<PAGE>   1



                                  EXHIBIT 10.1

                  Lease between FBTC Leasing Corp., as Lessor,
                  and Living Centers Holding Company as Lessee

                         Participation Agreement among
                   Living Centers Holding Company, as Lessee,
                  FBTC Leasing Corp., a New York corporation,
                                   as Lessor,
               The Chase Manhattan Bank, as Agent for the Lenders

              Guarantee made by Living Centers of America, Inc. a
                 Guarantor in favor of The Chase Manhattan Bank
                                    as Agent





                                       14
<PAGE>   2

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



                                     LEASE

                                    between


                              FBTC LEASING CORP.,
                                   as Lessor,

                                      and

                         LIVING CENTERS HOLDING COMPANY
                                   as Lessee



                          ____________________________

                          Dated as of October 10, 1996
                          ____________________________




This Lease is subject to a security interest in favor of The Chase Manhattan
Bank, as agent (the "Agent"), under a Credit Agreement, dated as of October 10,
1996 among FBTC Leasing Corp., the Lenders, and the Agent, as amended or
supplemented.  This Lease has been executed in several counterparts.  To the
extent, if any, that this Lease constitutes chattel paper (as such term is
defined in the Uniform Commercial Code of the State where the Properties are
located, no security interest in this Lease may be created through the transfer
or possession of any counterpart other than the original counterpart containing
the receipt therefor executed by the Agent on the signature page hereof.





                                       15
<PAGE>   3



                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                     Page
                                                                                                                     ----
         <S>           <C>                                                                                              <C>
                                                 SECTION 1.  DEFINITIONS  . . . . . . . . . . . . . . . . . . . . . .   1
         1.1           Defined Terms  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                       -------------                                                                                     

                                              SECTION 2.  PROPERTY AND TERM   . . . . . . . . . . . . . . . . . . . .   1
         2.1           Property   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                       --------                                                                                          
         2.2           Lease Term   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                       ----------                                                                                        
         2.3           Title  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                       -----                                                                                             
         2.4           Lease Supplements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                       -----------------                                                                                 

                                                     SECTION 3.  RENT . . . . . . . . . . . . . . . . . . . . . . . .   1
         3.1           Rent   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                       ----                                                                                              
         3.2           Supplemental Rent  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                       -----------------                                                                                 
         3.3           Performance on a Non-Business Day  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                       ---------------------------------                                                                 

                                               SECTION 4.  UTILITY CHARGES  . . . . . . . . . . . . . . . . . . . . .   2
         4.1           Utility Charges  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                       ---------------                                                                                   

                                               SECTION 5.  QUIET ENJOYMENT  . . . . . . . . . . . . . . . . . . . . .   3
         5.1           Quiet Enjoyment  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                       ---------------                                                                                   

                                                  SECTION 6.  NET LEASE   . . . . . . . . . . . . . . . . . . . . . .   3
         6.1           Net Lease; No Setoff; Etc.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                       --------------------------                                                                        
         6.2           No Termination or Abatement  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
                       ---------------------------                                                                       

                                            SECTION 7.  OWNERSHIP OF PROPERTY   . . . . . . . . . . . . . . . . . . .   4
         7.1           Ownership of the Property  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
                       -------------------------                                                                         

                                            SECTION 8.  CONDITION OF PROPERTY   . . . . . . . . . . . . . . . . . . .   5
         8.1           Condition of the Property  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
                       -------------------------                                                                         
         8.2           Possession and Use of the Property   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                       ----------------------------------                                                                

                                                  SECTION 9.  COMPLIANCE  . . . . . . . . . . . . . . . . . . . . . .   6
         9.1           Compliance with Legal Requirements and Insurance Requirements  . . . . . . . . . . . . . . . .   6
                       -------------------------------------------------------------                                     

                                                       SECTION 10.  . . . . . . . . . . . . . . . . . . . . . . . . .   6
         10.1          Maintenance and Repair; Return   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                       ------------------------------                                                                    
         10.2          Right of Inspection.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
                       -------------------                                                                               
         10.3          Environmental Inspection   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
                       ------------------------                                                                          


</TABLE>





                                       16
<PAGE>   4



<TABLE>
         <S>           <C>                                                                                             <C>
                                             SECTION 11.  MODIFICATIONS . . . . . . . . . . . . . . . . . . . . . . .   8

         11.1          Modifications, Substitutions and Replacements  . . . . . . . . . . . . . . . . . . . . . . . .   8
                       ---------------------------------------------                                                     

                                                    SECTION 12.  TITLE  . . . . . . . . . . . . . . . . . . . . . . .   9
         12.1          Warranty of Title  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9
                       -----------------                                                                                 
         12.2          Grants and Releases of Easements   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9
                       --------------------------------                                                                  

                                             SECTION 13.  PERMITTED CONTESTS  . . . . . . . . . . . . . . . . . . . .  10
         13.1          Permitted Contests Other Than in Respect of Impositions  . . . . . . . . . . . . . . . . . . .  10
                       -------------------------------------------------------                                           

                                                  SECTION 14.  INSURANCE  . . . . . . . . . . . . . . . . . . . . . .  10
         14.1          Public Liability and Workers' Compensation Insurance   . . . . . . . . . . . . . . . . . . . .  10
                       ----------------------------------------------------                                              
         14.2          Hazard and Other Insurance   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
                       --------------------------                                                                        
         14.3          Coverage   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
                       --------                                                                                          

                                          SECTION 15.  CONDEMNATION AND CASUALTY  . . . . . . . . . . . . . . . . . .  12
         15.1          Casualty and Condemnation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
                       -------------------------                                                                         
         15.2          Environmental Matters  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
                       ---------------------                                                                             

                                              SECTION 16.  LEASE TERMINATION  . . . . . . . . . . . . . . . . . . . .  14
         16.1          Termination upon Certain Events  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
                       -------------------------------                                                                   
         16.2          Procedures   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
                       ----------                                                                                        

                                                   SECTION 17.  DEFAULT . . . . . . . . . . . . . . . . . . . . . . .  14
         17.1          Lease Events of Default  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
                       -----------------------                                                                           
         17.2          Final Liquidated Damages   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
                       ------------------------                                                                          
         17.3          Lease Remedies   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
                       --------------                                                                                    
         17.4          Waiver of Certain Rights   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
                       ------------------------                                                                          
         17.5          Assignment of Rights Under Contracts   . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
                       ------------------------------------                                                              
         17.6          Remedies Cumulative  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
                       -------------------                                                                               
         17.7          Covenant Defaults  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
                       -----------------                                                                                 

                                           SECTION 18.  LESSOR'S RIGHT TO CURE  . . . . . . . . . . . . . . . . . . .  19
         18.1          Lessor's Right to Cure Lessee's Lease Defaults   . . . . . . . . . . . . . . . . . . . . . . .  19
                       ----------------------------------------------                                                    

