Castle:

                           (i) to ARV's knowledge, a list of all parties
performing work in connection with the operation or construction of the Project
which are paid by ARV, on behalf of the LLC, through ARV's accounts payable
system or otherwise, and as set forth in Exhibit E annexed hereto;

                           (ii) to ARV's knowledge, all contracts relating to
the operation of the Project (including such contracts relating to the supply of
furniture, fixtures and equipment to the Project), a list of which are set forth
on Exhibit D-2 annexed hereto; and

                           (iii) all books and records of the LLC which are
maintained by ARV and are in ARV's possession, in each case, in its capacity as
a Member.

                      (d) If Existing Castle is the Purchasing Member, ARV shall
deliver to Existing Castle, on or prior to the Closing, originals of each of the
following documents:

                           (i) all contracts in ARV's possession or control
relating to the Project;

                           (ii) all existing final and interim lien waivers in
ARV's possession or control, executed and acknowledged by each contractor
performing work in connection with the Project; and

                           (iii) all books and records of the LLC which are
maintained by ARV and are in ARV's possession, in each case, in its capacity as
a Member or as manager of the Project, including without limitation, general
ledgers and cancelled checks.

               10. Redemption of Equity Interest in PPRHHC. In consideration of
the Purchase Price, at Closing, the non-Purchasing Member and the Purchasing
Member shall 

<PAGE>   8
each cause Prospect Park Residence Home Health Care, Inc. a New York corporation
("PPRHHC") to redeem, for no consideration, each of the shares of capital stock
in PPRHHC held by the non-Purchasing Member. The non-Purchasing Member shall
fully and promptly cooperate with the Purchasing Member and PPRHHC in connection
with such redemption, including, without limitation (a) delivering original
stock certificates and any other evidence of the non-Purchasing Member's
ownership interest in PPRHHC to PPRHHC at the Closing, (b) on or prior to the
date which is fifteen (15) days before the Closing, together with the Purchasing
Member, executing and delivering written notices required by any applicable
governmental authority, as determined by the Purchasing Member, describing the
proposed redemption described in this Paragraph 10, the names of the persons
anticipated to be officers and/or directors of PPRHHC after the Closing and any
other information required to be contained in such notice by such governmental
authority and (c) on the Closing date, together with the Purchasing Member,
executing and delivering written notices to such governmental authorities,
confirming that matters described in clause (b) have occurred and, if
applicable, describing any changes to the information contained in the notice
originally delivered in accordance with such clause (b).

               11. Transfers to Nominees. The Purchasing Member may assign its
rights and obligations under this letter agreement to its nominee or designee so
long as (a) the Purchasing Member retains full liability for the performance of
all of its obligations under this letter agreement notwithstanding any
assignment to such nominee or designee and (b) the Purchasing Member shall
provide written notice to the non-Purchasing Member of such assignment,
including a copy of the instrument of assignment, which instrument shall include
the assumption by the assignee of all of the Purchasing Member's obligations
hereunder and such instrument shall be reasonably acceptable to the
non-Purchasing Member.

               12. Representations of Existing Castle. Existing Castle hereby
represents and warrants to ARV as follows:

                      (a) each of the leases of space at the Project described
on Exhibit C annexed hereto, are unmodified and are in full force and effect,
and such leases constitute the sole and complete agreement between the LLC and
the applicable tenants thereunder; provided, however, that Park Slope Geriatric
Day Center, Inc. has informed Existing Castle that it is having difficulty in
raising the funds necessary for its tenant improvements in its space at the
Project;

                      (b) each of the estoppel certificates and rent
commencement certificates, in each case, described on Exhibit C annexed hereto,
are unmodified and Existing Castle has not received or agreed to, whether
orally, or in writing, any 


<PAGE>   9
modifications or revocations of such estoppel certificates or rent commencement
certificates;

                      (c) Existing Castle is a limited liability company, duly
formed and existing in good standing under the laws of the State of New Jersey;

                      (d) Existing Castle hereby consents and submits to the
jurisdiction of the federal and state courts located in the State and County of
New York and appoints the law firm of Roberts & Holland LLP attn: Elliot Pisem
as its agent to receive service of process in connection with any matter arising
out of or relating to the Project or this letter agreement; and

                      (e) Existing Castle has full limited liability company
power and authority to execute and deliver this letter agreement.

