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                                                   (Alternative Living Services)
                                                                    EXHIBIT 10.1

                                 LOAN AGREEMENT


         THIS LOAN AGREEMENT (this "Agreement") is made as of the _____ day of
July, 1998, by and between ALS FINANCING, INC., a Kansas corporation (together
with its successors and assigns, the "Borrower"), and GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation (together with its successors and assigns,
the "Lender").

                                R E C I T A L S:

         1.      Borrower has requested that the Lender make a loan to Borrower
in the principal sum of $25,000,000 (the "Loan").

         2.      Lender has agreed to make the Loan on the terms and conditions
hereinafter set forth.

         NOW, THEREFORE, it is hereby agreed as follows:


                                    ARTICLE I
                 DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.


                  1.1  As used in this Agreement, the following terms shall have
the following meanings unless the context hereof shall otherwise indicate:

                  "ACCOUNTS" means any rights of Borrower arising from the
operation of the Facility to payment for goods sold or leased or for services
rendered, not evidenced by an Instrument, including, without limitation, (i) all
accounts arising from the operation of the Facility, (ii) all moneys and
accounts held by Lender pursuant to Section 4.13 of this Agreement, and (iii)
all rights (if any) to payment from Medicare or Medicaid programs, or similar
state or federal programs, boards, bureaus or agencies and rights to payment
from patients, residents, private insurers, and others arising from the
operation of the Facility, including rights to payment pursuant to Reimbursement
Contracts. Accounts shall include the proceeds thereof (whether cash or noncash,
moveable or immoveable, tangible or intangible) received from the sale,
exchange, transfer, collection or other disposition or substitution thereof.

                  "ACTUAL MANAGEMENT FEES" means actual management fees paid or
incurred in connection with operation of the Facility.

                  "AFFILIATE" means, with respect to any Person, (i) each Person
that controls, is controlled by or is under common control with such Person,
(ii) each Person that, directly or indirectly, owns or controls, whether
beneficially or as a trustee, guardian or other fiduciary, more than 49% of the
Stock of such Person, and 

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(iii) each of such Person's officers, directors, members, joint venturers and
partners.

                  "ASSIGNMENT OF LEASES AND RENTS" means, collectively, those
certain Assignments of Leases and Rents of even date herewith executed by
Borrower for the benefit of Lender.

                  "ASSUMED MANAGEMENT FEES" means imputed management fees of
five percent (5%) of net resident revenues of the Facility (which shall be
reduce by those expenses normally compensated as part of management fees and
separately paid by Borrower and otherwise included in net income and also for
any Medicare and Medicaid contractual adjustments, if Borrower elects in its
sole discretion, to participate in such programs).

                  "BUSINESS DAY" means a day on which commercial banks are not
authorized or required by law to close in New York, New York.

                  "CLOSING DATE" means the date on which all or any part of the
Loan is disbursed by the Lender to or for the benefit of Borrower.

                  "COLLATERAL" means, collectively, the Property, Improvements,
Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money,
Permits (to the fullest extent assignable), Reimbursement Contracts, and all
Proceeds, all whether now owned or hereafter acquired, and including
replacements, additions, accessions, substitutions, and products thereof and
thereto, and all other property which is or hereafter may become subject to a
Lien in favor of Lender as security for any of the Loan Obligations.

                  "COLLATERAL ASSIGNMENT OF LESSEE'S SECURITY AGREEMENTS" means
the Collateral Assignment of Lessee's Security Agreements of even date herewith
executed by Borrower for the benefit of Lender.

                  "COMMITMENT LETTER" means the commitment letter issued by
Lender to Borrower dated June 26, 1998.

                  "DEBT SERVICE COVERAGE FOR THE FACILITY" means a ratio in
which the first number is the sum in the aggregate for all Facilities of net
pre-tax income of the Borrower from the operations of the Facilities as set
forth in the quarterly statements provided to Lender (without deduction for
Actual Management Fees paid or incurred), calculated based upon the preceding
twelve (12) months (or such lesser period as shall have elapsed following the
closing of the Loan), plus interest expense, to the extent deducted in
determining net income, plus non-cash expenses or allowances for depreciation
and amortization of the Facilities for said period, less either Assumed
Management Fees or Actual Management Fees, as applicable, and the second number
is the sum of the actual principal amounts due (even if not paid) on the 


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Loan (but which shall not include that portion associated with the balloon
payment of the Loan) for the applicable period plus the interest expense on such
Loan for the applicable period. In calculating "pre-tax income", Extraordinary
Income and Extraordinary Expenses shall be excluded.

                  "DEFAULT" means the occurrence or existence of any event
which, but for the giving of notice or expiration of time or both, would
constitute an Event of Default.

                  "DEFAULT RATE" means a per annum rate equal to the lesser of
the interest rate on the Note plus five percent (5%) per annum or the maximum
rate permitted by applicable law.

                  "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 Property and/or the
Improvements.

                  "EQUIPMENT" means all beds, linen, televisions, carpeting,
telephones, cash registers, computers, lamps, glassware, rehabilitation
equipment, restaurant and kitchen equipment, and other fixtures and equipment of
Borrower located on, attached to or used or useful in connection with any of the
Property or the Facility and all renewals and replacements thereof and
substitutions therefor; provided, however, that with respect to any items which
are leased for the benefit of the Facility and not owned by Borrower, the
Equipment shall include the leasehold interest only of Borrower together with
any options to purchase any of said items and any additional or greater rights
with respect to such items which Borrower may hereafter acquire, but the
foregoing shall not be construed to mean that such leasing shall be permitted
except as provided hereunder and under the other Loan Documents.

                  "EVENT OF DEFAULT" means any "Event of Default" as defined
in Article VII hereof.

                  "EXTRAORDINARY INCOME AND EXTRAORDINARY EXPENSES" means
material items of a character significantly different from the typical or
customary business activities of Borrower which would not be expected to recur
frequently and which would not be considered as recurring factors in any
evaluation of the ordinary operating processes of Borrower's business.

                  "EXHIBIT" means an Exhibit to this Agreement, unless the
context refers to another document, and each such Exhibit shall be deemed a part
of this Agreement to the same extent as if it were set forth in its entirety
wherever reference is made thereto.

                  "FACILITIES" means all of the facilities described and named
in Schedule I hereto.


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                  "FACILITY" means, collectively and individually, each facility
named and described in Schedule I attached hereto and made a part hereof.

                  "GAAP" means, as in effect from time to time, generally
accepted accounting principles consistently applied as promulgated by the
American Institute of Certified Public Accountants.

                  "GENERAL INTANGIBLES" means all intangible personal property
of Borrower arising out of or connected with the Property or the Facility and
all renewals and replacements thereof and substitutions therefor (other than
Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement
Contracts), including, without limitation, things in action, contract rights and
other rights to payment of money.

                  "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
Property and/or the Improvements or the use, operation or improvement of the
Property.

                  "GUARANTOR" means Alternative Living Services, Inc., a
Delaware corporation.

                  "GUARANTY AGREEMENT" means that certain Exceptions to
Nonrecourse Guaranty of even date herewith from Guarantor to Lender.

                  "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 storage tanks, whether empty or containing any
substance; any substance the presence of which on the 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.

                  "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 Property and/or the
Improvements. 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 


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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 1801, and their state analogs.

                  "IMPROVEMENTS" means all buildings, structures and
improvements of every nature whatsoever now or hereafter situated on the
Property, including, but not limited to, all gas and electric fixtures,
radiators, heaters, engines and machinery, boilers, ranges, elevators and
motors, plumbing and heating fixtures, carpeting and other floor coverings,
water heaters, awnings and storm sashes, and cleaning apparatus which are or
shall be attached to the Property or said buildings, structures or improvements.

                  "INDEBTEDNESS" means any (i) obligations for borrowed money,
(ii) obligations, payment for which is being deferred by more than thirty (30)
days, representing the deferred purchase price of property other than accounts
payable arising in connection with the purchase of inventory customary in the
trade and in the ordinary course of Borrower's business, (iii) obligations,
whether or not assumed, secured by Liens or payable out of the proceeds or
production from the Accounts and/or property now or hereafter owned or acquired,
and (iv) the amount of any other obligation (including obligations under
financing leases) which would be shown as a liability on a balance sheet
prepared in accordance with GAAP.

                  "INSTRUMENTS" means all instruments, chattel paper, documents
or other writings obtained from or in connection with the operation of the
Property or the Facility (including, without limitation, all ledger sheets,
computer records and printouts, data bases, programs, books of account and files
relating thereto).

                  "INVENTORY" means all inventories of food, beverages and other
comestibles held by Borrower for sale or use at or from the Property or the
Facility, and soap, paper supplies, medical supplies, drugs and all other such
goods, wares and merchandise held by Borrower for sale to or for consumption by
guests, patients or residents of the Property or the Facility and all such other
goods returned to or repossessed by Borrower.

                  "LEASE AGREEMENT" means the following:

                  (a) with respect to the Loma Linda Facility that certain Lease
Agreement between the Borrower and the Guarantor, as Lessee, of even date
herewith, whereby the Lessee has leased the Loma Linda Facility from the
Borrower;

                  (b) with respect to the Oceanside Facility that certain Lease
Agreement between the Borrower and the Guarantor, as Lessee, of even date
herewith, whereby the Lessee has leased the Oceanside Facility from the
Borrower;


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                  (c) with respect to the Augusta Facility that certain Lease
Agreement between the Borrower and the Guarantor, as Lessee, of even date
herewith, whereby the Lessee has leased the Augusta Facility from the Borrower;

                  (d) with respect to the Liberal Facility that certain Lease
Agreement between the Borrower and the Guarantor, as Lessee, of even date
herewith, whereby the Lessee has leased the Liberal Facility from the Borrower;
and

                  (e) with respect to the Colorado Facility (i) that certain
Lease Agreement between the Borrower and the Sterling House, as Lessee, of even
date herewith, whereby Sterling House, as Lessee has leased the Colorado
Facility from the Borrower and (ii) that certain Lease Agreement between the
Borrower and the Guarantor, as Lessee of even date herewith, whereby the
Guarantor, as Lessee has leased the Colorado Facility from the Borrower
automatically upon termination of the Lease Agreement with Sterling House.

                 "LESSEE" means (a) the Guarantor with respect to the Loma
Linda Facility, the Oceanside Facility, the Augusta Facility and the Liberal
Facility, and (b) with respect to the Colorado Facility, Sterling House until
the Lease Agreement automatically terminates and, thereafter the Guarantor.

                  "LESSEE'S SECURITY AGREEMENTS" means the respective Lessee's
Security Agreements of even date herewith by and between each Lessee and the
Borrower, as assigned by the Borrower to the Lender pursuant to the Collateral
Assignment of Lessee's Security Agreements.

                  "LIEN" means any voluntary or involuntary mortgage, security
deed, deed of trust, lien, pledge, assignment, security interest, title
retention agreement, financing lease, levy, execution, seizure, judgment,
attachment, garnishment, charge, lien or other encumbrance of any kind,
including those contemplated by or permitted in this Agreement and the other
Loan Documents.

                  "LOAN" means the Loan in the principal sum of $25,000,000 made
by Lender to Borrower as of the date hereof.

                  "LOAN DOCUMENTS" means, collectively, this Agreement, the
Assignment of Leases and Rents, the Note, the Assignment of Licenses, Permits
and Contracts, the Guaranty Agreement, the Mortgage, the Collateral Assignment
of Lessee's Security Agreements, and the Subordination Agreement, together with
any and all other documents executed by Borrower or others, evidencing, securing
or otherwise relating to the Loan.

                  "LOAN OBLIGATIONS" means the aggregate of all principal and
interest owing from time to time under the Note and all expenses, charges and
other amounts from time to time owing under


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the Note, this Agreement, or the other Loan Documents and all covenants,
agreements and other obligations from time to time owing to, or for the benefit
of, Lender pursuant to the Loan Documents.

                  "MANAGEMENT AGREEMENT" means the Management Agreement dated
March 5, 1998, as amended, by and between R.A.C. Lake Park, Ltd., a
California limited partnership, and the Guarantor.

                  "MATURITY DATE" means August 1, 2008.

                  "MEDICAID" means that certain program of medical assistance,
funded jointly by the federal government and the States, for impoverished
individuals who are aged, blind and/or disabled, and/or members of families with
dependent children, which program is more fully described in Title XIX of the
Social Security Act (42 U.S.C. ss. 1396 et seq.) and the regulations
promulgated thereunder.

                  "MEDICARE" means that certain federal program providing health
insurance for eligible elderly and other individuals, under which physicians,
hospitals, skilled nursing homes, home health care and other providers are
reimbursed for certain covered services they provide to the beneficiaries of
such program, which program is more fully described in Title XVIII of the Social
Security Act (42 U.S.C. ss. 1395 et seq.) and the regulations promulgated
thereunder.

                  "MONEY" means all monies, cash, rights to deposit or savings
accounts or other items of legal tender obtained from or for use in connection
with the operation of the Facility.

                  "MORTGAGE" means, collectively and individually, that certain
Deed of Trust (or Mortgage) and Security Agreement, of even date herewith, from
Borrower to or for the benefit of Lender and covering specific Property
described in Exhibits "A" through "A-4" hereto and identified in Exhibit "B"
hereto.

                  "NOTE" means the Promissory Note of even date herewith in the
principal amount of the Loan payable by Borrower to the order of Lender.

                  "O&M PROGRAM" means a written program of operations and
maintenance established or approved in writing by Lender relating to any
Hazardous Materials in, on or under the Property or the Improvements.

                  "PERMITS" means all licenses, permits and certificates
required under applicable federal and state law in connection with the
ownership, operation, use or occupancy of the Property and/or the Facility,
including, without limitation, business licenses, state health department
licenses, food service licenses, licenses to conduct business, and certificates
of need.