                                              SECTION 19.  LEASE TERMINATION  . . . . . . . . . . . . . . . . . . . .  19
         19.1          Provisions Relating to Lessee's Termination of this Lease or Exercise of Purchase Option   . .  19
                       ----------------------------------------------------------------------------------------          
         19.2          Aggregate Tranche A Percentage   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
                       ------------------------------                                                                    

                                               SECTION 20.  PURCHASE OPTION . . . . . . . . . . . . . . . . . . . . .  20
         20.1          Purchase Option  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
                       ---------------                                                                                   
         20.2          Maturity Date Purchase Option  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
                       -----------------------------                                                                     
         20.3          Obligation to Purchase All Properties  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
                       -------------------------------------                                                             


</TABLE>





                                       17
<PAGE>   5
<TABLE>
<S>                    <C>                                                                                             <C>
                                              SECTION 21.  SALE OF PROPERTY   . . . . . . . . . . . . . . . . . . . .  20

         21.1          Sale Procedure   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
                       --------------                                                                                    
         21.2          Application of Proceeds of Sale  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
                       -------------------------------                                                                   
         21.3          Indemnity for Excessive Wear   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
                       ----------------------------                                                                      
         21.4          Appraisal Procedure  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
                       -------------------                                                                               
         21.5          Certain Obligations Continue   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
                       ----------------------------                                                                      

                                                SECTION 22.  HOLDING OVER   . . . . . . . . . . . . . . . . . . . . .  22
         22.1          Holding Over   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
                       ------------                                                                                      

                                                SECTION 23.  RISK OF LOSS   . . . . . . . . . . . . . . . . . . . . .  23
         23.1          Risk of Loss   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
                       ------------                                                                                      

                                          SECTION 24.  SUBLETTING AND ASSIGNMENT  . . . . . . . . . . . . . . . . . .  23
         24.1          Subletting and Assignment  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
                       -------------------------                                                                         
         24.2          Subleases  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
                       ---------                                                                                         

                                            SECTION 25.  ESTOPPEL CERTIFICATES  . . . . . . . . . . . . . . . . . . .  23
         25.1          Estoppel Certificates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
                       ---------------------                                                                             

                                                  SECTION 26.  NO WAIVER  . . . . . . . . . . . . . . . . . . . . . .  24
         26.1          No Waiver  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
                       ---------                                                                                         

                                           SECTION 27.  ACCEPTANCE OF SURRENDER . . . . . . . . . . . . . . . . . . .  24
         27.1          Acceptance of Surrender  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
                       -----------------------                                                                           

                                             SECTION 28.  NO MERGER OF TITLE  . . . . . . . . . . . . . . . . . . . .  24
         28.1          No Merger of Title   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
                       ------------------                                                                                

                                                   SECTION 29.  NOTICES . . . . . . . . . . . . . . . . . . . . . . .  24
         29.1          Notices  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
                       -------                                                                                           

                                                SECTION 30.  MISCELLANEOUS  . . . . . . . . . . . . . . . . . . . . .  25
         30.1          Miscellaneous  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
                       -------------                                                                                     
         30.2          Amendments and Modifications   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
                       ----------------------------                                                                      
         30.3          Successors and Assigns   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       ----------------------                                                                            
         30.4          Headings and Table of Contents   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       ------------------------------                                                                    
         30.5          Counterparts   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       ------------                                                                                      
         30.6          GOVERNING LAW  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       -------------                                                                                     
         30.7          Limitations on Recourse  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       -----------------------                                                                           
         30.8          Memorandum of Lease  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       -------------------                                                                               
         30.9          Priority   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       --------                                                                                          
         31.1          Ground Lease   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
                       ------------                                                                                      
Exhibits
--------
Exhibit A              Lease Supplement
Exhibit B              Memorandum of Lease
</TABLE>





                                       18
<PAGE>   6
         LEASE (this "Lease"), dated as of October 10, 1996, between FBTC
LEASING CORP., a New York corporation, having its principal office at Two World
Trade Center, New York, New York  10048, as lessor (the "Lessor"), and LIVING
CENTERS HOLDING COMPANY, a  Delaware corporation, having its principal office
at 15415 Katy Freeway, Suite 800, Houston, Texas 77094, as lessee (the
"Lessee").

                       In consideration of the mutual agreements herein
contained, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:


                            SECTION 1.  DEFINITIONS

                 1.1    Defined Terms.  Capitalized terms used herein but not
otherwise defined in this Lease shall have the respective meanings specified in
Annex A to the Participation Agreement dated as of the date hereof among
Lessee, Lessor, Agent and the Lenders named therein.


                         SECTION 2.  PROPERTY AND TERM

                 2.1    Property.  Subject to the terms and conditions
hereinafter set forth and contained in the respective Lease Supplement relating
to each Property, Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, each Property.

                 2.2    Lease Term.  The Property is leased for the Term,
unless extended or earlier terminated in accordance with the provisions of this
Lease.

                 2.3    Title.  Each Property is leased to Lessee without any
representation or warranty, express or implied, by Lessor and subject to the
rights of parties in possession, the existing state of title (including the
Permitted Exceptions) and all applicable Legal Requirements.  Lessee shall in
no event be excused in its obligation to pay Rent for any defect in title to
the Property.

                 2.4    Lease Supplements.  On each Property Closing Date,
Lessee and Lessor shall each execute and deliver a Lease Supplement for the
Property to be leased on such date in substantially the form of Exhibit A
hereto and thereafter such Property shall be subject to the terms of this
Lease.


                                SECTION 3.  RENT

                 3.1    Rent.  (a)  On each applicable Payment Date occurring
after the termination of the Construction Period for a Property and on any date
when this Lease shall terminate, Lessee shall pay the Basic Rent attributable
to such Property.

                 (b)    Basic Rent shall be due and payable in lawful money of
the United States and shall be paid by wire transfer of immediately available
funds on or before the due date





                                       19
<PAGE>   7
therefor to such account or accounts at such bank or banks or to such other
Person or in such other manner as Lessor shall from time to time direct.

                 (c)    Neither Lessee's inability or failure to take
possession of all, or any portion, of the Property when delivered by Lessor,
nor Lessor's inability or failure to deliver all or any portion of the Property
to Lessee, whether or not attributable to any act or omission of Lessee or any
act or omission of Lessor, or for any other reason whatsoever, shall delay or
otherwise affect Lessee's obligation to pay Rent in accordance with the terms
of this Lease.