               At closing, Existing Castle shall deliver to ARV a certificate
updating such representations to the date of Closing. Existing Castle's
representations set forth in this Paragraph shall survive the Closing.

               13. Representations of ARV. ARV hereby represents and warrants to
Existing Castle as follows:

                      (a) ARV represents and warrants to Existing Castle that
the books and records of the LLC which are maintained by ARV and are in ARV's
possession, in each case, in its capacity as a Member or as manager of the
Project, and which books and records have heretofore been examined by or made
available for examination by representatives of Existing Castle, constitute the
only books and records of the LLC maintained by ARV, in its capacity as a Member
or as manager of the Project, and are true, correct and complete in all material
respects;

                      (b) ARV is a corporation, duly formed and existing in good
standing under the laws of the State of California;

                      (c) ARV is authorized to transact business in the State of
New York, hereby consents and submits to the jurisdiction of the federal and
state courts located in the State and County of New York and appoints the law
firm of Fried, Frank, Harris, Shriver & Jacobson attn: Jon Mechanic as its agent
to receive service of process in connection with any matter arising out of or
relating to the Project or this letter agreement;

                      (d) ARV has full corporate power and authority to execute
and deliver this letter agreement; and


<PAGE>   10
                      (e) A true and complete list of all contracts entered into
by ARV on behalf of the LLC, in connection with the Project, is annexed hereto
as Exhibit D-3.

               At Closing, ARV shall deliver to Existing Castle a certificate
updating such representations to the date of Closing. ARV's representations set
forth in this Paragraph shall survive the Closing.

               14. Mutual Representations. Each party hereto hereby represents
and warrants to the other parties hereto as follows:

                      (a) such party has not taken and will not take any action
which would cause the fee interest in the Property owned by the LLC to be
subject to any liens, encumbrances or charges whatsoever, other than as shown on
the title report with respect to the Property, a copy of which is annexed hereto
as Exhibit F;

                      (b) other than as set forth on Exhibit G annexed hereto,
such party has not incurred on behalf of the LLC any expenses or other items
which would constitute liabilities of the LLC, other than (i) with respect to
Existing Castle, as shown on the books and records of the LLC on the date hereof
and (ii) with respect to ARV, as shown on the books and records of the LLC as of
September 30, 1997; it being understood that ARV shall, on or prior to November
21, 1997, deliver a certificate to Existing Castle, updating its representations
set forth in this clause (b) through the date hereof; and

                      (c) the only obligations of the LLC to the parties hereto
are as set forth in this letter agreement and no party hereto has incurred any
obligation of or on behalf of the LLC other than in good faith and in the
ordinary course of the LLC's business.

                      Each party hereto's respective representations set forth
in this Paragraph shall survive the Closing.

               15. Additional Covenants. (a) Each party hereto agrees that it
will not take any of the following actions without the consent of the other
party:

                      (i) enter into, amend, terminate or otherwise modify any
lease of space at the Project;

                      (ii) incur any obligation on behalf of the LLC; and

                      (iii) modify, amend or terminate any contract with respect
to the construction or operation of the Project.