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                  "PERMITTED ENCUMBRANCES" has the meaning given to that term
in Section 5.2 hereof.

                  "PERSON" means any natural person, firm, trust, corporation,
partnership, limited liability company, trust and any other form of legal
entity.

                  "PROCEEDS" means all proceeds (including proceeds of
insurance and condemnation) from the sale, exchange, transfer, collection, loss,
damage, disposition, substitution or replacement of any of the Collateral.

                  "PROPERTY" means the five (5) parcels of real estate which are
more particularly described in Exhibits "A" through "A-4" attached hereto, upon
which the Facilities are located, and which, concurrent with the Closing Date,
will be owned by the Borrower.

                  "REIMBURSEMENT CONTRACTS" means all third party reimbursement
contracts for the Facility which are now or hereafter in effect with respect to
residents qualifying for coverage under the same, including Medicare, Medicaid
and private insurance agreements, and any successor program or other similar
reimbursement program and/or private insurance agreements.

                  "RENTS" means all rent and other payments of whatever nature
from time to time payable pursuant to leases of the Property or the Facility, or
for retail space or other space at the Property (including, without limitation,
rights to payment earned under leases for space in the Improvements for the
operation of ongoing retail businesses such as newsstands, barbershops, beauty
shops, physicians' offices, pharmacies and specialty shops).

                  "SINGLE-PURPOSE ENTITY" means a Person which owns no interest
or property other than the Property, the Improvements or interests in the
Borrower.

                  "STERLING HOUSE" means Sterling House Corporation, a Kansas
corporation and a wholly-owned subsidiary of the Guarantor.

                  "STOCK" means all shares, options, warrants, general or
limited partnership interests, membership interests, participations or other
equivalents (regardless of how designated) in a corporation, limited liability
company, partnership or any equivalent entity, whether voting or nonvoting,
including, without limitation, common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended).

                  "SUBORDINATION AGREEMENT" means that certain Subordination of
Management Agreement of even date herewith by and among Borrower, Guarantor, and
Lender solely with respect to the Oceanside Facility.


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                  1.2   Singular terms shall include the plural forms and vice
versa, as applicable, of the terms defined.

                  1.3   Terms contained in this Agreement shall, unless
otherwise defined herein or unless the context otherwise indicates, have the
meanings, if any, assigned to them by the Uniform Commercial Code in effect in
the State of Kansas.

                  1.4   All accounting terms used in this Agreement shall be 
construed in accordance with GAAP, except as otherwise specified.

                  1.5   All references to other documents or instruments shall
be deemed to refer to such documents or instruments as they may hereafter be
extended, renewed, modified, or amended and all replacements and substitutions
therefor.

                  1.6   All references herein to "Medicaid" and "Medicare" shall
be deemed to include any successor program thereto.


                                   ARTICLE II
                                TERMS OF THE LOAN

                  2.1  THE LOAN. Borrower has agreed to borrow the Loan from
Lender, and Lender has agreed to make the Loan to Borrower, subject to
Borrower's compliance with and observance of the terms, conditions, covenants,
and provisions of this Agreement and the other Loan Documents, and Borrower has
made the covenants, representations, and warranties herein and therein as a
material inducement to Lender to make the Loan.

                  2.2  SECURITY FOR THE LOAN. The Loan will be evidenced,
secured and guaranteed by the Loan Documents.


                                   ARTICLE III
                    BORROWER'S REPRESENTATIONS AND WARRANTIES

         To induce Lender to enter into this Agreement, and to make the Loan to
Borrower, Borrower represents and warrants to Lender as follows:


                  3.1  EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly
organized and validly existing Kansas corporation, has the power to own its
properties and to carry on its business as is now being conducted, and is duly
qualified to do business and is in good standing in every jurisdiction in which
the character of the properties owned by it or in which the transaction of its
business makes its qualification necessary.

                  3.2  POWER AND AUTHORITY. Borrower has full power and
authority to borrow the indebtedness evidenced by the Note and to incur the Loan
Obligations provided for herein, all of which have


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been authorized by all proper and necessary action. All consents, approvals,
authorizations, orders or filings of or with any court or governmental agency or
body, if any, required for the execution, delivery and performance of the Loan
Documents by the Borrower have been obtained or made.

                  3.3  DUE EXECUTION AND ENFORCEMENT. Each of the Loan Documents
to which Borrower is a party constitutes a valid and legally binding obligation
of Borrower, enforceable in accordance with its respective terms (except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium, or other laws relating to the rights of creditors
generally and by general principles of equity) and does not violate, conflict
with, or constitute any default under any law, government regulation, decree,
judgment, Borrower's articles of organization/incorporation, partnership
agreement or operating agreement, as applicable, or any other agreement or
instrument binding upon Borrower.

                  3.4  SINGLE PURPOSE ENTITY.  Borrower is a Single Purpose 
Entity.

                  3.5  PENDING MATTERS.

                       a.    Operations; Financial Condition. No action or
investigation is pending or, to the best of Borrower's knowledge, threatened
before or by any court or administrative agency which might result in any
material adverse change in the financial condition, operations or prospects of
Borrower or any lower reimbursement rate under the Reimbursement Contracts. The
Borrower is not in violation of any agreement, the violation of which might
reasonably be expected to have a material adverse effect on its business or
assets, and the Borrower is not in violation of any order, judgment, or decree
of any court, or any statute or governmental regulation to which it is subject,
the violation of which could reasonably be expected to have a material adverse
effect on the operation of the Facility or on any of the Collateral.

                       b.   Condemnation or Casualty.  There are no proceedings
pending, or, to the best of Borrower's knowledge, threatened, to acquire through
e exercise of any power of condemnation, eminent domain or similar proceeding
any part of the Property, the Improvements or any interest therein, or to enjoin
or similarly prevent or restrict the use of the Property or the operation of the
Facility in any manner. None of the Improvements is subject to any unrepaired
casualty or other damage having a cost to repair in excess of $5,000.

                  3.6  FINANCIAL STATEMENTS ACCURATE. All financial statements
heretofore or hereafter provided by Borrower and Guarantor are and will be true
and complete in all material respects as of their respective dates and fairly
present the respective financial 


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condition of Borrower and Guarantor and each Facility, and there are no material
liabilities, direct or indirect, fixed or contingent, as of the respective dates
of such statements which are not reflected therein or in the notes thereto or in
a written certificate delivered with such statements. The financial statements
of the Borrower have been prepared on an accounting basis consistent with
Guarantor's audited financial statements. There has been no material adverse
change in the financial condition, operations, or prospects of Borrower and
Guarantor since the dates of such statements except as fully disclosed in
writing with the delivery of such statements. All financial statements of the
operations of the Facility heretofore or hereafter provided to Lender are and
will be true and complete in all material respects as of their respective dates.

                  3.7  COMPLIANCE WITH FACILITY LAWS. Each of the Facilities are
duly licensed as follows:


                       (a)  with respect to the Loma Linda Facility, as a
110-bed assisted living facility (currently operated as a 70-bed assisted living
facility) and a 70-bed senior housing facility under the applicable laws of the
State of California;

                       (b) with respect to the Oceanside Facility as a 160-bed
assisted living facility under the applicable laws of the State of California,
and is currently operated as an assisted living facility;
         
                       (c) with respect to the Augusta Facility as a 21-bed
assisted living facility under the applicable laws of the State of Kansas, and
is currently operated as an assisted living facility;

                       (d) with respect to the Liberal Facility, as a 44-bed
assisted living facility under the applicable laws of the State of Kansas, and
is currently operated as an assisted living facility; and

                       (e) with respect to the Colorado Springs Facility, as a
37-bed assisted living facility under the applicable laws of the State of
Colorado, and is currently operated as an assisted living facility.

Lessee is the lawful owner of all Permits for the Loma Linda Facility. Borrower
and Lessee are the lawful owners of all Permits for the Liberal Facility and the
Augusta Facility. Lessee has filed an application for licensure in its name and
is operating the Oceanside Facility with the knowledge and consent of the
applicable California regulatory authorities pending review of its application.
Sterling House is the sole owner of all Permits for the Colorado Springs
Facility. Lessee has filed an application for licensure in its name. The
Borrower has no reason to believe that any of such applications will not be
approved as to the Lessee. 

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<PAGE>   12
The Borrower anticipates that the Lessee will be licensed to operate (a) the
Oceanside Facility before October 31, 1998, and (b) the Colorado Springs
Facility before October 1, 1998.

        All Permits for the Facilities (a) are in full force and effect, (b)
constitute all of the material permits, licenses and certificates required for
the use, operation and occupancy thereof, (c) have not been pledged as
collateral for any other loan or Indebtedness, (d) are held free from
restrictions or any encumbrance which would materially adversely affect the use
or operation of the Facility, and (e) are not provisional, probationary or
restricted in any way. The Borrower and the Lessee as well as the operation of
each Facility, are in compliance in all material respects with the applicable
provisions of assisted living facility laws, rules, regulations and published
interpretations to which each Facility is subject. No waivers of any laws,
rules, regulations, or requirements (including, but not limited to, minimum foot
requirements per bed or unit) are required for any Facility to operate at its
current licensed bed capacity. All Reimbursement Contracts (if any) are in full
force and effect with respect to the Facility, and Borrower and Lessee are in
good standing with all the respective agencies governing such applicable
assisted living licenses, program certifications, and Reimbursement Contract (if
any). Borrower and Lessee are current in the payment of all so-called provider
specific taxes or other assessments with respect to such Reimbursement Contract
(if any). Borrower will maintain, and will cause Lessee to maintain, (without
allowing to lapse) the Certificate of Need, if applicable, and any required
Permits. In the event that Lender acquires the Facility through foreclosure or
otherwise, neither Lender nor a subsequent manager, a subsequent lessee or any
subsequent purchaser (through foreclosure or otherwise) must obtain a
Certificate of Need prior to applying for and receiving a license to operate the
Facility and certification to receive Medicare and Medicaid payments
(and its successor programs) for patients having coverage thereunder (if any),
provided that no service or bed unit complement is changed.

                  3.8  MAINTAIN UNIT CAPACITY. Neither Borrower nor the Lessee
has granted to any third party the right to reduce the number of licensed units
in the Facility or to apply for approval to transfer the right to any and all of
the licensed Facility units/beds to any other location.

                  3.9  MEDICARE AND MEDICAID COMPLIANCE. The Facility has no
patient reimbursement agreements, cost reports or Medicare or Medicaid surveys
or provider agreements.

                  3.10 THIRD-PARTY PAYORS. There is no threatened or pending
revocation, suspension, termination, probation, restriction, limitation, or
nonrenewal affecting Borrower, Lessee or any Facility or any participation or
provider agreement with any third-party payor, including Medicare, Medicaid,
Blue Cross and/or Blue Shield, if applicable, and any other private commercial
insurance


                                       12
<PAGE>   13
managed care and employee assistance program (such programs, the "Third-Party
Payors' Programs") to which Borrower or Lessee presently is subject. All
Medicare (if any), Medicaid (if any), and private insurance cost reports and
financial reports submitted by Borrower or Lessee are and will be materially
accurate and complete and have not been and will not be misleading in any
material respects. No cost reports for the Facility remain "open" or unsettled,
except as otherwise disclosed in writing.

                  3.11 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower
nor Lessee nor the Facility is currently the subject of any proceeding by any
governmental agency that would, and no notice of any violation has been received
from a governmental agency that would, directly or indirectly, or with the
passage of time:

                       a. Have a material adverse impact on Borrower's ability
to accept and/or retain residents or result in the imposition of a fine, a
sanction, a lower rate certification or a lower reimbursement rate for services
rendered to eligible residents; or

                       b. Modify, limit or annul or result in the transfer,
suspension, revocation or imposition of probationary use of any of the Permits.

                  3.12 PHYSICAL PLANT STANDARDS. The Facility and the use
thereof complies in all material respects with applicable local, state and
federal building codes, fire codes, zoning codes, use restrictions, health care,
health care facility and other similar regulatory requirements (the "Physical
Plant Standards"), and no material waivers of Physical Plant Standards exist at
the Facility.

                  3.13 PLEDGES OF RECEIVABLES. The Borrower has not pledged its
Accounts as collateral security for any loan or indebtedness other than, if
applicable, the Loan.

                  3.14 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has
filed or has obtained appropriate extensions for filing of all federal, state,
and local tax returns which it is required to file and has paid, or made
adequate provision for the payment of, all taxes which are shown pursuant to
such returns or are required to be shown thereon or to assessments received by
Borrower, including, without limitation, provider taxes. All such returns are
complete and accurate in all respects. Borrower has paid or made adequate
provision for the payment of all insurance premiums, applicable water and sewer
charges, government assessments or charges, ground rents (if applicable) and
Taxes (as defined in the Mortgage) with respect to the Property.

                  3.15 TITLE TO COLLATERAL. Borrower has good and marketable
title to all of the Collateral, subject to no lien, mortgage, pledge,
encroachment, zoning violation, or encumbrance, except Permitted Encumbrances,
which Permitted Encumbrances do not and

                                       13
<PAGE>   14
will not materially interfere with the security intended to be provided by the
Mortgage or the current use or operation of the Property and or the current
ability of the Facility to generate net operating income sufficient to service
the Loan. All Improvements situated on the Property are situated wholly within
the boundaries of the Property.

                  3.16 PRIORITY OF MORTGAGE. Each Mortgage constitutes a valid
first lien against the real and personal property described therein, prior to
all other liens or encumbrances, including those which may hereafter accrue,
excepting only Permitted Encumbrances, which Permitted Encumbrances do not and
will not materially and adversely affect (a) the ability of the Borrower to pay
in full the principal of and interest on the Note when due, (b) the security
(and its value) intended to be provided by the Mortgage or (c) the current use
of the Property and the Improvements.

                  3.17 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of
Borrower's principal place of business and chief executive office is set forth
on Exhibit B hereto.