                 3.2    Supplemental Rent.  (a) Lessee shall pay to Lessor or
the Person entitled thereto any and all Supplemental Rent promptly as the same
shall become due and payable, and if Lessee fails to pay any Supplemental Rent,
Lessor shall have all rights, powers and remedies provided for herein or by law
or equity or otherwise in the case of nonpayment of Basic Rent.  Lessee shall
pay to Lessor as Supplemental Rent, among other things, on demand, to the
extent permitted by applicable Legal Requirements, interest at the applicable
Overdue Rate on any installment of Basic Rent not paid when due for the period
for which the same shall be overdue and on any payment of Supplemental Rent not
paid when due or demanded by Lessor for the period from the due date or the
date of any such demand, as the case may be, until the same shall be paid.  The
expiration or other termination of Lessee's obligations to pay Basic Rent
hereunder shall not limit or modify the obligations of Lessee with respect to
Supplemental Rent.  Unless expressly provided otherwise in this Lease or any
other Operative Agreement, in the event of any failure on the part of Lessee to
pay and discharge any Supplemental Rent as and when due, Lessee shall also
promptly pay and discharge any fine, penalty, interest or cost which may be
assessed or added for nonpayment or late payment of such Supplemental Rent, all
of which shall also constitute Supplemental Rent.

                 (b)    Lessee shall make a payment of Supplemental Rent equal
to the Maximum Residual Guarantee Amount in accordance with Section 21.1(c).

                 3.3    Performance on a Non-Business Day.  If any payment is
required hereunder on a day that is not a Business Day, then such payment shall
be due on the next succeeding Business Day.


                          SECTION 4.  UTILITY CHARGES

                 4.1    Utility Charges.  Lessee shall pay, or cause to be
paid, all charges for electricity, power, gas, oil, water, telephone, sanitary
sewer service and all other rents and  utilities used in or on each Property
during the Term.  Lessee shall be entitled to receive any credit or refund with
respect to any utility charge paid by Lessee and the amount of any credit or
refund received by Lessor on account of any utility charges paid by Lessee, net
of the costs and expenses incurred by Lessor in obtaining such credit or
refund, shall be promptly paid over to Lessee.  All charges for utilities
imposed with respect to the Property for a billing period during which this
Lease expires or terminates shall be adjusted and prorated on a daily basis
between Lessor and Lessee, and each party shall pay or reimburse the other for
each party's pro rata share thereof.





                                       20
<PAGE>   8
                          SECTION 5.  QUIET ENJOYMENT

                 5.1    Quiet Enjoyment.  So long as no Lease Event of Default
shall have occurred and be continuing, Lessee shall peaceably and quietly have,
hold and enjoy each Property for the Term, free of any claim or other action by
Lessor or anyone rightfully claiming by, through or under Lessor with respect
to any matters arising from and after the Lease Commencement Date.


                             SECTION 6.  NET LEASE

                 6.1    Net Lease; No Setoff; Etc.  This Lease shall constitute
a net lease and, notwithstanding any other provision of this Lease, it is
intended that Basic Rent and Supplemental Rent shall be paid without
counterclaim, setoff, deduction or defense of any kind and without abatement,
suspension, deferment, diminution or reduction of any kind, and Lessee's
obligation to pay all such amounts is absolute and unconditional.  The
obligations and liabilities of Lessee hereunder shall in no way be released,
discharged or otherwise affected for any reason, including, without limitation,
to the maximum extent permitted by law:  (a) any defect in the condition,
merchantability, design, construction, quality or fitness for use of any
portion of any Property, or any failure of any Property to comply with all
Legal Requirements, including any inability to occupy or use any Property by
reason of such non-compliance; (b) any damage to, abandonment, loss,
contamination of or Release from or destruction of or any requisition or taking
of any Property or any part thereof, including eviction; (c) any restriction,
prevention or curtailment of or interference with any use of any Property or
any part thereof, including eviction; (d) any defect in title to or rights to
any Property or any Lien on such title or rights or on any Property; (e) any
change, waiver, extension, indulgence or other action or omission or breach in
respect of any obligation or liability of or by Lessor, Agent or any Lender;
(f) any bankruptcy, insolvency, reorganization, composition, adjustment,
dissolution, liquidation or other like proceedings relating to Lessee, Lessor,
Agent, any lender or any other Person, or any action taken with respect to this
Lease by any trustee or receiver of Lessee, Lessor, Agent, any lender or any
other Person, or by any court, in any such proceeding; (g) any claim that
Lessee has or might have against any Person, including Lessor, Agent or any
Lender; (h) any failure on the part of Lessor to perform or comply with any of
the terms of this Lease, any other Operative Agreement or of any other
agreement; (i) any invalidity or unenforceability or disaffirmance against or
by Lessee of this Lease or any provision hereof or any of the other Operative
Agreements or any provision of any thereof; (j) the impossibility of
performance by Lessee, Lessor or both; (k) any action by any court,
administrative agency or other Governmental Authority; any restriction,
prevention or curtailment of or any interference with the construction on or
any use of any Property or any part thereof; or (m) any other occurrence
whatsoever, whether similar or dissimilar to the foregoing, whether or not
Lessee shall have notice or knowledge of any of the foregoing.  This Lease
shall be noncancellable by Lessee for any reason whatsoever except as expressly
provided herein, and Lessee, to the extent permitted by Legal Requirements,
waives all rights now or hereafter conferred by statute or otherwise to quit,
terminate or surrender this Lease, or to any diminution, abatement or reduction
of Rent payable by Lessee hereunder.  If for any reason whatsoever this Lease
shall be terminated in whole or in part by operation of law or otherwise,
except as otherwise expressly provided herein, Lessee shall, unless prohibited
by Legal Requirements, nonetheless pay to Lessor (or, in the case of
Supplemental Rent, to whomever shall be entitled thereto) an amount equal to
each Rent payment at the time and in the manner that such payment would have
become due and payable under the terms of this





                                       21
<PAGE>   9
Lease if it had not been terminated in whole or in part, and in such case, so
long as such payments are made and no Lease Event of Default shall have
occurred and be continuing, Lessor will deem this Lease to have remained in
effect.  Each payment of Rent made by Lessee hereunder shall be final and,
absent manifest error in the computation of the amount thereof, Lessee shall
not seek or have any right to recover all or any part of such payment from
Lessor, Agent or any party to any agreements related thereto for any reason
whatsoever.  Lessee assumes the sole responsibility for the condition, use,
operation, maintenance, and management of the Property and Lessor shall have no
responsibility in respect thereof and shall have no liability for damage to the
property of Lessee or any subtenant of Lessee on any account or for any reason
whatsoever.

                 6.2    No Termination or Abatement.  Lessee shall remain
obligated under this Lease in accordance with its terms and shall not take any
action to terminate, rescind or avoid this Lease, notwithstanding any action
for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other
proceeding affecting Lessor, or any action with respect to this Lease which may
be taken by any trustee, receiver or liquidator of Lessor or by any court with
respect to Lessor, except as otherwise expressly provided herein.  Lessee
hereby waives all right (i) to terminate or surrender this Lease, except as
otherwise expressly provided herein, or (ii) to avail itself of any abatement,
suspension, deferment, reduction, setoff, counterclaim or defense with respect
to any Rent.  Lessee shall remain obligated under this Lease in accordance with
its terms and Lessee hereby waives any and all rights now or hereafter
conferred by statute or otherwise to modify or to avoid strict compliance with
its obligations under this Lease.  Notwithstanding any such statute or
otherwise, Lessee shall be bound by all of the terms and conditions contained
in this Lease.