<PAGE>   11
Notwithstanding the foregoing terms of this clause (a), ARV may, in its capacity
as manager of the Project, enter into, amend, terminate or otherwise modify any
lease or any contract relating to the Project, or incur obligations on behalf of
the LLC, in each case, so long as any such action is taken (A) in good faith,
(B) in the ordinary course of the LLC's business and (C) in connection with the
management of the residential portion of the Project. In order to maintain, to
the extent possible, the operational status quo during the period of uncertainty
as to which of the parties to this letter agreement shall be the Purchasing
Member, ARV shall not alter or modify the responsibilities or positions of those
persons charged with the administration or marketing of the Project, nor alter
the status of those professionals or consultants who have heretofore been
engaged by the LLC, in each case, without consulting with Existing Castle before
taking any such action, it being understood that nothing set forth in this
sentence shall be deemed to limit ARV's discretion to make and act upon business
decisions in respect of the management of the Project which ARV believes, in its
good faith judgment, are necessary to preserve and protect the Project.
Notwithstanding the foregoing, ARV shall not, without the consent of Existing
Castle, alter or modify the responsibilities of, or terminate the employment of
Linda Fine, Julie Biblowitz or Marsha Richmond; provided however, that Existing
Castle will not withhold such consent if there is a good faith basis for such
modification, alteration or termination.

                      (b) Existing Castle shall, prior to the Closing, use its
best efforts, on behalf of the LLC, to obtain from each of the tenants under the
leases described on Exhibit C, estoppel certificates dated no sooner than thirty
(30) days prior to the Closing, it being understood that Existing Castle's
representation and warranty set forth in Paragraph 12(a) as to the leases
described on Exhibit C shall be of no force or effect to the extent that
Existing Castle obtains the estoppel certificates described in this clause (b)
and such estoppel certificate shall confirm the representations theretofore made
by Existing Castle, it being further understood that Existing Castle shall not
be required to make any monetary payments to any such tenants in order to obtain
such estoppel certificates. ARV shall cooperate with Existing Castle in
connection with Existing Castle's obtaining the estoppel certificates described
in this clause (b).

                      (c) If ARV is the Purchasing Member, then Existing Castle
shall use its best efforts to obtain from each of the contractors performing
work in connection with the construction of the Project and relating to the
LLC's J51 application for real estate tax exemption in respect of the Project
affidavits that such contractors have been paid the amounts stated in the
certificate of the architect supervising the construction of the Project, and
Existing Castle shall deliver such affidavits to ARV on or prior to the Closing,
it being understood that Existing Castle shall not be required to make any
monetary payments to any such contractors in order to obtain such affidavits
(unless such payments are made on behalf of the LLC and in accordance with the
terms of the applicable contract between the LLC and such contractor).


<PAGE>   12
                      (d) Existing Castle shall, within ten (10) days after the
date hereof, deliver to ARV a certificate detailing (i) the names of all
contractors performing work in connection with the construction of the Project,
(ii) the total amount payable under each such contract with each such
contractor, (iii) all change orders in respect of such contracts and the values
thereof, (iv) to Existing Castle's best knowledge, the amounts paid or
outstanding to any such contractor, (v) whether full lien waivers have been
received from each such contractor in respect of all base work and change order
work performed by such contractor and (vi) whether any amounts in respect of
such contracts are in dispute and the nature of such dispute; such certificate
shall be deemed a representation of Existing Castle and shall survive the
Closing.

               16. The J51 Application. Each party hereto (a) acknowledges that
on or about November 3, 1997, a J51 application for real estate tax exemption in
respect of the Project, on behalf of the LLC, will be duly filed pursuant to the
J51 application presently in the possession of counsel to the LLC (Paul
Korngold, Esq., of Tuchman, Katz, Schwartz, Gelles & Korngold) and (b) agrees to
cooperate and to use their respective best efforts to obtain the approval of
such J51 application.

               17. No Distributions; LLC Liabilities. Except as otherwise set
forth in this letter agreement, the parties hereto agree that from and after the
date hereof, through and including the Closing, the LLC shall not make any
distribution of cash flow or Capital Contributions without the prior written
consent of ARV and Existing Castle, other than in respect of payments to ARV of
the Management Fee, payments to Existing Castle of the Construction Management
Fee, less the Punchlist Holdback, if any, and payments to unaffiliated third
parties of any obligation incurred by the LLC in good faith and in the ordinary
course of the LLC's business. The parties hereto further agree that the
Purchasing Member shall, at Closing, purchase the non-Purchasing Member's Shares
subject to all liabilities of the LLC.