                  3.18 DISCLOSURE. All information furnished or to be furnished
by Borrower to Lender in connection with the Loan or any of the Loan Documents,
is, or will be at the time the same is furnished, accurate and correct in all
material respects and complete insofar as completeness may be necessary to
provide Lender with true and accurate knowledge of the subject matter.

                  3.19 TRADE NAMES. Except as shown on Exhibit B, neither
Borrower nor the Loma Linda Facility, which operates under the trade name
"Crossings at the Palms", has ever changed its name, been known by any other
name or been a party to a merger, reorganization or similar transaction since
the date acquired by Guarantor or an Affiliate thereof. Except as shown on
Exhibit B, the Oceanside Facility, which operates under the trade name "Lake
Park Villas" has never changed its name, been known by any other name or been a
party to a merger, reorganization or similar transaction since the date acquired
by Guarantor or an Affiliate thereof. Except as shown on Exhibit B, the Augusta
Facility, which operates under the trade name "Sterling House of Augusta", has
never changed its name, been known by any other name or been a party to a
merger, reorganization or similar transaction since the date acquired by
Guarantor or an Affiliate thereof. Except as shown on Exhibit B, the Liberal
Facility, which operates under the trade name "Woodland Terrace", has never
changed its name, been known by any other name or been a party to a merger,
reorganization or similar transaction since the date acquired by Guarantor or an
Affiliate thereof. Except as shown on Exhibit B, the Colorado Springs Facility,
which operates under the trade name "Sterling House at Broadmoor", has never
changed its name, been known by any other name or been a party to a merger,
reorganization or similar transaction since the date acquired by Guarantor or an
Affiliate thereof. An Affiliate of Borrower listed on Exhibit B hereto, with


                                       14

<PAGE>   15

respect to each Facility, has owned such Facility for the period shown on
Exhibit B and is transferring the Facility (the Property and all other real and
personal property located thereon). Borrower is purchasing the Facilities with
the proceeds of the Loan.

                  3.20 ERISA. Borrower is in compliance in all material respects
with applicable provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").

                  3.21 OWNERSHIP. The ownership interests of the Persons
comprising the Borrower and each of the respective interests in the Borrower are
correctly and accurately set forth on Exhibit "C" hereto.

                  3.22 COMPLIANCE WITH APPLICABLE LAWS. The Facility and its
operations and the Property comply in all material respects with all covenants
and restrictions of record and applicable laws, ordinances, rules and
regulations, including, without limitation, the Americans with Disabilities Act
and the regulations thereunder, and all laws, ordinances, rules and regulations
relating to zoning, setback requirements and building codes. There are no
waivers of any building codes currently in existence for the Facility except for
waivers with respect to parking requirements, in which case each Facility
complies with the applicable parking requirement resulting from such waiver.

                  3.23 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C.
ss.548, and the borrowing of the Loan will not render Borrower insolvent for
purposes of 11 U.S.C. ss.548.

                  3.24 OTHER INDEBTEDNESS. Borrower has no outstanding
Indebtedness, secured or unsecured, direct or contingent (including any
guaranties), other than (a) the Loan, (b) indebtedness which represents trade
payables or accrued expenses incurred in the ordinary course of business of
owning and operating the Property, and (c) indebtedness secured by purchase
money liens provided that the aggregate amount of such indebtedness incurred
with respect to any one Facility, together with the rental income from all
Leases (other than resident agreements) of space in such Facility entered into
by Borrower as landlord, does not exceed the lesser of $500,000 or five percent
(5%) of the portion of the Loan allocated to such Facility as shown on Exhibit
B; no other debt will be secured (senior, subordinate or pari passu) by the
Property except for an additional lien on accounts receivable which may be
granted by Borrower in the future solely in compliance with the terms of the
Mortgage.

                  3.25 OTHER OBLIGATIONS. Borrower has no material financial
obligation under any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which Borrower is a party or by which Borrower or the
Property is otherwise bound, other than obligations incurred in the ordinary
course of the


                                       15
<PAGE>   16

operation of the Property and other than obligations under the Mortgage and
the other Loan Documents.

                  3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into
this Agreement or any of the other Loan Documents with the actual intent to
hinder, delay, or defraud any creditor and (2) has received reasonably
equivalent value in exchange for its obligations under the Loan Documents.
Giving effect to the transactions contemplated by the Loan Documents, the fair
saleable value of Borrower's assets exceeds and will, immediately following the
execution and delivery of the Loan Documents, be greater than Borrower's
probable liabilities, including the maximum amount of its contingent liabilities
or its debts as such debts become absolute and mature. Borrower's assets do not
and, immediately following the execution and delivery of the Loan Documents will
not, constitute unreasonably small capital to carry out its business as
conducted or as proposed to be conducted. Borrower does not intend to, and does
not believe that it will, incur debts and liabilities (including, without
limitation, contingent liabilities and other commitments) beyond its ability to
pay such debts as they mature (taking into account the timing and amounts to be
payable on or in respect of obligations of Borrower).

                  3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full
force and effect and there are no defaults (either monetary or nonmonetary) by
the Lessee or R.A.C. thereunder. Borrower has not entered into any other
management agreement with respect to the operation of the Facility.

                  3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its
representations and warranties and covenants contained herein are true and
correct as of the date hereof and shall survive closing of the Loan and the
assignment and delivery of the Loan to Investor. Borrower agrees that Investor
shall be a third party beneficiary of the representations, warranties and
covenants set forth herein.

                  3.29 LEASE AGREEMENT. Each Lease Agreement is in full force
and effect, and there are no defaults (either monetary or nonmonetary) by
Borrower or Lessee thereunder.


                                   ARTICLE IV
                        AFFIRMATIVE COVENANTS OF BORROWER

         Borrower agrees with and covenants unto the Lender that until the Loan
Obligations have been paid in full, Borrower shall:


                  4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and
punctually pay or cause to be paid the principal and interest of the Note in
accordance with its terms and duly and punctually pay and perform or cause to be
paid or performed all Loan Obligations hereunder and under the other Loan
Documents.


                                       16
<PAGE>   17

                  4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a
Kansas corporation, and, in each jurisdiction in which the character of the
property owned by it or in which the transaction of its business makes
qualification necessary, maintain good standing.

                  4.3 MAINTENANCE OF SINGLE PURPOSE. Maintain its existence as a
Single Purpose Entity.

                  4.4 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year,
make accurate provision for the payment of all current tax liabilities of all
kinds (including, without limitation, federal and state income taxes, franchise
taxes, payroll taxes, provider taxes (to the extent necessary to participate in
and receive maximum funding pursuant to Reimbursement Contracts, if any) and
Taxes (as defined in the Mortgage)), all required withholding of income taxes of
employees, all required old age and unemployment contributions, and all required
payments to employee benefit plans, and pay the same when they become due.

                  4.5 INSURANCE. Maintain or cause Lessee to maintain the
following insurance coverages with respect to the Property and the Facility:

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


                                       17
<PAGE>   18

uses, and shall provide for deductibles in such amounts as Lender may permit in
its sole discretion.

                      b. Commercial general liability insurance under a policy
containing "Comprehensive General Liability Form" of coverage (or a comparably
worded form of coverage) and the "Broad Form CGL" endorsement (or a policy which
otherwise incorporates the language of such endorsement), providing coverage on
an occurrence (not "claims made") basis, which policy shall include, without
limitation, coverage against claims for personal injury, bodily injury, death
and property damage liability with respect to the Facility and the operations
related thereto, whether on or off the Property, and the following coverages:
Employee as Additional Insured, Product Liability/Completed Operations; Broad
Form Contractual Liability, Independent Contractor, Personal Injury and
Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000
per person), Broad Form Cross Suits Liability Endorsement, where applicable,
hired and non-owned automobile coverage (including rented and leased vehicles),
and, if any alcoholic beverages shall be sold, manufactured or distributed in
the Facility, liquor liability coverage, all of which shall be in such amounts
as Lender may from time to time reasonably require, but not less than One
Million Dollars ($1,000,000) per occurrence, Two Million Dollars ($2,000,000) in
the aggregate and with umbrella coverage not less than Five Million Dollars
($5,000,000). If such policy shall cover more than one property, such limits
shall apply on a "per location" basis. If any swimming pool is located at any
Facility in the future, such umbrella coverage shall be increased to Ten Million
Dollars ($10,000,000). Such liability policy shall delete the contractual
exclusion under the personal injury coverage, if possible, and if available,
shall include the following endorsements: Notice of Accident, Knowledge of
Occurrence, and Unintentional Error and Omission.

                      c. Professional liability insurance coverage in an amount
equal to not less than One Million Dollars ($1,000,000) per occurrence and One
Million Dollars ($1,000,000) in the aggregate and insuring Borrower for acts
occurring prior to the date of the Loan.

                      d. Business interruption insurance (i) covering the same
perils of loss as are required to be covered by the property insurance required
under Section 4.5(a) above, (ii) in an amount equal to the projected annual net
income from the Facility plus carrying costs and extraordinary expenses of the
Property for a period of twelve (12) months, based upon Borrower's reasonable
estimate thereof as approved by Lender, (iii) including either an agreed amount
endorsement or a waiver of any co-insurance provisions, so as to prevent
Borrower, Lender and any other insured thereunder from being a co-insurer, and
(iv) providing that any covered loss thereunder shall be payable to Lender.


                                       18
<PAGE>   19

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

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

                      g. Flood insurance with a deductible not to exceed Three
Thousand Dollars ($3,000), or such greater amount as may be satisfactory to
Lender in its sole discretion, and in an amount equal to the full insurable
value of the Facility or the maximum amount available, whichever is less, if the
Facility is located in an area designated by the Secretary of Housing and Urban
Development or the Federal Emergency Management Agency as having special flood
hazards.

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


                                       19
<PAGE>   20

                      i. Such other insurance coverages, in such amounts, and
such other forms and endorsements, as may from time to time be reasonably
required by Lender and which are customarily required by institutional lenders
to similar properties, similarly situated, including, without limitation,
coverages against other insurable hazards (including, by way of example only,
earthquake, sinkhole and mine subsidence), which at the time are commonly
insured against and generally available.

                      All insurance required under this Section 4.5 shall have a
term of not less than one year and shall be in the form and amount and with
deductibles as, from time to time, shall be reasonably acceptable to Lender,
under valid and enforceable policies issued by financially responsible insurers
either licensed to transact business in the State where the Facility is located,
or obtained through a duly authorized surplus lines insurance agent or otherwise
in conformity with the laws of such State, with (a) a rating of not less than
the third (3rd) highest rating category by either Standard & Poor's Ratings
Group, Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch
Investors Service, Inc. or any successors thereto, or (b) an A-:V rating in
Best's Key Rating Guide; provided, however, that if the initial principal
balance of the Loan is greater than Seven Million Five Hundred Thousand Dollars
($7,500,000.00), such insurer must, in lieu of such Best's rating, have a long
term senior debt rating of at least "A-" by Standard & Poor's Ratings Group.
Certificates of Insurance shall be delivered to and held by Lender, and, upon
Lender's reasonable request, originals or certified copies of all insurance
policies shall be delivered to Lender. All such policies shall name Lender as an
additional insured, shall provide for loss payable solely to Lender and shall
contain: (i) standard "non-contributory mortgagee" endorsement or its equivalent
relating, inter alia, to recovery by Lender notwithstanding the negligent or
willful acts or omissions of Borrower and notwithstanding (a) occupancy or use
of the Facility for purposes more hazardous than those permitted by the terms of
such policy, (b) any foreclosure or other action taken by Lender pursuant to the
Mortgage upon the occurrence of an Event of Default, or (c) any change in title
or ownership of the Facility; and (ii) a provision that such policies shall not
be canceled or amended, including, without limitation, any amendment reducing
the scope or limits of coverage, or failed to be renewed, without at least
thirty (30) days prior written notice to Lender in each instance. With respect
to insurance policies which require payment of premiums annually, not less than
thirty (30) days prior to the expiration dates of the insurance policies
obtained pursuant to this Agreement, Borrower shall pay such amount, except to
the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not
less than thirty (30) days prior to the expiration dates of the insurance
policies obtained pursuant to this Agreement, certificates evidencing renewals
of such policies bearing notations evidencing the payment of premiums or
accompanied by other evidence reasonably satisfactory to Lender of such payment
shall be delivered by

                                      20

<PAGE>   21

Borrower to Lender. Borrower shall not carry separate insurance, concurrent in
kind or form or contributing in the event of loss, with any insurance required
under this Section 4.5. If the limits of any policy required hereunder are
reduced or eliminated due to a covered loss, Borrower shall pay the additional
premium, if any, in order to have the original limits of insurance reinstated,
or Borrower shall purchase new insurance in the same type and amount that
existed immediately prior to the loss.

                      If Borrower fails to maintain and deliver to Lender the
certificates of insurance required by this Agreement, Lender may, at its option,
procure such insurance and Borrower shall pay or, as the case may be, reimburse
Lender for, all premiums thereon promptly, upon demand by Lender, with interest
thereon at the Default Rate from the date paid by Lender to the date of
repayment and such sum shall constitute a part of the Loan Obligations.

                      The insurance required by this Agreement may, at the
option of Borrower, be effected by blanket and/or umbrella policies issued to
Borrower or to an Affiliate of Borrower covering the Facility and the properties
of such Affiliate; provided that, in each case, the policies otherwise comply
with the provisions of this Agreement and allocate to the Facility, from time to
time, the coverage specified by this Agreement, without possibility of reduction
or coinsurance by reason of, or damage to, any other property (real or personal)
named therein. If the insurance required by this Agreement shall be effected by
any such blanket or umbrella policies, Borrower shall furnish to Lender
certificates of insurance showing the amount of the insurance provided under
such policies which is applicable to the Facility.