                       SECTION 7.  OWNERSHIP OF PROPERTY

                 7.1    Ownership of the Property.  (a)  Lessor and Lessee
intend that (i) for financial accounting purposes with respect to Lessee (A)
this Lease will be treated as an "operating lease" pursuant to Statement of
Financial Accounting Standards (SFAS) No. 13, as amended, (B) Lessor will be
treated as the owner and lessor of the Property and (C) Lessee will be treated
as the lessee of the Property, but (ii) for federal, state and local income tax
and all other purposes (A) this Lease will be treated as a financing
arrangement, (B) the Lenders will be treated as senior lenders making loans to
Lessee in an amount equal to the Loans, which Loans will be secured by the
Property, (C) Lessor will be treated as a subordinated lender making a loan to
Lessee in an amount equal to the Lessor Contribution, which loan is secured by
the Property, and (D) Lessee will be treated as the owner of the Property and
will be entitled to all tax benefits ordinarily available to an owner of
property like the Property for such tax purposes.

                 (b)    Lessor and Lessee further intend and agree that, for
the purpose of securing Lessee's obligations for the repayment of the
above-described loans, (i) this Lease shall also be deemed to be a security
agreement and financing statement within the meaning of Article 9 of the
Uniform Commercial Code and a real property mortgage or deed of trust, as
applicable; (ii) the Lease provided for in Section 2 shall be deemed a grant of
a security interest in and a mortgage lien on the Lessee's right, title and
interest in the Properties (including the right to exercise all remedies as are
contained in the applicable Mortgage and





                                       22
<PAGE>   10
Memorandum of Lease upon the occurrence of a Lease Event of Default) and all
proceeds of the conversion, voluntary or involuntary, of the foregoing into
cash, investments, securities or other property, whether in the form of cash,
investments, securities or other property, for the benefit of the Lessor to
secure the Lessee's payment of all amounts owed by the Lessee under this Lease
and the other Operative Agreements and Lessor holds title to the Properties so
as to create and grant a first lien and prior security interest in each
Property (A) pursuant to this Lease for the benefit of the Agent under the
Assignment of Lease, to secure to the Agent the obligations of the Lessee under
the Lease and (B) pursuant to the Mortgages to secure to the Agent the
obligations of the Lessor under the Mortgages and the Notes; (iii) the
possession by Lessor or any of its agents of notes and such other items of
property as constitute instruments, money, negotiable documents or chattel
paper shall be deemed to be "possession by the secured party" for purposes of
perfecting the security interest pursuant to Section 9-305 of the Uniform
Commercial Code; and (iv) notifications to Persons holding such property, and
acknowledgements, receipts or confirmations from financial intermediaries,
bankers or agents (as applicable) of Lessee shall be deemed to have been given
for the purpose of perfecting such security interest under applicable law.
Lessor and Lessee shall, to the extent consistent with this Lease, take such
actions as may be necessary to ensure that, if this Lease were deemed to create
a security interest in the Properties in accordance with this Section, such
security interest would be deemed to be a perfected security interest of first
priority under applicable law and will be maintained as such throughout the
Basic Term.  Nevertheless, Lessee acknowledges and agrees that none of Lessor,
Agent, or any Lender has provided or will provide tax, accounting or legal
advice to Lessee regarding this Lease, the Operative Agreements or the
transactions contemplated hereby and thereby, or made any representations or
warranties concerning the tax, accounting or legal characteristics of the
Operative Agreements, and that Lessee has obtained and relied upon such tax,
accounting and legal advice concerning the Operative Agreements as it deems
appropriate.

                 (c)    Lessor and Lessee further intend and agree that in the
event of any insolvency or receivership proceedings or a petition under the
United States bankruptcy laws or any other applicable insolvency laws or
statute of the United States of America or any State or Commonwealth thereof
affecting Lessee or Lessor, the transactions evidenced by this Lease shall be
regarded as loans made by an unrelated third party lender to Lessee.


                       SECTION 8.  CONDITION OF PROPERTY

                 8.1    Condition of the Property.  LESSEE ACKNOWLEDGES AND
AGREES THAT IT IS RENTING EACH PROPERTY "AS IS" WITHOUT REPRESENTATION,
WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR AND SUBJECT TO (A) THE
EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF,
(C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT
SHOW AND (D) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE
HEREOF.  NONE OF LESSOR, THE AGENT AND ANY LENDER HAS MADE OR SHALL BE DEEMED
TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED,
INCLUDING THE CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL CONDITION, OR ANY
ENVIRONMENTAL OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE DEEMED TO HAVE ANY
LIABILITY WHATSOEVER AS





                                       23
<PAGE>   11
TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, OR
FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER
REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT TO ANY PROPERTY (OR ANY PART THEREOF) AND NONE OF LESSOR, THE AGENT AND
ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR
THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL
REQUIREMENT.

                 8.2    Possession and Use of the Property.  Each Property
shall be used in a manner consistent with the Agency Agreement and, after the
Completion Date for the Property, as a skilled nursing or assisted living
Facility.  Lessee shall pay, or cause to be paid, all charges and costs
required in connection with the use of the Properties.  Lessee shall not commit
or permit any waste of any Property or any part thereof.


                             SECTION 9.  COMPLIANCE

                 9.1    Compliance with Legal Requirements and Insurance
Requirements.  Subject to the terms of Section 13 relating to permitted
contests, Lessee, at its sole cost and expense, shall (a) comply in all
material respects with all Legal Requirements (including all Environmental
Laws) and Insurance Requirements relating to each Property, including the use,
construction, operation, maintenance, repair and restoration thereof, whether
or not compliance therewith shall require structural or extraordinary changes
in the Improvements or interfere with the use and enjoyment of each Property,
and (b) procure, maintain and comply in all material respects with all
licenses, permits, orders, approvals, consents and other authorizations
required for the construction, renovation, use, maintenance and operation of
each Property and for the use, operation, maintenance, repair and restoration
of the Improvements.


                      SECTION 10.  MAINTENANCE AND REPAIR

                 10.1   Maintenance and Repair; Return.  (a) Lessee, at its
sole cost and expense, shall maintain each Property in good condition (ordinary
wear and tear excepted) and make all necessary repairs thereto, of every kind
and nature whatsoever, whether interior or exterior, ordinary or extraordinary,
structural or nonstructural or foreseen or unforeseen, in each case in
substantial compliance with all Legal Requirements and Insurance Requirements
and on a basis reasonably consistent with the operation and maintenance of
commercial properties comparable in type and location to the applicable
Property subject, however, to the provisions of Section 15 with respect to
Condemnation and Casualty.