               18. Employment of Linda Fine. ARV, Existing Castle and the LLC
shall continue to employ Linda Fine pursuant to the terms of that certain letter
agreement dated March 6, 1997 (the "Fine Agreement") until the later of (i)
midnight, November 30, 1997 or (ii) the date on which ARV elects to become the
Purchasing Member (the "Fine Termination Date"). At 12:01 a.m. on the day after
the Fine Termination Date, Linda Fine shall cease to be an employee of ARV and
the LLC and shall become an employee of Existing Castle, with Existing Castle
assuming all obligations to Linda Fine under the Fine Agreement accruing after
the Fine Termination Date.

               19. Further Assurances. Each party hereto shall, at its sole cost
and expense, do, execute, acknowledge and deliver or cause to be done, executed,
acknowledged and delivered all such further acts, agreements and assurances as
the other party shall from time to time reasonably require (a) to carry into
effect the purposes of 


<PAGE>   13
this letter agreement and (b) for the better assuring and confirming of all of
such party's rights, powers and remedies hereunder. Any Exhibits not completed
on the date this Agreement is signed shall be completed within ten (10) days of
the date hereof.

               20. Guaranty by Existing Castle. Existing Castle acknowledges
that Existing Castle's obligations under this letter agreement shall constitute
"DKL obligations" for purposes of Section 17.11 of the Operating Agreement.

               21. Legal Fees. Each party hereto shall be responsible for the
expenses of its own legal counsel in connection with this letter agreement and
the transactions contemplated hereby. In no event shall such legal expenses be
deemed expenses of the LLC.

               22. Time of the Essence. Time is of the essence as to each
party's obligations under this letter agreement.

               23. Notices. All notices to be delivered under this letter
agreement shall be in writing, and shall be delivered in the manner set forth in
Section 17.1 of the Operating Agreement.

               24. Ratification of Operating Agreement. Other than as set forth
in this letter agreement, the Operating Agreement is unmodified and continues in
full force and effect.

               25. Governing Law. The place of negotiation, execution and
delivery of this letter agreement is the State of New York. This letter
agreement and the validity, enforceability, construction and interpretation
thereof shall be governed by and enforced in accordance with the laws of the
State of New York, without reference to the conflicts of law principles of that
State.

               26. Counterparts. This letter agreement may be executed in one or
more counterparts, each of which, taken together, shall constitute one
agreement.

               27. Entire Agreement. This letter agreement, including all
exhibits hereto constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof and shall supersede and take the place of
any other oral understandings and agreements, or instruments purporting to be an
agreement of the parties hereto relating to the transactions contemplated
hereby, including, without limitation, any letter of intent, term sheet or
written correspondence.


<PAGE>   14
               Please indicate your agreement to the provisions of this letter
agreement by executing a copy of same and returning it to the undersigned.


                           Very truly yours,

                           CASTLE SERVICE CO., LLC,
                           a New Jersey limited liability company


                           By:    /s/ Stanley Diamond
                              -------------------------------
                              Name:  Stanley Diamond
                              Title:    Chairman


<PAGE>   15
ACKNOWLEDGED AND AGREED
AS OF NOVEMBER 6, 1997:

ARV ASSISTED LIVING, INC.,
a California corporation


By:  /s/ John A. Booty
   -------------------------------
    Name:  John A. Booty
    Title:    President and CEO



PROSPECT PARK RESIDENCE, LLC,
a New York limited liability company


By:  CASTLE SERVICE CO., LLC,
      a New Jersey limited liability company


      By:   /s/ Stanley Diamond
         -------------------------------
         Name:  Stanley Diamond
         Title:    Chairman


By:  ARV ASSISTED LIVING, INC.,
      a California corporation


      By:   /s/ John A. Booty
         -------------------------------
         Name:  John A. Booty
         Title:    President and CEO