                      Neither Lender nor its agents or employees shall be liable
for any loss or damage insured by the insurance policies required to be
maintained under this Agreement; it being understood that (i) Borrower shall
look solely to its insurance company for the recovery of such loss or damage,
(ii) such insurance company shall have no rights of subrogation against Lender,
its agents or employees, and (iii) Borrower shall use its best efforts to
procure from such insurance company a waiver of subrogation rights against
Lender. If, however, such insurance policies do not provide for a waiver of
subrogation rights against Lender (whether because such a waiver is unavailable
or otherwise), then Borrower hereby agrees, to the extent permitted by law and
to the extent not prohibited by such insurance policies, to waive its rights of
recovery, if any, against Lender, its agents and employees, whether resulting
from any damage to the Facility, any liability claim in connection with the
Facility or otherwise. If any such insurance policy shall prohibit Borrower from
waiving such claims, then Borrower must obtain from such insurance company a
waiver of subrogation rights against Lender.

                      Net proceeds of insurance or condemnation (after payment
of Lender's reasonable costs and expenses) (a) in an amount less than


                                       21
<PAGE>   22

$250,000, shall be made available, and (b) in the amount of $250,000 or more may
be made available, in the Lender's sole discretion, to Borrower for Borrower's
repair, restoration and replacement of the Improvements, Equipment and Inventory
damaged or taken on the following terms and subject to Borrower's satisfaction
of the following conditions:

                      a. The aggregate amount of all such proceeds shall not
exceed the aggregate amount of all such Loan Obligations.

                      b. At the time of such loss or damage and at all times
thereafter while Lender is holding any portion of such proceeds, there shall
exist no Default or Event of Default;

                      c. The Improvements, Equipment, and Inventory for which
loss or damage has resulted shall be capable of being restored to its
preexisting condition and utility in all material respects with a value equal to
or greater than that which existed prior to such loss or damage and such
restoration shall be capable of being completed prior to the earlier to occur of
(i) the expiration of business interruption insurance as determined by an
independent inspector or (ii) the Maturity Date;

                      d. Within thirty (30) days from the date of such loss or
damage Borrower shall have given Lender a written notice electing to have the
proceeds applied for such purpose;

                      e. Within sixty (60) days following the date of notice
under the preceding subparagraph (c) and prior to any proceeds being disbursed
to Borrower, Borrower shall have provided to Lender all of the following:

                            (i)   complete plans and specifications for
                     restoration, repair and replacement of the Improvements,
                     Equipment and Inventory damaged to the condition, utility
                     and value required by (b) above,

                            (ii)  if loss or damage exceeds $50,000, fixed-price
                     or guaranteed maximum cost bonded construction contracts
                     with a bondable contractor for completion of the repair and
                     restoration work in accordance with such plans and
                     specifications,

                            (iii) builder's risk insurance for the full cost of
                     construction with Lender named under a standard mortgagee
                     loss-payable clause,

                            (iv) such additional funds as in Lender's reasonable
                     opinion are necessary to complete such repair, restoration
                     and replacement, and

                                       22
<PAGE>   23

                             (v) copies of all material permits and licenses
                      necessary to complete the work in accordance with the
                      plans and specifications;

                      f. Lender may, at Borrower's expense, retain an
independent inspector to review and approve plans and specifications and
completed construction and to approve all requests for disbursement, which
approvals shall be conditions precedent to release of proceeds as work
progresses;

                      g. No portion of such proceeds shall be made available by
Lender for architectural reviews or for any other purposes which are not
directly attributable to the cost of repairing, restoring or replacing the
Improvements, Equipment and Inventory for which a loss or damage has occurred
unless the same are covered by such insurance;

                      h. Borrower shall diligently pursue such work and shall
complete such work prior to the earlier to occur of the expiration of business
interruption insurance or the Maturity Date;

                      i. The Facility continues to achieve the Debt Service
Coverage requirements set forth in Section 4.13 below;

                      j. Each disbursement by Lender of such proceeds and
deposits shall be funded subject to conditions and in accordance with
disbursement procedures which a commercial construction lender would typically
establish in the exercise of sound banking practices and shall be made only upon
receipt of disbursement requests on an AIA G702/703 form (or similar form
approved by Lender) signed and certified by Borrower and, if required by the
Lender, its architect and general contractor with appropriate invoices and lien
waivers as required by Lender;

                      k. Lender shall have a first lien security interest in all
building materials and completed repair and restoration work and in all fixtures
and equipment acquired with such proceeds, and Borrower shall execute and
deliver such mortgages, deeds of trust, security agreements, financing
statements and other instruments as Lender shall request to create, evidence, or
perfect such lien and security interest; and

                      In the event and to the extent such proceeds are not
permitted or required to be used for the repair, restoration and replacement of
the Improvements, Equipment and Inventory for which a loss or damage has
occurred, or in the event Borrower fails to timely make the election to have
insurance proceeds applied to the restoration of the Improvements, Equipment, or
Inventory, or, having made such election, fails to timely comply with the terms
and conditions set forth herein, or, if the conditions set forth herein for such
application are otherwise not satisfied, then Lender shall be entitled without
notice to or consent from Borrower to apply such proceeds, or the balance
thereof, at Lender's option


                                       23
<PAGE>   24

either (i) to the full or partial payment or prepayment of the Loan Obligations
(without premium) in the manner aforesaid, or (ii) to the repair, restoration
and/or replacement of all or any part of such Improvements, Equipment and
Inventory for which a loss or damage has occurred.

                      Borrower appoints Lender as Borrower's attorney-in-fact to
cause the issuance of an endorsement of any insurance policy to bring Borrower
into compliance herewith and, as limited above, at Lender's sole option, to make
any claim for, receive payment for, and execute and endorse any documents,
checks or other instruments in payment for loss, theft, or damage covered under
any such insurance policy; however, in no event will Lender be liable for
failure to collect any amounts payable under any insurance policy.

                  4.6 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause
the Lessee to provide to Lender, at its address set forth in Section 8.7 and at
GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite 305,
Birmingham, Alabama 35209, the following financial statements and information on
a continuing basis during the term of the Loan:

                       a. Within ninety (90) days after the end of each fiscal
year of each Facility and the Borrower (if different from such Facility)
unaudited financial statements of the operations of such Facility and the
Borrower, which statements shall be prepared on an accounting basis consistent
with Guarantor's audited financial statements, and shall include a balance sheet
and a statement of income and expenses for the year then ended, certified by a
financial officer of Borrower to be true and correct in all material respects.

                       b. Within one hundred twenty (120) days after the end of
each fiscal year of the Guarantor, audited financial statements of the Guarantor
prepared by KPMG Peat Marwick or any other nationally recognized accounting firm
or independent certified public accountant reasonably acceptable to Lender,
which statements shall be prepared in accordance with GAAP, and shall include a
balance sheet and a statement of income and expenses for the year then ended. In
lieu of its obligations hereunder, Guarantor may submit to Lender, upon its
filing thereof, a copy of Form 10K as filed with the United States Securities
and Exchange Commission.

                       c. Within forty-five (45) days after the end of each
fiscal quarter of each Facility and Borrower (if different from such Facility),
unaudited financial statements of the operations of such Facility and Borrower
prepared on an accounting basis consistent with Guarantor's audited financial
statements, which statements shall include a balance sheet and statement of
income and expenses for the quarter then ended, and shall be certified as true
and correct in all material respects by a financial officer of Borrower.

                                       24
<PAGE>   25

                       d. Within forty-five (45) days after the end of each
fiscal quarter of the Guarantor, unaudited interim financial statements of the
Guarantor, prepared on an accounting basis consistent with Guarantor's audited
financial statements, which shall include a balance sheet and statement of
income and expenses for the quarter then ended, and shall be certified as true
and correct in all material respects by a financial officer of the Guarantor. In
lieu of its obligations hereunder, Guarantor may submit to Lender a copy of Form
10Q as filed by Guarantor with the United States Securities and Exchange
Commission.

                       e. Within forty-five (45) days of the end of each fiscal
quarter of each Facility, a statement of the number of bed days available and
the actual resident days incurred for such quarter, together with, if
applicable, quarterly census information of such Facility as of the end of such
quarter in sufficient detail to show patient-mix (i.e., private, Medicare,
Medicaid, and V.A.), if applicable, on a daily average basis for such year
through the end of such quarter, certified by a financial officer of Borrower
and Guarantor to be true and correct. Such statements of each Facility shall be
accompanied by a summary showing the information described in Exhibit "D".

                       f. Within ten (10) days of filing or receipt, all
Medicare and/or Medicaid cost reports and any amendments thereto filed with
respect to the Facility, if any, and all responses, audit reports, or other
inquiries with respect to such cost reports.

                       g. Within ten (10) days of receipt, a copy of the
Medicaid Rate Calculation Worksheet (or the equivalent thereof), if any, issued
by the appropriate Medicaid Agency for the Facility.

                       h. Within ten (10) days of receipt, any and all notices
(regardless of form) from any and all licensing and/or certifying agencies that
the Facility license and/or the Medicare and/or Medicaid certification of the
Facility (if any) is being downgraded to a substandard category, revoked, or
suspended or that any such action is pending or being considered.

                       i. Upon Lender's request, evidence of payment by Borrower
or Lessee of any applicable provider bed taxes or similar taxes, which taxes
Borrower agrees to pay or cause Lessee to pay.

                       j. Within one hundred twenty (120) days after the end of
each of Lessee's fiscal years, and more frequently if reasonably requested by
Lender, an aged accounts receivable report for the Facility in sufficient detail
to show amounts due from each class of patient-mix, if applicable, (i.e.,
private, Medicare, Medicaid and V.A.), by the account age classifications of 30
days, 60 days, 90 days, 120 days, and over 120 days.

                                       25
<PAGE>   26

                      The Lender reserves the right to require that the annual
financial statements of the Borrower be audited by a nationally recognized
accounting firm or independent certified public accountant acceptable to Lender
if (i) a monetary default continues beyond the applicable cure period or, (ii)
if Lender has reasonable grounds to believe that the unaudited financial
statements do not accurately represent the financial condition of the Borrower,
on an accounting basis consistent with Guarantor's audited financial statements.

                      The Lender further reserves the right to require such
other financial information of Borrower, Guarantor and/or the Facility, in such
form and at such other times (including monthly or more frequently) as Lender
shall reasonably require, and Borrower agrees promptly to provide or to cause to
be provided, such information to Lender. All financial statements must be in the
form and detail as Lender may from time to time reasonably request, provided,
however, that Lender will make reasonable efforts to use Borrower's existing
forms of reports for all purposes.

                  4.7 COMPLIANCE CERTIFICATE. At the time of furnishing the 
quarterly operating statements required under the foregoing Section, furnish to
Lender a compliance certificate in the form attached hereto as Exhibit "E"
executed by a financial officer of Borrower and of the Lessee.

                  4.8 BOOKS AND RECORDS. Keep and maintain at all times at the
Facility, and upon Lender's reasonable request make available at the Borrower's
office, complete and accurate books of account and records (including copies of
supporting bills and invoices) adequate to reflect correctly the results of the
operation of the Facility, and copies of all written contracts, subleases (if
any), and other instruments which affect the Property, which books, records,
contracts, subleases (if any) and other instruments shall be subject to
examination and inspection at any reasonable time by Lender (upon reasonable
advance notice, which for such purposes only may be given orally, except in the
case of an emergency or following an Event of Default, in which case no advance
notice shall be required); provided, however, that if an Event of Default has
occurred and is continuing, Borrower shall deliver to Lender upon written demand
all books, records, contracts, subleases (if any) and other instruments relating
to the Facility or its operation and Borrower authorizes Lender to obtain a
credit report on Borrower at any time.

                  4.9 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause
to be paid all other Indebtedness now owing or hereafter incurred by Borrower in
accordance with the terms of such Indebtedness, except such Indebtedness owing
to those other than Lender which is being contested in good faith and with
respect to which any execution against properties of Borrower has been
effectively stayed and for which reserves and collateral for the 


                                       26
<PAGE>   27

payment and security thereof have been established as determined by Lender in
its sole discretion.

                  4.10  RECORDS OF ACCOUNTS. Maintain all records, including
records pertaining to the Accounts of Borrower, at the principal place of
business of Borrower as set forth in this Agreement.

                  4.11  CONDUCT OF BUSINESS. Conduct, or cause the Lessee to
conduct, the operation of the Facility at all times in a manner consistent with
the level of operation of the Facility as of the date hereof, including without
limitation, the following:

                              (i)   to maintain the standard of care for the
                        residents of the Facility at all times at a level
                        necessary to ensure quality care for the residents of
                        the Facility in accordance with customary and prudent
                        industry standards;

                              (ii)  to operate the Facility in a prudent manner
                        and in compliance with applicable laws and regulations
                        relating thereto and cause all Permits, Reimbursement
                        Contracts, and any other agreements necessary for the
                        use and operation of the Facility or as may be necessary
                        for participation in the Medicaid, Medicare, or other
                        applicable reimbursement programs if Lessee, in its sole
                        discretion, elects to participate in any such program to
                        remain in effect without reduction in the number of
                        licensed beds authorized for use in the Medicaid,
                        Medicare, or other applicable reimbursement programs;

                              (iii) to maintain sufficient Inventory and
                        Equipment of types and quantities at the Facility to
                        enable Lessee adequately to perform operations of the
                        Facility;

                              (iv)  to keep all Improvements and Equipment
                        located on or used or useful in connection with the
                        Facility in good repair, working order and condition,
                        reasonable wear and tear excepted, and from time to time
                        make all needed and proper repairs, renewals,
                        replacements, additions, and improvements thereto to
                        keep the same in good operating condition;

                              (v)   to maintain sufficient cash in the operating
                        accounts of the Facility in order to satisfy the working
                        capital needs of the Facility; and

                              (vi)  to keep all required Permits current and in
                        full force and effect.