                 (b)    Lessor shall under no circumstances be required to
build any improvements on any Property, make any repairs, replacements,
alterations or renewals of any nature or description to any Property, make any
expenditure whatsoever in connection with this Lease or maintain any Property
in any way.  Lessor shall not be required to maintain, repair or rebuild all or
any part of any Property, and Lessee waives the right to (i) require Lessor to
maintain, repair, or rebuild all or any part of any Property, or (ii) make
repairs at





                                       24
<PAGE>   12
the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement,
contract, agreement, covenants, condition or restriction at any time in effect.

                 (c)    Lessee shall, upon the expiration or earlier
termination of the Term with respect to a Property, vacate, surrender and
transfer such Property to Lessor, at Lessee's own expense, free and clear of
all Liens other than (i) Liens of the types described in clause (i) of the
definition of Permitted Liens, (ii) Liens of the type described in clause (ii)
of the definition of Permitted Exceptions and (iii) Lessor Liens, in as good
condition as they were on the applicable Property Closing Date or, if later,
the Completion Date in respect of such Property, ordinary wear and tear
excepted, and in compliance with all Legal Requirements and the other
requirements of this Lease (and in any event without (x) any asbestos installed
or maintained in any part of such Property, (y) any polychlorinated byphenyls
(PCBs) in, on or used, stored or located at such Property, and (z) any other
Hazardous Substances in violation of Applicable Environmental Laws).  Lessee
shall cooperate with any independent purchaser of such Property in order to
facilitate the ownership and operation by such purchaser of such Property after
such expiration or earlier termination of the Term, including providing all
books, reports and records regarding the maintenance, repair and ownership of
such Property and all data and technical information relating thereto, granting
or assigning all licenses necessary for the operation and maintenance of such
Property and cooperating in seeking and obtaining all necessary licenses,
permits and approvals of Governmental Authorities.  Lessee shall have also paid
the total cost for the completion of all Modifications commenced prior to such
expiration or earlier termination of the Term.  The obligation of Lessee under
this Section 10.1(c) shall survive the expiration or termination of this Lease.

                 10.2   Right of Inspection.  Lessor may, at reasonable times
and with reasonable prior notice, enter upon, inspect and examine at its own
cost and expense (unless a Lease Event of Default exists, in which case the
out-of-pocket costs and expenses of Lessor shall be paid by Lessee), any
Property.  Upon request of the Agent, Lessee shall furnish to Lessor
statements, no more than once per year, accurate in all material respects,
regarding the condition and state of repair of each Property.  Lessor shall
have no duty to make any such inspection or inquiry and shall not incur any
liability or obligation by reason of not making any such inspection or inquiry.

                 10.3   Environmental Inspection.  Upon surrender of possession
of each Property, or not more than 120 days nor less than 30 days prior to the
Expiration Date (unless Lessee has previously irrevocably exercised the
Purchase Option), Lessee shall, at its sole cost and expense, provide to Lessor
a report by an environmental consultant selected by Lessee and reasonably
satisfactory to Lessor certifying that Hazardous Substances have not at any
time during the Term been generated, used, treated or stored on, transported to
or from, Released at, on or from or deposited at or on such Property, and no
portion of such Property has been used for such purposes other than (i) as
necessary to use, operate, maintain, repair and restore such Property and (ii)
in full compliance with all Environmental Laws.  If such is not the case, the
report shall set forth a remedial response plan relating to such Property
(which remedial response plan, if required by any Environmental Law or
Governmental Authority, shall be approved by the appropriate Governmental
Authority).  Such remedial response plan shall include, but shall not be
limited to, plans for full response, remediation, removal, or other corrective
action, and the protection, or mitigative action associated with the
protection, of natural resources including wildlife, aquatic species, and
vegetation associated with such





                                       25
<PAGE>   13
Property, as required by all applicable Environmental Laws.  If such report
includes a remedial response plan, Lessee shall promptly deposit funds in
escrow with the Agent sufficient to ensure the full execution and
implementation of such plan.


                           SECTION 11.  MODIFICATIONS

                 11.1   Modifications, Substitutions and Replacements.  (a)  So
long as no Lease Event of Default has occurred and is continuing, Lessee, at
its sole cost and expense, may at any time and from time to time make
alterations, renovations, improvements and additions to a Property or any part
thereof (collectively, "Modifications"); provided, that: (i) except for any
Modification required to be made pursuant to a Legal Requirement or an
Insurance Requirement, no Modification, individually, or when aggregated with
any (A) other Modification or (B) grant, dedication, transfer or release
pursuant to Section 12.2, shall impair the value of such Property or the
utility or useful life of such Property from that which existed immediately
prior to such Modification; (ii) the Modification shall be performed
expeditiously and in a good and workmanlike manner; (iii) Lessee shall comply
with all Legal Requirements (including all Environmental Laws) and Insurance
Requirements applicable to the Modification, including the obtaining of all
permits and certificates of occupancy, and the structural integrity of such
Property shall not be adversely affected; (iv) Lessee shall maintain or cause
to be maintained builders' risk insurance at all times when a Modification is
in progress; (v) subject to the terms of Section 13 relating to permitted
contests, Lessee shall pay all costs and expenses and discharge any Liens
arising with respect to the Modification; (vi) such Modifications shall comply
with Sections 8.2 and 10.1 and shall not change the primary character of such
Property; and (vii) no Improvements shall be demolished, except to the extent
such demolition does not impair the value, utility or useful life of such
Property.  All Modifications (other than those that may be readily removed
without impairing the value, utility or remaining useful life of such Property)
shall remain part of the realty and shall be subject to this Lease, and title
thereto shall immediately vest in Lessor.  So long as no Lease Event of Default
has occurred and is continuing, Lessee may place upon a Property any inventory,
trade fixtures, machinery, equipment or other property belonging to Lessee or
third parties and may remove the same at any time during the term of this
Lease; provided that such inventory, trade fixtures, machinery, equipment or
other property, or their respective operations, do not impair the value,
utility or remaining useful life of such Property.

                 (b)    Following the Completion Date with respect to any
Property, Lessee shall notify Lessor of the undertaking of any construction,
repairs or alterations to the Property the cost of which is anticipated to
exceed $500,000.  Prior to undertaking any such construction or alterations
costing in excess of such amount, Lessee shall deliver to Lessor (i) a brief
narrative of the work to be done and a copy of the plans and specifications
relating to such work; and (ii) an Officer's Certificate stating that such work
when completed will not impair the value, utility or remaining life of such
Property.  Lessor, by itself or its agents, shall have the right, but not the
obligation, from time to time to inspect such construction to ensure that the
same is completed consistent with the plans and specifications.

                 (c)    Following the Completion Date with respect to any
Property, Lessee shall not without the consent of Lessor undertake any
construction or alterations to such Property if





                                       26
<PAGE>   14
such construction or alterations cannot, in the reasonable judgement of Agent,
be completed on or prior to the date that is twelve months prior to the
Expiration Date.

                               SECTION 12.  TITLE

                 12.1   Warranty of Title.  (a)  Lessee agrees that, except as
otherwise provided herein and subject to the terms of Section 13 relating to
permitted contests, Lessee shall not directly or indirectly create or allow to
remain, and shall promptly discharge at its sole cost and expense, any Lien,
defect, attachment, levy, title retention agreement or claim upon any Property
or any Modifications or any Lien, attachment, levy or claim with respect to the
Rent or with respect to any amounts held by the Agent pursuant to the Credit
Agreement, other than Permitted Liens.  Lessee shall promptly notify Lessor in
the event it receives knowledge that a Lien (other than a Permitted Lien or a
Lessor Lien) exists with respect to the Property unless Lessee promptly removes
such Lien.

                 (b)    Nothing contained in this Lease shall be construed as
constituting the consent or request of Lessor, expressed or implied, to or for
the performance by any contractor, mechanic, laborer, materialman, supplier or
vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to any Property
or any part thereof.  NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT
BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO
LESSEE, OR TO ANYONE HOLDING ANY PROPERTY OR ANY PART THEREOF THROUGH OR UNDER
LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY
PROPERTY.

                 12.2   Grants and Releases of Easements.  Provided that no
Lease Event of Default shall have occurred and be continuing and subject to the
provisions of Sections 8, 9, 10 and 11, Lessor hereby consents to the following
actions by Lessee, in the name and stead of Lessor, but at Lessee's sole cost
and expense:  (a) the granting (prior to the Lien of the Mortgage) of
easements, licenses, rights-of-way and other rights and privileges in the
nature of easements reasonably necessary or desirable for the construction,
use, repair, renovation or maintenance of any Property as herein provided; (b)
the release (free and clear of the Lien of the Mortgage) of existing easements
or other rights in the nature of easements which are for the benefit of any
Property; (c) the dedication or transfer (prior to the Lien of the Mortgage) of
unimproved portions of any Property for road, highway or other public purposes;
(d) the execution of petitions to have any Property annexed to any municipal
corporation or utility district; and (e) the execution of amendments to any
covenants and restrictions affecting any Property; provided, that in each case
Lessee shall have delivered to Lessor an Officer's Certificate stating that:
(i) such grant, release, dedication or transfer does not impair the value of
utility or remaining useful life of the applicable Property, (ii) such grant,
release, dedication or transfer is necessary in connection with the
construction, use, maintenance, alteration, renovation or improvement of the
applicable Property, (iii) Lessee shall remain obligated under this Lease and
under any instrument executed by Lessee consenting to the assignment of
Lessor's interest in this Lease as security for indebtedness, in each such case
in accordance with their terms, as though such grant, release, dedication or
transfer, had not been effected and (iv) Lessee shall pay and perform any
obligations of Lessor under such grant, release,





                                       27
<PAGE>   15
dedication or transfer.  Without limiting the effectiveness of the foregoing,
provided that no Lease Event of Default shall have occurred and be continuing,
Lessor shall, upon the request of Lessee, and at Lessee's sole cost and
expense, execute and deliver any instruments necessary or appropriate to
confirm any such grant, release, dedication or transfer to any Person permitted
under this Section.


                        SECTION 13.  PERMITTED CONTESTS

                 13.1   Permitted Contests Other Than in Respect of
Impositions.  Except to the extent otherwise provided for in Section 12.2 of
the Participation Agreement, Lessee, on its own or on Lessor's behalf but at
Lessee's sole cost and expense, may contest, by appropriate administrative or
judicial proceedings conducted in good faith and with due diligence, the
amount, validity or application, in whole or in part, of any Legal Requirement,
or utility charges payable pursuant to Section 4.1 or any Lien, attachment,
levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or
otherwise compromise any such item, provided that (a) the commencement and
continuation of such proceedings shall suspend the collection thereof from, and
suspend the enforcement thereof against the applicable Properties, Lessor, the
Agent and the Lenders; (b) there shall be no risk of the imposition of a Lien
(other than a Permitted Lien) on any Property and no part of any Property nor
any Rent would be in any danger of being sold, forfeited, lost or deferred; (c)
at no time during the permitted contest shall there be a risk of the imposition
of criminal liability or civil liability on Lessor, the Agent or any Lender for
failure to comply therewith; and (d) in the event that, at any time, there
shall be a material risk of extending the application of such item beyond the
earlier of the Maturity Date and the Expiration Date for the applicable
Property, then Lessee shall deliver to Lessor an Officer's Certificate
certifying as to the matters set forth in clauses (a), (b) and (c) of this
Section 13.1.  Lessor, at Lessee's sole cost and expense, shall execute and
deliver to Lessee such authorizations and other documents as may reasonably be
required in connection with any such contest and, if reasonably requested by
Lessee, shall join as a party therein at Lessee's sole cost and expense.


                             SECTION 14.  INSURANCE

                 14.1   Public Liability and Workers' Compensation Insurance.
During the Term, Lessee shall procure and carry, at Lessee's sole cost and
expense, commercial general liability insurance for claims for injuries or
death sustained by persons or damage to property while on each Property.  Such
insurance shall be on terms and in amounts that are no less favorable than
insurance maintained by owners of similar properties and that are in accordance
with normal industry practice, provided that Lessee shall be permitted to
self-insure such liability up to $1,000,000.  The policy shall be endorsed to
name Lessor, the Agent and the Lenders as additional insureds.  The policy
shall also specifically provide that the policy shall be considered primary
insurance which shall apply to any loss or claim before any contribution by any
insurance which Lessor, the Agent or the Lenders may have in force.  Lessee
shall, in the operation of the Property, comply with the applicable workers'
compensation laws and protect Lessor against any liability under such laws.





                                       28
<PAGE>   16
                 14.2   Hazard and Other Insurance.  (a)  During the Term,
Lessee shall keep each Property insured against loss or damage by fire and
other risks on terms and in amounts that are no less favorable than insurance
maintained by owners of similar properties, that are in accordance with normal
industry practice, are in amounts equal to the actual replacement cost of the
Improvements.  So long as no Lease Event of Default exists, any loss payable
under the insurance policy required by this Section will be paid to and
adjusted solely by Lessee, subject to Section 15.  So long as no Lease Event of
Default exists, any loss payable under any title insurance policy covering any
Property will be paid to and adjusted solely by Lessee, subject to Section 15.