                   4.12 PERIODIC SURVEYS. Furnish or cause Lessee to furnish to
Lender, within thirty (30) days of receipt, a copy of any Medicare, Medicaid, or
other licensing agency survey or report and any 


                                       27
<PAGE>   28

statement of deficiencies and/or any other report indicating that any action is
pending or being considered to downgrade the Facility to a substandard category,
and within the time period required by the particular agency for furnishing a
plan of correction also furnish or cause to be furnished to Lender a copy of the
plan of correction generated from such survey or report for the Facility, and
correct or cause to be corrected any deficiency, the curing of which is a
condition of continued licensure or for full participation in Medicaid, Medicare
or other reimbursement program pursuant to any Reimbursement Contract for
existing residents or for new residents to be admitted with Medicaid or Medicare
coverage, if Borrower or Lessee, in its sole discretion, elects to participate
in any such program, by the date required for cure by such agency (plus
extensions granted by such agency).

                   4.13 DEBT SERVICE COVERAGE REQUIREMENTS. 

                        a. Maintain (commencing with the closing of the Loan),
and, within forty-five (45) days after the end of each fiscal quarter of the
Facility, provide evidence satisfactory to the Lender of the achievement of, the
following Debt Service Coverage for the Facility ratios until the Loan
Obligations are paid in full:

                             (i)  a Debt Service Coverage for the Facility,
                        after deduction of Actual Management Fees, of not less
                        than 1.0 to 1.0; and

                             (ii) a Debt Service Coverage for the Facility,
                        after deduction of Assumed Management Fees, of not less
                        than 1.25 to 1.0.

                        b. If the Facilities fail for two consecutive quarters
to achieve or provide evidence of achievement of the Debt Service Coverage for
the Facility, upon fifteen (15) days written notice to Borrower, Borrower will
deposit with Lender additional cash or other liquid collateral in an amount
which, when added to the first number of the debt service coverage calculation,
would have resulted in the noncomplying debt service coverage requirement having
been satisfied. If such failure continues for four (4) consecutive quarters
after deposit of the requisite additional cash or other liquid collateral, upon
fifteen (15) days written notice to Borrower, Borrower will deposit with Lender
additional cash or other liquid collateral (with credit for amounts currently
being held by Lender pursuant to the foregoing sentence), in an amount which, if
the same had been applied on the first day of the first quarter for which such
noncompliance of the debt service coverage requirement occurred to reduce the
outstanding principal indebtedness of the Loan Obligations, would have resulted
in the noncomplying debt service coverage requirement having been satisfied, and
Borrower agrees promptly to provide such additional cash or other liquid
collateral. Such additional Collateral will be held by the Lender in a standard
custodial account, and shall


                                       28

<PAGE>   29
constitute additional collateral for the Loan Obligations and an "Account" as
defined in this Agreement, and, upon the occurrence of an Event of Default, may
be applied by the Lender, in such order and manner as the Lender may elect, to
the reduction of the Loan Obligations. Borrower shall not be entitled to any
interest earned on such additional Collateral. Provided that there is no
outstanding Default or Event of Default, such additional Collateral which has
not been applied to the Loan Obligations will be released by the Lender at such
time as Borrower provides the Lender with evidence that the required debt
service coverage requirements outlined above have been achieved and maintained
(without regard to any cash deposited pursuant to this Section 4.13) as of the
end of each of two (2) consecutive quarters.

                   4.14 OCCUPANCY. Maintain or cause to be maintained at all
times a daily average annual (calender year) occupancy for the Facility, on a
combined basis, of eighty percent (80%) or more (based on the number of beds
available at each Facility with the minimum number of beds available at any
Facility remaining at or in excess of the number of beds set forth in the
Facility description in Schedule I); provided, however, that failure to maintain
such occupancy level shall not constitute an Event of Default if, at such time,
the Debt Service Coverage for the Facility ratios are being achieved.

                   4.15 CAPITAL EXPENDITURES. Maintain and cause the Lessee to
maintain the Facility in good condition and make minimum capital expenditures
for the Facility in each fiscal year in the amount of $250 per unit, on a
combined basis, (which capital expenditures may include those necessary for
ordinary repairs and routine maintenance), commencing the first year of the Loan
term (with the exception of the Loma Linda Facility for which such expenditures
shall commence the second year of the Loan term) and, within ninety (90) days of
the end of such fiscal year, provide evidence thereof satisfactory to Lender. In
determining whether or not such requirement has been met, with respect to each
Facility, the Lender will carry forward to the next year(s) the excess amount of
capital expenditures made for such Facility in excess of $250.00 per unit in any
one year. In the event that Borrower shall fail to do so, Borrower shall, upon
Lender's written request, immediately establish and maintain a capital
expenditures reserve fund with Lender equal to the difference between the
required amount per unit and the amount per unit actually spent by the Borrower.
Borrower grants to Lender a right of setoff against all moneys in the capital
expenditures reserve fund, and Borrower shall not permit any other Lien to exist
upon such fund. The proceeds of such capital expenditures reserve fund will be
disbursed monthly upon Lender's receipt of satisfactory evidence that Borrower
has made the required capital expenditures. Upon Borrower's failure to
adequately maintain the Facility in good condition, Lender may, but shall not be
obligated to, make such capital expenditures and may apply the moneys in the


                                       29
<PAGE>   30

capital expenditures reserve fund for such purpose. To the extent there are
insufficient moneys in the capital expenditures reserve fund for such purposes,
all funds advanced by Lender to make such capital expenditures shall constitute
a portion of the Loan Obligations, shall be secured by the Mortgage and shall
accrue interest at the Default Rate until paid. Upon an Event of Default, Lender
may apply any moneys in the capital expenditures reserve fund to the Loan
Obligations, in such order and manner as Lender may elect. For any partial
fiscal year during which the Loan is outstanding, the required expenditure
amount shall be prorated by multiplying the total of the required amount per
unit by a fraction, the numerator of which is the number of days during such
year for which all or part of the Loan is outstanding and the denominator of
which is the number of days in such year.

                   4.16 MANAGEMENT AGREEMENT. Not permit the termination (except
upon issuance of a Permit to the Lessee of the Oceanside Facility), amendment or
assignment of the Management Agreement unless the prior written consent of
Lender is first obtained, which consent shall not be unreasonably withheld.
Borrower will enter and cause the Guarantor to enter into the Subordination
Agreement. Borrower will not enter into any other management agreement without
Lender's prior written consent, which consent shall not be unreasonably
withheld.

                   4.17 UPDATED APPRAISALS. For so long as the Loan remains
outstanding, if any Event of Default shall occur hereunder, or if, in Lender's
judgment, a material depreciation in the value of the Property shall have
occurred, then in any such event, Lender may cause the Property to be appraised
by an appraiser selected by Lender, and in accordance with Lender's appraisal
guidelines and procedures then in effect, and Borrower agrees to cooperate in
all respects with such appraisals and furnish to the appraisers all requested
information regarding the Property and the Facility. Borrower agrees to pay all
reasonable costs incurred by Lender in connection with such appraisal which
costs shall be secured by the Mortgage and shall accrue interest at the Default
Rate until paid.

                   4.18 COMPLY WITH COVENANTS AND LAWS. Comply, and cause the
Lessee to comply in all material respects, with all applicable covenants and
restrictions of record and all laws, ordinances, rules and regulations and keep
the Facility and the Property in compliance in all material respects with
applicable laws, ordinances, rules and regulations, including, without
limitation, the Americans with Disabilities Act and regulations promulgated
thereunder, and laws, ordinances, rules and regulations relating to zoning,
health, building codes, setback requirements, Medicaid and Medicare laws, if
applicable, and keep the Permits for the Facility in full force and effect.

                   4.19 TAXES AND OTHER CHARGES. Subject to Borrower's right to
contest the same as set forth in Section 9(c) of the Mortgage, pay and cause the
Lessee to pay all taxes, assessments, charges, claims for labor, supplies, rent,
and other obligations which, if unpaid, 

                                       30
<PAGE>   31
might give rise to a Lien against property of Borrower, except Liens to the
extent permitted by this Agreement.

                   4.20 COMMITMENT LETTER. Provide all items and pay all amounts
required by the Commitment Letter. If any term of the Commitment Letter shall
conflict with the terms of this Agreement, this Agreement shall govern and
control. As to any matter contained in the Commitment Letter, and as to which no
mention is made in this Agreement or the other Loan Documents, the Commitment
Letter shall continue to be in effect and shall survive the execution of this
Agreement and all other Loan Documents.

                   4.21 CERTIFICATE. Upon Lender's written request, furnish
Lender with a certificate stating that Borrower has complied with and is in
compliance with all terms, covenants and conditions of the Loan Documents to
which Borrower is a party and that there exists no Default or Event of Default
or, if such is not the case, that one or more specified events have occurred,
and describing such event.

                   4.22 NOTICE OF FEES OR PENALTIES. Notify Lender, within 15
days of Borrower's knowledge thereof, of the assessment by any state or any
Medicare, Medicaid, health or licensing agency of any material fines or
penalties against Borrower, Lessee or the Facility.

                   4.23 LOAN CLOSING CERTIFICATION. Immediately notify Lender,
in writing, in the event any representation, warranty or covenant contained
herein or in that certain Loan Closing Certification, executed by Borrower for
the benefit of Lender of even date herewith, becomes untrue in any material
respect.

                   4.24 LEASE AGREEMENT.

                       a. Maintain the Lease Agreement in full force and effect
and timely perform all of its obligations thereunder and not permit the
termination or amendment of the Lease Agreement unless the prior written consent
of Lender is first obtained (which consent will not be unreasonably withheld or
delayed); provided, however, that the Lender's prior consent shall not be
required for termination of the Lease Agreement in the event of emergency
situations (i.e., termination of the Facility's license);

                       b. In the event that proceedings are instituted to
terminate the Facility's license, immediately engage oversight management
services from a management company reasonably acceptable to Lender; and

                       c. In the event that bankruptcy or insolvency proceedings
are instituted by or against the Lessee, Borrower shall (to the extent permitted
by the applicable bankruptcy court having jurisdiction over such proceedings),
upon written instruction received from Lender, terminate the Lease Agreement.



                                       31
<PAGE>   32
                                    ARTICLE V
                         NEGATIVE COVENANTS OF BORROWER

         Until the Loan Obligations have been paid in full, Borrower shall not:


                   5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer
any of its interest in the Permits, or Reimbursement Contracts, if any,
(including rights to payment thereunder) pertaining to the Facility, or assign,
transfer, or remove or permit any other person to assign, transfer, or remove
any records pertaining to the Facility including, without limitation, resident
records, medical and clinical records (except for removal of such resident
records as directed by the residents owning such records, without Lender's prior
written consent, which consent may be granted or refused in Lender's sole
discretion.

                   5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to
exist any Lien upon or with respect to the Facility or any of its properties,
rights, income or other assets relating thereto, including, without limitation,
the Collateral, whether now owned or hereafter acquired, other than the
following permitted Liens ("Permitted Encumbrances"):

                       a. Liens at any time existing in favor of the Lender;

                       b. Liens which are listed in Exhibit "F" attached hereto;

                       c. Inchoate Liens arising by operation of law for the
purchase of labor, services, materials, equipment or supplies, provided payment
shall not be delinquent and, if such Lien is a lien upon any of the Property or
Improvements, such Lien must be fully disclosed to Lender and bonded off and
removed from the Property and Improvements within thirty (30) days of its
creation in a manner satisfactory to Lender;

                       d. Liens incurred in the ordinary course of business in
connection with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of tenders,
statutory obligations, leases and contracts (other than for money borrowed or
for credit received with respect to property acquired) entered into in the
ordinary course of business as presently conducted or to secure obligations for
surety or appeal bonds;

                       e. Liens for current year's taxes, assessments or
governmental charges or levies not yet due and payable; and

                       f. Liens securing indebtedness permitted under Section
3.24.

                                       32
<PAGE>   33

                   5.3 MERGER, CONSOLIDATION, ETC. Except as otherwise provided
in the Mortgage, consummate any merger, consolidation or similar transaction, or
sell, assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions), all or substantially all of its assets (whether now or
hereafter acquired), without the prior written consent of the Lender, which
consent may be granted or refused in Lender's sole discretion.

                   5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS.

                       a. Dissolve or terminate or materially amend the terms of
its certificate of incorporation, articles of organization, operating agreement
or partnership agreement, as applicable, the terms of which require Borrower to
be a Single-Purpose Entity;

                       b. enter into any transaction of merger or consolidation,
or liquidate or dissolve itself (or suffer any liquidation or dissolution), or
acquire by purchase or otherwise all or substantially all the business or assets
of, or any Stock or other evidence of beneficial ownership of, any Person;

                       c. guarantee or otherwise become liable on or in
connection with any obligation of any other Person;

                       d. at any time own any encumbered asset other than (i)
the Property, and (ii) incidental personal property necessary for the operation
of the Property;

                       e. at any time be engaged directly or indirectly, in any
business other than the ownership, management and operation of the Property;

                       f. enter into any contract or agreement with any general
partner, principal, member or Affiliate of Borrower or any Affiliate of any
general partner, principal or member of Borrower except upon terms and
conditions that are intrinsically fair and substantially similar to those that
would be available on an arm's-length basis with third parties other than an
Affiliate;

                       g. incur, create or assume any indebtedness, secured or
unsecured, direct or contingent (including guaranteeing any obligation), other
than (i) the Loan, and (ii) indebtedness which represents trade payables or
accrued expenses incurred in the ordinary course of business of owning and
operating the Property, indebtedness secured by purchase money liens or
represented by equipment or vehicle leases, provided that the aggregate amount
of such indebtedness incurred with respect to a Facility does not exceed the
lesser of $500,000 or five percent (5%) of the portion of the Loan allocated to
such Facility as shown on Exhibit B; no other debt will be secured (senior,
subordinate or pari passu) by the Property except for an additional lien on
accounts receivable which may be granted by Borrower in the future solely in
compliance with the terms of the Mortgage;

                                       33
<PAGE>   34

                       h. make any loans or advances to any third party
(including any Affiliate);

                       i. become insolvent or fail to pay its debts from its
assets as the same shall become due;

                       j. fail to do all things necessary to preserve its
existence as a Single-Purpose Entity, and will not, nor will any partner,
limited or general, member or shareholder thereof, amend, modify or otherwise
change its partnership certificate, partnership agreement, articles of
organization, operating agreement, articles of incorporation or by-laws in a
manner which adversely affects Borrower's existence as a Single-Purpose Entity;

                       k. fail to conduct and operate its business as presently
conducted and operated; provided however, that no default shall exist hereunder
if Borrower engages in activities closely related to and compatible with
assisted living or offers additional services not offered on the date hereof to
the extent permitted under applicable law with respect to assisted living
facilities;

                       l. fail to maintain books and records and bank accounts
separate from those of its Affiliates, including its members, general partners
or shareholders, as applicable;

                       m. fail to at all times hold itself out to the public as
a legal entity separate and distinct from any other entity (including any
Affiliate thereof, including the general partner or any member or shareholder of
Borrower or any Affiliate of the general partner or any member or shareholder of
Borrower, as applicable);

                       n. fail to file its own tax returns;

                       o. fail to maintain adequate capital for the normal
obligations reasonably foreseeable in a business of its size and character and
in light of its contemplated business operations;

                       p. seek the dissolution or winding up, in whole or in
part, of Borrower;

                       q. commingle the funds and other assets of Borrower with
those of any general partner, any member, any shareholder, any Affiliate or any
other Person;

                       r. fail to maintain its assets in such a manner that it
is not costly or difficult to segregate, ascertain or identify its individual
assets from those of any Affiliate or any other Person; and

                       s. hold itself out to be responsible for the debts or
obligations of any other Person.


                                       34
<PAGE>   35

                   5.5  CHANGE OF BUSINESS. Make any material change in the
nature of its business as it is being conducted as of the date hereof; provided,
however, that Borrower may engage in activities closely related to and
compatible with assisted living and offer additional services not offered on the
date hereof to the extent permitted with respect to assisted living facilities
and under applicable Permits.

                   5.6  CHANGES IN ACCOUNTING. Change its methods of accounting,
unless such change is permitted by GAAP, and provided such change does not have
the effect of curing or preventing what would otherwise be an Event of Default
or Default had such change not taken place.

                   5.7  ERISA FUNDING AND TERMINATION. Permit (a) the funding
requirements of ERISA with respect to any employee plan to be less than the
minimum required by ERISA at any time, or (b) any employee plan to be subject to
involuntary termination proceedings at any time.

                   5.8  TRANSACTIONS WITH AFFILIATES. Enter into any transaction
with any Affiliate of Borrower other than in the ordinary course of its business
and on fair and reasonable terms no less favorable to Borrower than those it
could obtain in a comparable arms-length transaction with a Person not an
Affiliate.

                   5.9  TRANSFER OF OWNERSHIP INTERESTS. Except as otherwise
provided in the Mortgage, permit a change in the majority ownership of the stock
of Borrower as of the date of this Agreement unless the written consent of the
Lender is first obtained, which consent may be granted or refused in Lender's
sole discretion.

                   5.10 CHANGE OF USE. Alter or change the use of the Facility
or permit any management agreement other than the Management Agreement or lease
(other than the Lease Agreement and a sublease which, together with all other
space and personal property leases entered into by Borrower as landlord, with
respect to a single facility, does not exceed, when added together with all
purchase money security interests applicable to such Facility, does not exceed
the lesser of $500,000 or 5% of the portion of the Loan allocated to such
Facility, as set forth on Exhibit B) for the Facility or enter into any
operating lease for the Facility, unless Borrower first notifies Lender and
provides Lender a copy of the proposed lease agreement or management agreement,
obtains Lender's written consent thereto, which consent shall not be
unreasonably withheld, and obtains and provides Lender with a subordination
agreement in form satisfactory to Lender, as determined by Lender in its sole
reasonable discretion, from such Lessee or lessee subordinating to all rights of
Lender.

                   5.11 PLACE OF BUSINESS. Change its chief executive office or
its principal place of business, as set forth on Exhibit B hereto, without first
giving Lender at least thirty (30) days prior written notice thereof and
promptly providing Lender such information and 


                                       35
<PAGE>   36

amendatory financing statements as Lender may request in connection therewith.

                   5.12 ACQUISITIONS. Directly or indirectly, purchase, lease,
manage, own, operate, or otherwise acquire any property or other assets (or any
interest therein) which are not used in connection with the operation of the
Facility.


                                   ARTICLE VI
                              ENVIRONMENTAL HAZARDS

                   6.1 PROHIBITED ACTIVITIES AND CONDITIONS. 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 6.2, Borrower shall
not cause or permit any of the following:

                       a. The presence, use, generation, release, treatment,
processing, storage (including storage in above ground and underground storage
tanks), handling, or disposal-of any Hazardous Materials in, on or under the
Property or any Improvements;

                       b. The transportation of any Hazardous Materials to,
from, or across the Property;

                       c. Any occurrence or condition on the Property or in the
Improvements or any other property of Borrower that is adjacent to the Property,
which occurrence or condition is or may be in violation of Hazardous Materials
Laws; or

                       d. Any violation of or noncompliance with the terms of
any Environmental Permit with respect to the Property, the Improvements or any
property of Borrower that is adjacent to the Property.

The matters described in clauses (a) through (d) above are referred to
collectively in this Article VI as "Prohibited Activities and Conditions" and
individually as a "Prohibited Activity and Condition."

                   6.2 EXCLUSIONS. Notwithstanding any other provision of
Article VI to the contrary, "Prohibited Activities and Conditions" shall not
include the safe and lawful use and storage of quantities of (i) pre- packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of the Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Property's parking areas, so long as all of the
foregoing are used, stored,


                                       36
<PAGE>   37

handled, transported and disposed of in compliance with Hazardous Materials
Laws.

                   6.3 PREVENTIVE ACTION. Borrower shall take all appropriate
steps (including the inclusion of appropriate provisions in any Leases approved
by Lender which are executed after the date of this Agreement) to prevent its
employees, agents, contractors, tenants and occupants of the Facility from
causing or permitting any Prohibited Activities and Conditions.

                   6.4 O & M PROGRAM COMPLIANCE. 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 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 Loan Obligations.

                   6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Lender that, except as previously disclosed
by Borrower to Lender in writing:

                       a. Borrower has not at any time caused or permitted any
Prohibited Activities and Conditions.

                       b. No Prohibited Activities and Conditions exist or have
existed.

                       c. The Property and the Improvements do not now contain
any underground storage tanks, and, to the best of Borrower's knowledge after
reasonable and diligent inquiry, the Property and the Improvements have not
contained any underground storage tanks in the past. If there is an underground
storage tank located on the Property or the Improvements which has been
previously disclosed by Borrower to Lender in writing, that tank complies with
all requirements of Hazardous Materials Laws.

                       d. 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
Property and the Improvements in accordance with Hazardous Materials Laws now in
effect and all such Environmental Permits are in full force and effect. No event
has occurred with respect to the Property and/or Improvements that constitutes,
or with the passing of time or the giving of notice would constitute,
noncompliance with the terms of any Environmental Permit.

                                       37
<PAGE>   38

                       e. 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 Property and/or the Improvements and
allege, arise out of, or relate to any Prohibited Activity and Condition.

                       f. 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 Property, the
Improvements or any other property of Borrower that is adjacent to the Property.
The representations and warranties in this Article VI 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 Loan
Obligations have been paid in full.

                   6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify
Lender in writing of any and all of the following that may occur:

                       a. Borrower's discovery of any Prohibited Activity and
Condition.

                       b. 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 and Conditions or any other environmental, health or safety matters
affecting the Property, the Improvements or any other property of Borrower that
is adjacent to the Property.

                       c. Any representation or warranty in this Article VI
which becomes untrue at any time after the date of this Agreement.

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

                   6.7 COSTS OF INSPECTION. Borrower shall pay promptly the
costs of any environmental inspections, tests or audits required by Lender in
connection with any foreclosure or deed in lieu of foreclosure, or, if required
by Lender, as a condition of Lender's consent to any "Transfer" (as defined in
the Mortgage), or required by Lender following a reasonable determination by
Lender that Prohibited Activities and 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 Loan Obligations.

                   6.8 REMEDIAL WORK. If any investigation, site monitoring,
containment, clean-up, restoration or other remedial work 

                                       38
<PAGE>   39

("Remedial Work") is necessary to comply with any Hazardous Materials Laws or
order of any Governmental Authority that has or acquires jurisdiction over the
Property, the Improvements or the use, operation or improvement of the Property
under any Hazardous Materials Laws, Borrower shall, by the earlier of (1) the
applicable deadline required by Hazardous Materials Laws 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 such work by the time required by applicable Hazardous Materials Laws.
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 Loan Obligations.

                   6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. 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 and Condition.

                   6.10 INDEMNITY.

                        a. Borrower shall hold harmless, defend and indemnify
(i) Lender, (ii) any prior owner or holder of the Note, (iii) the officers,
directors, partners, agents, shareholders, employees and trustees of any of the
foregoing, and (iv) the heirs, legal representatives, successors and assigns of
each of the foregoing (together, the "Indemnitees") against all proceedings,
claims, damages, losses, expenses, penalties and costs (whether initiated or
sought by any Governmental Authority 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 Article VI.

                           2. Any failure by Borrower to perform any of its
obligations under this Article VI.

                           3. The existence or alleged existence of any
Prohibited Activity and Condition.

                           4. The presence or alleged presence of Hazardous
Materials in, on, or around under the Property, the Improvements or any property
of Borrower that is adjacent to the Property, or

                           5. Actual or alleged violation of any Hazardous
Materials Laws.

                                       39
<PAGE>   40

                       b. Counsel selected by Borrower to defend Indemnitees
shall be subject to the approval of those Indemnitees. Notwithstanding anything
contained herein, any Indemnitee may elect to defend any claim or legal or
administrative proceeding at the Borrower's expense if such Indemnitee has
reason to believe that its interests are not being adequately represented or
diverge from other interests being represented by such counsel (but Borrower
shall be obligated to bear the expense of at most only one such separate
counsel). Nothing contained herein shall prevent an Indemnitee from employing
separate counsel in any such action at any time and participating in the defense
thereof at its own expense.

                       c. 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 any Indemnitee, as determined
by such Indemnitee in its sole discretion.

                       d. The liability of Borrower to indemnify the Indemnitees
shall not be limited or impaired by any of the following, or by any failure of
Borrower or any guarantor to receive notice of or consideration for any of the
following:

                          1. Any amendment or modification of any Loan
Document.

                          2. Any extensions of time for performance required by
any of the Loan Documents.

                          3. The accuracy or inaccuracy of any representations
and warranties made by Borrower under this Agreement or any other Loan Document.

                          4. The release of Borrower or any other person, by
Lender or by operation of law, from performance of any obligation under any of
the Loan Documents.

                          5. The release or substitution in whole or in part of
any security for the Loan Obligations.

                          6. Lender's failure to properly perfect any lien or
security interest given as security for the Loan Obligations.

                       e. 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

                                       40
<PAGE>   41

administrative proceeding incident to any matters against which Indemnitees are
entitled to be indemnified under this Article VI.

                          2. Reimburse Indemnitees for any expenses paid or
incurred in connection with any matters against which Indemnitees are entitled
to be indemnified under this Article VI.

                          3. Reimburse Indemnitees for any and all expenses,
including reasonable fees and costs of attorneys and expert witnesses, paid or
incurred in connection with the enforcement by Indemnitees of their rights under
this Article VI, or in monitoring and participating in any legal or
administrative proceeding.

                       f. In any circumstances in which the indemnity under this
Article VI 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 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 reasonable fees and out of
pocket expenses of such attorneys and consultants.

                       g. The provisions of this Article VI shall be in addition
to any and all other obligations and liabilities that Borrower may have under
the applicable law or under the other Loan Documents, and each Indemnitee shall
be entitled to indemnification under this Article VI without regard to whether
Lender or that Indemnitee has exercised any rights against the Property and/or
the Improvements 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
Article VI shall be joint and several. The obligations of Borrower to indemnify
the Indemnitees under this Article VI shall survive any repayment or discharge
of the Loan Obligations, any foreclosure proceeding, any foreclosure sale, any
delivery of any deed in lieu of foreclosure, and any release of record of the
lien of the Mortgage.