                 (b)    If at any time during the Term the area in which any
Property is located is designated a "flood-prone" area pursuant to the Flood
Disaster Protection Act of 1973 or any amendments or supplements thereto, then
Lessee shall comply with the National Flood Insurance Program as set forth in
the Flood Disaster Protection Act of 1973, as may be amended.  In addition,
Lessee will fully comply with the requirements of the National Flood Insurance
Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be
amended from time to time, and with any other Legal Requirement, concerning
flood insurance to the extent that it apply to any Property.

                 14.3   Coverage.  (a)  Lessee shall furnish Lessor and the
Agent with certificates showing the insurance required under Sections 14.1 and
14.2 to be in effect and naming Agent, the Lenders and the Lessor as an
additional insured with respect to liability insurance and showing the
mortgagee endorsement required by Section 14.3(c).  All such insurance shall be
at the cost and expense of Lessee.  Such certificates shall include a provision
in which the insurer agrees to provide thirty (30) days' advance written notice
by the insurer to Lessor and the Agent in the event of cancellation or
modification of such insurance.  If a Lease Event of Default has occurred and
is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of
all insurance policies required by this Lease.

                 (b)    Lessee agrees that the insurance policy or policies
required by this Lease shall include an appropriate clause pursuant to which
such policy shall provide that it will not be invalidated should Lessee waive,
in writing, prior to a loss, any or all rights of recovery against any party
for losses covered by such policy.  Lessee hereby waives any and all such
rights against Lessor, the Agent and the Lenders to the extent of payments made
under such policies.

                 (c)    All insurance policies required by Section 14.2 shall
include a "New York" or standard form mortgagee endorsement in favor of the
Agent and, if available, the Lessor.

                 (d)    Neither Lessor nor Lessee shall carry separate
insurance concurrent in kind or form or contributing in the event of loss with
any insurance required under this Lease except that Lessor may carry separate
liability insurance so long as (i) Lessee's insurance is designated as primary
and in no event excess or contributory to any insurance Lessor may have in
force which would apply to a loss covered under Lessee's policy and (ii) each
such insurance policy will not cause Lessee's insurance required under this
Lease to be subject to a coinsurance exception of any kind.





                                       29
<PAGE>   17
                 (e)    Lessee shall pay as they become due all premiums for
the insurance required by this Lease, shall renew or replace each policy prior
to the expiration date thereof and shall promptly deliver to Lessor and the
Agent certificates for renewal and replacement policies.

                     SECTION 15.  CONDEMNATION AND CASUALTY

                 15.1   Casualty and Condemnation.  (a)  Subject to the
provisions of this Section 15 and Section 16 (in the event Lessee delivers, or
is obligated to deliver, a Termination Notice), and prior to the occurrence and
continuation of a Lease Default, Lessee shall be entitled to receive (and
Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and
interest in) any award, compensation or insurance proceeds to which Lessee or
Lessor may become entitled by reason of their respective interests in a
Property (i) if all or a portion of such Property is damaged or destroyed in
whole or in part by a Casualty or (ii) if the use, access, occupancy, easement
rights or title to such Property or any part thereof is the subject of a
Condemnation; provided, however, if a Lease Default shall have occurred and be
continuing such award, compensation or insurance proceeds shall be paid
directly to Lessor or, if received by Lessee, shall be held in trust for
Lessor, and shall be paid over by Lessee to Lessor, and provided further that
in the event of any Casualty or Condemnation, the estimated cost of restoration
of which is in excess of $1,000,000, any such award, compensation or insurance
proceeds shall be paid directly to Lessor, or if received by Lessee, shall be
held in trust for Lessor and shall be paid over by Lessee to Lessor.

                 (b)    So long as no Lease Event of Default has occurred and
is continuing, Lessee may appear in any proceeding or action to negotiate,
prosecute, adjust or appeal any claim for any award, compensation or insurance
payment on account of any such Casualty or Condemnation and shall pay all
expenses thereof; provided that if the estimated cost of restoration of the
Property or the payment on account of such title defect is in excess of
$1,000,000, then Lessor shall be entitled to participate in any such proceeding
or action.  At Lessee's reasonable request, and at Lessee's sole cost and
expense, Lessor and the Agent shall participate in any such proceeding, action,
negotiation, prosecution or adjustment.  Lessor and Lessee agree that this
Lease shall control the rights of Lessor and Lessee in and to any such award,
compensation or insurance payment.

                 (c)    If Lessor or Lessee shall receive notice of a Casualty
or a possible Condemnation of a Property or any interest therein, Lessor or
Lessee, as the case may be, shall give notice thereof to the other and to the
Agent promptly after the receipt of such notice.

                 (d)    In the event of a Casualty or receipt of notice by
Lessee or Lessor of a Condemnation, Lessee shall, not later than thirty (30)
days after such occurrence, deliver to Lessor and the Agent an Officer's
Certificate stating that either (i) (x) such Casualty is not a Significant
Casualty or (y) such Condemnation is neither a Total Condemnation nor a
Significant Condemnation and that this Lease shall remain in full force and
effect with respect to the applicable Property and, at Lessee's sole cost and
expense, Lessee shall promptly and diligently restore the applicable Property
in accordance with the terms of Section 15.1(e) or (ii) this Lease shall
terminate with respect to the applicable Property in accordance with Section
16.1.





                                       30
<PAGE>   18
                 (e)    If pursuant to this Section 15.1, this Lease shall
continue in full force and effect following a Casualty or Condemnation with
respect to the affected Property, Lessee shall, at its sole cost and expense,
promptly and diligently repair any damage to the applicable Property caused by
such Casualty or Condemnation in conformity with the requirements of Sections
10.1 and 11.1 using the as-built plans and specifications for the applicable
Property (as modified to give effect to any subsequent Modifications, any
Condemnation affecting the Property and all applicable Legal Requirements) so
as to restore the applicable Property to the same condition, operation,
function and value as existed immediately prior to such Casualty or
Condemnation.  In such event, title to the applicable Property shall remain
with Lessor.

                 (f)    In no event shall a Casualty or Condemnation with
respect to which this Lease remains in full force and effect under this Section
15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1.

                 (g)    Notwithstanding anything to the contrary set forth in
Section 15.1(a) or Section 15.1(e), if during the Term a Casualty occurs with
respect to a Property or Lessee receives notice of a Condemnation with respect
to a Property, and following such Casualty or Condemnation, such Property
cannot reasonably be restored on or before the date which is twelve months
prior to the Maturity Date to substantially the same condition as existed
immediately prior to such Casualty or Condemnation or before such day such
Property is not in fact so restored, then Lessee shall exercise its Purchase
Option with respect to such Property on the next Payment Date or irrevocably
agree in writing to exercise the Maturity Date Purchase Option with respect to
such Property, and in either such event such remaining Casualty or Condemnation
proceeds shall be paid to the Agent, which shall pay such funds to Lessee upon
the closing of the purchase of such Property.