                                   ARTICLE VII
                         EVENTS OF DEFAULT AND REMEDIES


                   7.1 EVENTS OF DEFAULT. The occurrence of any one or more of
the following shall constitute an "Event of Default" hereunder:

                                       41
<PAGE>   42

                       a. The failure by Borrower to pay any installment of
principal, interest, or other payments required under the Note, within five (5)
days after the same becomes due; or

                       b. Borrower's violation of any covenant set forth in
Article V hereof; or

                       c. Borrower's failure to deliver or cause to be delivered
the financial statements and information set forth in Section 4.6 above within
the times required and such failure is not cured within thirty (30) days
following Lender's written notice to Borrower thereof; or

                       d. The failure of Borrower properly and timely to perform
or observe any covenant or condition set forth in this Agreement (other than
those specified in (a), (b) and (c) of this Section) or any other Loan Documents
which is not cured within any applicable cure period as set forth herein or, if
no cure period is specified therefor, is not cured within thirty (30) days of
Lender's notice to Borrower of such Default; provided, however, that if such
default cannot be cured within such thirty (30) day period, such cure period
shall be extended for an additional sixty (60) days, as long as Borrower is
diligently and in good faith prosecuting said cure to completion; or

                       e. The filing by Borrower or Guarantor of a voluntary
petition, or the adjudication of any of the aforesaid Persons, or the filing by
any of the aforesaid Persons of any petition or answer seeking or acquiescing,
in any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief for itself under any present or future federal,
state or other statute, law or regulation relating to bankruptcy, insolvency or
other relief for debtors, or if any of the aforesaid Persons should seek or
consent to or acquiesce in the appointment of any trustee, receiver or
liquidator for itself or of all or any substantial part of its property or of
any or all of the rents, revenues, issues, earnings, profits or income thereof,
or the mailing of any general assignment for the benefit of creditors or the
admission in writing by any of the aforesaid Persons of its inability to pay its
debts generally as they become due; or

                       f. The entry by a court of competent jurisdiction of an
order, judgment, or decree approving a petition filed against Borrower or
Guarantor which petition seeks any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency, or other relief for debtors, which order, judgment or
decree remains unvacated and unstayed for an aggregate of sixty (60) days
(whether or not consecutive) from the date of entry thereof, or the appointment
of any trustee, receiver or liquidator of any of the aforesaid Persons or of all
or any substantial part of its properties or of any or all of the rents,
revenues, issues,

                                       42
<PAGE>   43

earnings, profits or income thereof, which appointment shall remain unvacated
and unstayed for an aggregate of sixty (60) days (whether or not consecutive);
or

                       g. Unless otherwise permitted hereunder or under any
other Loan Documents, the sale, transfer, lease, assignment, or other
disposition, voluntarily or involuntarily, of the Collateral, or any part
thereof, or, except for Permitted Encumbrances as described in Section 5.2
above, any further encumbrance of the Collateral, unless the prior written
consent of Lender is obtained; or

                       h. The failure of Borrower to take the corrective
measures required in this Agreement within the time periods specified following
Lender's demand because the Debt Service Coverage for the Facility has not been
met; or

                       i. Any certificate, statement, representation, warranty
or audit heretofore or hereafter furnished by or on behalf of Borrower or
Guarantor pursuant to or in connection with this Agreement (including, without
limitation, representations and warranties contained herein or in any Loan
Documents) or as an inducement to Lender to make the Loan to Borrower, (i)
proves to have been false in any material respect at the time when the facts
therein set forth were stated or certified, or (ii) proves to have omitted any
substantial contingent or unliquidated liability or claim against Borrower, or
(iii) on the date of execution of this Agreement there shall have been any
material adverse change in any of the facts previously disclosed by any such
certificate, statement, representation, warranty or audit, which change shall
not have been disclosed to Lender in writing at or prior to the time of such
execution; or

                       j. The failure of Borrower to correct or cause the Lessee
to correct, within the time deadlines set by any applicable Medicare, Medicaid
or licensing agency, any deficiency which would result in the following actions
by such agency with respect to the Facility:

                          1.  a termination of any Reimbursement Contract
           or any Permit; or

                          2.  a ban on new admissions generally or on
           admission of patients otherwise qualifying for Medicare or
           Medicaid coverage; or

                       k. The Borrower or the Facility should be assessed fines
or penalties by any state or any Medicare, Medicaid, health or licensing agency
having jurisdiction over such Persons or the Facility in excess of $25,000 which
are not paid within the time specified therefor; or


                                       43
<PAGE>   44

                       l. A final judgment shall be rendered by a court of law
or equity against Borrower in excess of $25,000, and the same shall remain
undischarged for a period of thirty (30) days, unless such judgment is either
(i) fully covered by collectible insurance and such insurer has within such
period acknowledged such coverage in writing, or (ii) although not fully covered
by insurance, enforcement of such judgment has been effectively stayed, such
judgment is being contested or appealed by appropriate proceedings and Borrower
or Guarantor, as the case may be, has established reserves adequate for payment
in the event such Person is ultimately unsuccessful in such contest or appeal
and evidence thereof is provided to Lender; or

                       m. The occurrence of any material adverse change in the
financial condition or prospects of Borrower or Guarantor, or the existence of
any other condition which, in Lender's reasonable determination, constitutes a
material impairment of any such Person's ability to operate the Facility or of
such Person's ability to perform their respective obligations under the Loan
Documents, and is not remedied within thirty (30) days after written notice.

                       n. The Lease Agreement is terminated.

                          Notwithstanding anything in this Section, all
requirements of notice shall be deemed eliminated if Lender is prevented from
declaring an Event of Default by bankruptcy or other applicable law. The cure
period, if any, shall then run from the occurrence of the event or condition of
Default rather than from the date of notice.

                   7.2 REMEDIES. Upon the occurrence of any one or more of the
foregoing Events of Default, the Lender may, at its option:

                       a. Declare the entire unpaid principal of the Loan
Obligations to be, and the same shall thereupon become, immediately due and
payable, without presentment, protest or further demand or notice of any kind,
all of which are hereby expressly waived.

                       b. Proceed to protect and enforce its rights by action at
law (including, without limitation, bringing suit to reduce any claim to
judgment), suit in equity and other appropriate proceedings including, without
limitation, for specific performance of any covenant or condition contained in
this Agreement.

                       c. Exercise any and all rights and remedies afforded by
the laws of the United States, the states in which any of the Property or other
Collateral is located or any other appropriate jurisdiction as may be available
for the collection of debts and enforcement of covenants and conditions such as
those contained in this Agreement and the Loan Documents.


                                       44
<PAGE>   45

                       d. Exercise the rights and remedies of setoff and/or
banker's lien against the interest of Borrower in and to every account and other
property of Borrower which is in the possession of the Lender or any person who
then owns a participating interest in the Loan, to the extent of the full amount
of the Loan.

                       e. Exercise its rights and remedies pursuant to any other
Loan Documents.

                                  ARTICLE VIII
                                  MISCELLANEOUS


                   8.1 WAIVER. No remedy conferred upon, or reserved to, the
Lender in this Agreement or any of the other Loan Documents is intended to be
exclusive of any other remedy or remedies, and each and every remedy shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing in law or in equity. Exercise of or omission to exercise
any right of the Lender shall not affect any subsequent right of Lender to
exercise the same. No course of dealing between Borrower and Lender or any delay
on the Lender's part in exercising any rights shall operate as a waiver of any
of the Lender's rights. No waiver of any Default under this Agreement or any of
the other Loan Documents shall extend to or shall affect any subsequent or other
then existing Default or shall impair any rights, remedies or powers of Lender.

                   8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees
and expenses (including reasonable attorneys' fees and expenses of counsel for
Lender) in connection with the Loan, the Note, the preparation of this Agreement
and the other Loan Documents (including any amendments hereafter made), and in
connection with any modifications thereto and the recording of any of the Loan
Documents. If, at any time, a Default occurs or Lender becomes a party to any
suit or proceeding in order to protect its interests or priority in any
Collateral for any of the Loan Obligations or its rights under this Agreement or
any of the Loan Documents, or if Lender is made a party to any suit or
proceeding by virtue of the Loan, this Agreement or any Collateral and as a
result of any of the foregoing, the Lender employs counsel to advise or provide
other representation with respect to this Agreement, or to collect the balance
of the Loan Obligations, or to take any action in or with respect to any suit or
proceeding relating to this Agreement, any of the other Loan Documents, the
Lease Agreement, any Collateral, Borrower, any Guarantor or Lessee or to
protect, collect, or liquidate any of the security for the Loan Obligations, or
attempt to enforce any security interest or lien granted to the Lender by any of
the Loan Documents, then in any such events, all of the actual attorney's fees
arising from such services, including attorneys' fees for preparation of
litigation and in any appellate or bankruptcy proceedings, and any expenses,
costs and charges relating thereto shall constitute additional obligations of
Borrower to the Lender payable on demand of the Lender. Without


                                       45
<PAGE>   46

limiting the foregoing, Borrower has undertaken the obligation for payment of,
and shall pay, all recording and filing fees, revenue or documentary stamps or
taxes, intangibles taxes, and other taxes, expenses and charges payable in
connection with this Agreement, any of the Loan Documents, the Loan Obligations,
or the filing of any financing statements or other instruments required to
effectuate the purposes of this Agreement, and should Borrower fail to do so,
Borrower agrees to reimburse Lender for the amounts paid by Lender, together
with penalties or interest, if any, incurred by Lender as a result of
underpayment or nonpayment. Such amounts shall constitute a portion of the Loan
Obligations, shall be secured by the Mortgage and shall bear interest at the
Default Rate from the date advanced until repaid.

                   8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's
failure to do so, the Lender may make any payment or do any act on Borrower's
behalf that Borrower or others are inquired to do to remain in compliance with
this Agreement or any of the other Loan Documents, and Borrower agrees to
reimburse the Lender, on demand, for any payment made or expense incurred by
Lender pursuant to the foregoing authorization, including, without limitation,
reasonable attorneys' fees, and until so repaid any sums advanced by Lender
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall bear interest at the Default Rate from the date advanced
until repaid.

                   8.4 INDEMNIFICATION. Borrower shall, at its sole cost and
expense, protect, defend, indemnify and hold harmless the Indemnified Parties
from and against any and all claims, suits, liabilities (including, without
limitation, strict liabilities), actions, proceedings, obligations, debts,
damages, losses, costs, expenses, diminutions in value, fines, penalties,
charges, fees, judgments, awards, amounts paid in settlement, punitive damages,
foreseeable and unforeseeable consequential damages, of whatever kind or nature
(including but not limited to reasonable attorneys' fees and other costs of
defense) imposed upon or incurred by or asserted against Lender by reason of (a)
ownership of the Note, the Mortgage, the Property or any interest therein or
receipt of any Rents; (b) any amendment to, or restructuring of, the Loan
Obligations and/or any of the Loan Documents; (c) any and all lawful action that
may be taken by Lender in connection with the enforcement of the provisions of
the Mortgage or the Note or any of the other Loan Documents, whether or not suit
is filed in connection with same, or in connection with Borrower, the Lessee,
any guarantor and/or any partner, joint venturer, member or shareholder thereof
becoming a party to a voluntary or involuntary federal or state bankruptcy,
insolvency or similar proceeding; (d) any accident, injury to or death of
persons or loss of or damage to property occurring in, on or about the Property,
the Improvements or any part thereof or on the adjoining sidewalks, curbs,
adjacent property or adjacent parking areas, streets or ways; (e) any use,
nonuse or condition in, on or about the Property, the Improvements or any part
thereof or on the adjoining sidewalks, curbs, adjacent

                                       46
<PAGE>   47

property or adjacent parking areas, streets or ways; (f) any failure on the part
of Borrower, the Lessee, or any guarantor to perform or comply with any of the
terms of this Agreement or any of the other Loan Documents; (g) any claims by
any broker, person or entity claiming to have participated in arranging on
behalf of Borrower the making of the Loan evidenced by the Note; (h) any failure
of the Property to be in compliance with any applicable laws; (i) performance of
any labor or services or the furnishing of any materials or other property with
respect to the Property, the Improvements or any part thereof; (j) the failure
of any person to file timely with the Internal Revenue Service an accurate Form
1099-b, statement for recipients of proceeds from real estate, broker and barter
exchange transactions, which may be required in connection with the Mortgage, or
to supply a copy thereof in a timely fashion to the recipient of the proceeds of
the transaction in connection with which the Loan is made; (k) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents; (l) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (m) the violation of any requirements of the
Employee Retirement Income Security Act of 1974, as amended; (n) any fines or
penalties assessed or any corrective costs incurred by Lender if the Facility or
any part of the Property is determined to be in violation of any covenants,
restrictions of record, or any applicable laws, ordinances, rules or
regulations; or (o) the enforcement by any of the Indemnified Parties of the
provisions of this Section 8.4; provided, however, that no indemnity shall be
required for any such damages, costs, liabilities, losses or judgments arising
from the gross negligence or willful misconduct of the Indemnified Party. Any
amounts payable to Lender by reason of the application of this Section 8.4 shall
become immediately due and payable and shall constitute a portion of the Loan
Obligations, shall be secured by the Mortgage and shall accrue interest at the
Default Rate. The obligations and liabilities of Borrower under this Section 8.4
shall survive any termination, satisfaction, assignment, entry of a judgment of
foreclosure or exercise of a power of sale or delivery of a deed in lieu of
foreclosure of the Mortgage. For purposes of this Section 8.4, the term
"Indemnified Parties" means Lender and any Person who is or will have been
involved in the origination of the Loan, any Person who is or will have been
involved in the servicing of the Loan, any Person in whose name the encumbrance
created by the Mortgage is or will have been recorded, any Person who may hold
or acquire or will have held a full or partial interest in the Loan (including,
without limitation, any investor in any securities backed in whole or in part by
the Loan) as well as the respective directors, officers, shareholder, partners,
members, employees, agents, servants, representatives, contractors,
subcontractors, affiliates, subsidiaries, participants, successors and assigns
of any and all of the foregoing (including, without limitation, any other Person
who holds or acquires or will have held a participation or other full or partial
interest in the Loan or the Property, whether during the term of the Mortgage or
as a part of or following a foreclosure of

                                       47
<PAGE>   48

the Loan and including, without limitation, any successors by merger,
consolidation or acquisition of all or a substantial portion of Lender's assets
and business).

                   8.5 HEADINGS. The headings of the Sections of this Agreement
are for convenience of reference only, are not to be considered a part hereof,
and shall not limit or otherwise affect any of the terms hereof.

                   8.6 SURVIVAL OF COVENANTS. All covenants, agreements,
representations and warranties made herein and in certificates or reports
delivered pursuant hereto shall be deemed to have been material and relied on by
Lender, notwithstanding any investigation made by or on behalf of Lender, and
shall survive the execution and delivery to Lender of the Note and this
Agreement.

                   8.7 NOTICES, ETC. Any notice or other communication required
or permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below) with receipt acknowledged by the recipient thereof, (b) three
(3) Business Days following the date deposited in the U.S. mail, certified or
registered, with return receipt requested, or (c) one (1) Business Day following
the date deposited with Federal Express or other national overnight carrier, and
in each case addressed as follows:

                 If to Borrower:

                           ALS Financing, Inc.
                           c/o Alternative Living Services, Inc.
                           450 North Sunnyslope Road, Suite 300
                           Brookfield, Wisconsin 53005
                           Attention: Thomas E. Komula
                           Fax: (414) 789-6182

                  With a copy to:

                           Alan C. Leet, Esq.
                           Rogers & Hardin
                           2700 International Tower
                           229 Peachtree Street, N.E.
                           Atlanta, GA   30303
                           Fax: (404) 525-2224

provided, however, that failure to send such copies shall not render any such
notice or other communications invalid.



                                       48


<PAGE>   49



                  If to Lender:

                           GMAC Commercial Mortgage Corporation
                           650 Dresher Road
                           P.O. Box 1015
                           Horsham, Pennsylvania  19044-8015
                           ATTN:  Servicing Department

                  with a copy to:

                           Kelly M. Wrenn, Esquire
                           Ballard Spahr Andrews & Ingersoll, LLP
                           601 13th Street, NW Suite 1000 South
                           Washington, DC  20005-3807

Either party may change its address to another single address by notice given as
herein provided, except any change of address notice must be actually received
in order to be effective.

                   8.8 BENEFITS. All of the terms and provisions of this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns. No Person other than Borrower or Lender shall
be entitled to rely upon this Agreement or be entitled to the benefits of this
Agreement.

                   8.9 PARTICIPATION. Borrower acknowledges that Lender may, at
its option, sell participation interests in the Loan or to other participating
banks or Lender may (but shall not be obligated to) assign its interest in the
Loan to its affiliates or to other assignees (the "Assignee") to be included as
a pool of properties to be financed in a proposed Real Estate Mortgage
Investment Conduit (REMIC). Borrower agrees with each present and future
participant in the Loan or Assignee of the Loan that if an Event of Default
should occur, each present and future participant or Assignee shall have all of
the rights and remedies of Lender with respect to any deposit due from the
Borrower. The execution by a participant of a participation agreement with
Lender, and the execution by the Borrower of this Agreement, regardless of the
order of execution, shall evidence an agreement between Borrower and said
participant in accordance with the terms of this Section. If the Loan is
assigned to the Assignee, the Assignee will engage an underwriter (the
"Underwriter"), who will be responsible for the due diligence, documentation,
preparation and execution of certain documents required in connection with the
offering of interests in the REMIC. Borrower agrees that Lender may, at its sole
option and without notice to or consent of the Borrower, assign its interest in
the Loan to the Assignee for inclusion in the REMIC and, in such event,
Borrower agrees to provide the Assignee with such information as may be
reasonably required by the Underwriter in connection therewith or by an investor
in any securities backed in whole or in part by the Loan or any rating agency
rating such securities. Borrower irrevocably waives any and all right it may
have under applicable law to prohibit such disclosure, including,

                                       49
<PAGE>   50

but not limited to, any right of privacy, and consents to the disclosure of such
information to the Underwriter, to potential investors in the REMIC, and to such
rating agencies.

                   8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This
Agreement and the instruments referred to herein supersede and incorporate all
representations, promises, and statements, oral or written, made by Lender in
connection with the Loan. This Agreement may not be varied, altered, or amended
except by a written instrument executed by an authorized officer of the Lender.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be an original, but such counterparts shall
together constitute one and the same instrument.

                   8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by terms
and provisions set forth in this Loan Agreement and the other Loan Documents and
in the event of any irreconcilable conflict between the terms of the other Loan
Documents and the terms of this Loan Agreement, the terms of this Loan Agreement
shall control; provided, however, that in the event there is any apparent
conflict between any particular term or provision which appears in both this
Loan Agreement and the other Loan Documents, and it is possible and reasonable
for the terms of both this Loan Agreement and the Loan Documents to be performed
or complied with, then, notwithstanding the foregoing, both the terms of this
Loan Agreement and the other Loan Documents shall be performed and complied
with.

                   8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE
VALIDITY, INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF KANSAS
AND THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE
PERSONAL JURISDICTION IN THE STATE OF KANSAS, FOR THE ENFORCEMENT OF ANY AND ALL
OBLIGATIONS UNDER THE LOAN DOCUMENTS, EXCEPT THAT IF ANY SUCH ACTION OR
PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES
OF AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES
THERETO, SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL
BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS OR ANY
SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION.

                   8.13 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE
ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM,
SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY
RELATED TO THIS AGREEMENT OR THE LOAN OR (B) IN ANY WAY CONNECTED WITH OR
PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER
WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE
EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR
OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF
THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER
SOUNDING IN CONTRACT, TORT OR

                                       50
<PAGE>   51

OTHERWISE. BORROWER AND LENDER AGREE THAT EITHER PARTY MAY FILE A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND
BARGAINED AGREEMENT OF EITHER PARTY HERETO TO IRREVOCABLY WAIVE THEIR RIGHTS TO
TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN AND THAT, TO THE
EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER
(WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE
TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.

              [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]









                                       51

<PAGE>   52
                   8.14 NONRECOURSE. NOTWITHSTANDING ANYTHING TO THE CONTRARY
HEREIN, OR IN ANY OF THE OTHER LOAN DOCUMENTS EVIDENCING THE LOAN, THE LIABILITY
OF THE BORROWER FOR THE PAYMENT OF PRINCIPAL AND INTEREST AND AGREED CHARGES,
AND THE OBSERVANCE AND PERFORMANCE OF ALL OF THE TERMS, COVENANTS, AND
CONDITIONS AND PROVISIONS OF THE NOTE AND THE OTHER LOAN DOCUMENTS, SHALL BE
LIMITED TO THE EXTENT PROVIDED IN THE MORTGAGE AND THE NOTE.


                   IN WITNESS WHEREOF, the Borrower and the Lender have caused
this Agreement to be properly executed, by their respective duly authorized
representatives, as of the date first above written.


WITNESS:                                    BORROWER:

                                            ALS FINANCING, INC., a Kansas
                                            corporation



                                            By:                         (SEAL)
                                               -------------------------
                                                David M. Boitano
                                                Vice President


WITNESS:                                    LENDER:

                                            GMAC COMMERCIAL MORTGAGE
                                            CORPORATION, a California
                                            corporation



                                            By:                         (SEAL)
                                               -------------------------
                                               William E. Shine
                                               Executive Vice President









                                       52

<PAGE>   53
                                                   (Alternative Living Services)



                                   SCHEDULE I


         "FACILITY" means the following:

                  (a) the facility known as Crossings at the Palms, presently a
140-bed facility, consisting of 70 assisted living beds and 70 senior housing
beds, and located at 25585 Van Leuven, in Loma Linda, California 92354, as it
may now or hereafter exist, together with any other general and specialized care
facilities, if any (including any Alzheimer's care unit, subacute, and nursing
home facility), now or hereafter operated on the Property ( the "Loma Linda
Facility");

                  (b) the facility known as "Lake Park Villas," presently a
160-bed assisted living facility located at 3524 Lake Boulevard, in Oceanside,
California 92056, as it may now or hereafter exist, together with any other
general or specialized care facilities, if any (including any Alzheimer's care
unit, subacute, and nursing home facility), now or hereafter operated on the
Property (the "Oceanside Facility");

                  (c) the facility known as "Sterling House of Augusta",
presently a 21-bed assisted living facility located at 1611 Fairway Drive, in
Augusta, Kansas 67010, as it may now or hereafter exist, together with any other
general or specialized care facilities, if any (including any Alzheimer's care
unit, subacute, and any nursing home facility), now or hereafter operated on the
Property (the "Augusta Facility");

                  (d) the facility known as "Woodland Terrace," presently a
44-bed assisted living facility located at 1500 Terrace, in Liberal, Kansas
67901, as it may now or hereafter exist, together with any other general or
specialized care facilities, if any (including any Alzheimer's care unit,
subacute, and any nursing home facility), now or hereafter operated on the
Property (the "Liberal Facility"); and

                  (e) the facility known as "Sterling House at Broadmoor",
presently a 37-bed assisted living facility located at 615 Southpointe Court, in
Colorado Springs, Colorado 80906, as it may now or hereafter exist, together
with any other general or specialized care facilities, if any (including any
Alzheimer's care unit, subacute, and any nursing home facility), now or
hereafter operated on the Property (the "Colorado Springs Facility").







                                       53

<PAGE>   54
                                    EXHIBIT A

                               [LEGAL DESCRIPTION]









                                       54

<PAGE>   55



                                    EXHIBIT B

                          [TO BE PROVIDED AND ATTACHED]







                                       55

<PAGE>   56



                                    EXHIBIT C

                               OWNERSHIP INTERESTS



<TABLE>
<CAPTION>

                                                % of Ownership
             Shareholder                         in Borrower
             -----------                         -----------
<S>                                              <C>
Alternative Living Services, Inc.,                 100
a Delaware corporation

</TABLE>








                                       56

<PAGE>   57



                                    EXHIBIT D

                         SUMMARY OF FINANCIAL STATEMENTS
                                 AND CENSUS DATA


Facility Name:
              ------------------------------------------------------------------
Report Date: 
              ------------------------------------------------------------------

<TABLE>
<CAPTION>
                           QUARTER  QUARTER  QUARTER  12 MONTH
                           ENDING   ENDING   ENDING    ENDING
                           (DATE)   (DATE)   (DATE)    (DATE)
<S>                        <C>      <C>      <C>      <C>
CENSUS DATA

Total Number
of Beds:   
                           -------  -------  -------  ---------                  
Number of Days in
  Period: 
                           -------  -------  -------  ---------

Total Resident Days
  Available:               -------  -------  -------  ---------

Resident Utilization
  Days:
         Medicaid         
                           -------  -------  -------  ---------
         Private           
                           -------  -------  -------  ---------
         Medicare         
                           -------  -------  -------  ---------
         Other  
                           -------  -------  -------  ---------
Total Utilization
  Days:       
                           -------  -------  -------  ---------
CASH FLOW ANALYSIS

Total Routine Resident
Revenue:
                           -------  -------  -------  ---------
Total Net
Revenues:    
                           -------  -------  -------  ---------
Total
Expenses: 
                           -------  -------  -------  ---------
Pre-Tax
Income:                
                           -------  -------  -------  ---------  
</TABLE>







                                       57

<PAGE>   58



<TABLE>
<S>                       <C>       <C>     <C>       <C>                         

ADD BACK

Depreciation and
  Amortization:
                           -------  -------  -------  ---------  

Interest on
  Mortgage:
                           -------  -------  -------  ---------  

Facility Lease
Expense (if
applicable): 
                           -------  -------  -------  ---------  

Management
Fees:     
                           -------  -------  -------  ---------  

Extraordinary
Items:   
                           -------  -------  -------  ---------  

Net Operating
Income:  
                           -------  -------  -------  ---------  
</TABLE>


                  I hereby certify the above to be true and correct as of the
date for which the information is provided. Dated this ____ day of
________________, 199_.



                                            By:
                                               --------------------------------

                                            Its:
                                                -------------------------------








                                       58

<PAGE>   59



                                    EXHIBIT E

                             COMPLIANCE CERTIFICATE


GMAC COMMERCIAL MORTGAGE CORPORATION
2200 WOODCREST PLACE, SUITE 305
BIRMINGHAM, ALABAMA 35209

       RE:    Loan Agreement dated July __, 1998 (together with amendments, if
              any, the "Loan Agreement") by and between GMAC Commercial Mortgage
              Corporation, as Lender, and ALS Financing, Inc., as Borrower

The undersigned officer of the above-named Borrower, does hereby certify that
for the quarterly financial period ending ____________________:

1.       No Default or Event of Default has occurred or exists except
         ____________________.

2.       The Debt Service Coverage for the Facility after deduction of Actual
         Management Fees for the preceding twelve (12) months (or such lesser
         period as shown have elapsed following the closing of the Loan) through
         the end of such period was:

         Required: 1.0 to 1.0
         Actual: _____ to 1.0

         THE MANNER OF CALCULATION IS ATTACHED.

3.       The Debt Service Coverage for the Facility after deduction of Assumed
         Management Fees for the preceding twelve (12) months (or such lesser
         period as shall have elapsed following the closing of the Loan) through
         the end of such period was:

         Required: 1.25 to 1.0
         Actual: _____ to 1.0

         THE MANNER OF CALCULATION IS ATTACHED.

4.       The fiscal year to date average daily occupancy for the Facility:

         Required: Not less than 80%
         Actual: __________

5.       The capital expenditures per unit was: [ANNUAL COMPLIANCE
         CERTIFICATE ONLY]

         Required: $250 per unit.
         Actual: $______ per unit.
         EVIDENCE OF SUCH CAPITAL EXPENDITURES IS ATTACHED.


                                       59
<PAGE>   60

6.       Capitalized terms not defined herein shall have the meanings given to
         such terms in the Loan Agreement.

7.       All information set forth in this Certificate is true and correct in
         all material respects (a) as of the date of this Certificate with
         respect to Paragraph 1, and (b) as of the end of the quarter for which
         the information is provided in all other Paragraphs.







                                     ALS FINANCING, INC., a Kansas corporation,
                                     Borrower


                                     By:
                                        ---------------------------------------
                                     Name:
                                          -------------------------------------
                                     Title:
                                           ------------------------------------





                                     ALTERNATIVE LIVING SERVICES, INC., a
                                     Delaware corporation, Lessee


                                     By:
                                        ---------------------------------------
                                     Name:
                                          -------------------------------------
                                     Title:
                                           ------------------------------------

Dated this the _____ day of ____________________.








                                       60

<PAGE>   61


                                    EXHIBIT F

                             PERMITTED ENCUMBRANCES

            [Insert Schedule B exceptions in Title Insurance Policy]









                                       61