                 15.2  Environmental Matters.  (a) Promptly upon Lessee's
actual knowledge of the presence of Hazardous Substances in any portion of a
Property in concentrations and conditions that constitute an Environmental
Violation, Lessee shall notify Lessor in writing of such condition.  In the
event of such Environmental Violation, Lessee shall, not later than thirty (30)
days after Lessee has actual knowledge of such Environmental Violation, either
deliver to Lessor and the Agent an Officer's Certificate and a Termination
Notice with respect to such Property pursuant to Section 16.1, if applicable,
or, at Lessee's sole cost and expense, promptly and diligently undertake any
response, clean up, remedial or other action necessary to remove, cleanup or
remediate the Environmental Violation in accordance with the terms of Section
9.1.  If Lessee does not deliver a Termination Notice with respect to such
Property pursuant to Section 16.1, Lessee shall, upon completion of remedial
action by Lessee, cause to be prepared by an environmental consultant
reasonably acceptable to Lessor a report describing the Environmental Violation
and the actions taken by Lessee (or its agents) in response to such
Environmental Violation, and a statement by the consultant that the
Environmental Violation has been remedied in full compliance with applicable
Environmental Laws.

                 (b)    In addition, Lessee shall provide to Lessor, within
five (5) Business Days of receipt, copies of all written communications with
any Governmental Authority relating to any Environmental Law in connection with
any Property.  Lessee shall also promptly provide such detailed reports of any
such environmental claims as reasonably may be requested by Lessor and the
Agent.





                                       31
<PAGE>   19

                         SECTION 16.  LEASE TERMINATION

                 16.1   Termination upon Certain Events.  (a) If Lessor or
Lessee shall have received notice of a Total Condemnation, then Lessee shall be
obligated, within thirty (30) days after Lessee receives notice thereof, to
deliver a written notice in the form described in Section 16.2(a) (a
"Termination Notice") of the termination of this Lease with respect to the
applicable Property.

                 (b)    If either:  (i) Lessee or Lessor shall have received
notice of a Condemnation, and Lessee shall have delivered to Lessor an
Officer's Certificate that such Condemnation is a Significant Condemnation; or
(ii) a Casualty occurs, and Lessee shall have delivered to Lessor an Officer's
Certificate that such Casualty is a Significant Casualty; or (iii) an
Environmental Violation occurs or is discovered and Lessee shall have delivered
to Lessor an Officer's Certificate stating that, in the reasonable, good-faith
judgment of Lessee, the cost to remediate the same will exceed 10% of the
Property Cost of such Property; then, Lessee shall, simultaneously with the
delivery of the Officer's Certificate pursuant to the preceding clause (i),
(ii) or (iii), deliver a Termination Notice with respect to the affected
Property.

                 16.2   Procedures.  (a)  A Termination Notice shall contain:
(i) notice of termination of this Lease with respect to the affected Property
on a date not more than thirty (30) days after Lessor's receipt of such
Termination Notice (the "Termination Date"); (ii) a binding and irrevocable
agreement of Lessee to pay the Termination Value and purchase such Property on
such Termination Date and (iii) the Officer's Certificate described in Section
16.1(b).

                 (b)    On the Termination Date, Lessee shall pay to Lessor the
Termination Value for the applicable Property, plus all amounts owing in
respect of Rent for such Property (including Supplemental Rent) theretofore
accruing and Lessor shall convey such Property to Lessee (or Lessee's designee)
all in accordance with Section 19.1.


                              SECTION 17.  DEFAULT

                 17.1   Lease Events of Default.  If any one or more of the
following events (each a "Lease Event of Default") shall occur:

                 (a)    Lessee shall fail to make payment of (i) any Basic Rent
         or any Supplemental Rent representing amounts owed under the Credit
         Agreement or the other Credit Documents within five (5) Business Days
         after the same has become due and payable or (ii) any Maximum Residual
         Guarantee Amount, Purchase Option Price or Termination Value after the
         same has become due and payable; or

                 (b)    Lessee shall fail to make payment of any other
         Supplemental Rent due and payable within five (5) Business Days after
         receipt of notice thereof; or

                 (c)    Lessee shall fail to maintain insurance as required by
         Section 14; or





                                       32
<PAGE>   20
                 (d)    (i) subject to the limitations contained in Section
         17.7 as to the Lessee only, Lessee or any Guarantor shall fail to
         observe or perform any term, covenant or condition of Lessee or such
         Guarantor, respectively, under this Lease, the Participation
         Agreement, the Guarantee or any other Operative Agreement to which it
         is a party (other than those set forth in Section 17.1(a), (b) or (c)
         hereof) and such default shall remain unremedied for a period of 30
         days, provided that such 30 day period shall be extended (up to a
         maximum period of 180 days) as to defaults which cannot be cured with
         the payment of money but are curable though not reasonably capable of
         cure within such 30 day period, provided that Lessee has commenced to
         cure such default prior to the end of such 30 day period and
         prosecutes such cure to completion or (ii) any representation or
         warranty by Lessee or any Guarantor, respectively, set forth in this
         Lease, the Guaranty or in any other Operative Agreement or in any
         document entered into in connection herewith or therewith or in any
         document, certificate or financial or other statement delivered in
         connection herewith or therewith shall be false or inaccurate in any
         material way; or

                 (e)    an Agency Agreement Event of Default shall have
         occurred and be continuing; or

                 (f)    Lessee or any Guarantor shall (i) admit in writing its
         inability to pay its debts generally as they become due, (ii) file a
         petition under the United States bankruptcy laws or any other
         applicable insolvency law or statute of the United States of America
         or any State or Commonwealth thereof, (iii) make a general assignment
         for the benefit of its creditors, (iv) consent to the appointment of a
         receiver of itself or the whole or any substantial part of its
         property, (v) fail to cause the discharge of any custodian, trustee or
         receiver appointed for Lessee or any such Guarantor or the whole or a
         substantial part of its property within ninety (90) days after such
         appointment, or (vi) file a petition or answer seeking or consenting
         to reorganization under the United States bankruptcy laws or any other
         applicable insolvency law or statute of the United States of America
         or any State or Commonwealth thereof; or

                 (g)    insolvency proceedings or a petition under the United
         States bankruptcy laws or any other applicable insolvency law or
         statute of the United States of America or any State or Commonwealth
         thereof shall be filed against Lessee or any Guarantor and not
         dismissed within ninety (90) days from the date of its filing, or a
         court of competent jurisdiction shall enter an order or decree
         appointing, without its consent of, a receiver of Lessee or any
         Guarantor or the whole or a substantial part of its property, and such
         order or decree shall not be vacated or set aside within ninety (90)
         days from the date of the entry thereof; or

                 (h)    a Credit Agreement Event of Default shall have occurred
         and be continuing;  or

                 (i)    an event of default under the Corporate Credit
         Agreement shall have occurred and be continuing;

then, in any such event, Lessor may, in addition to the other rights and
remedies provided for in this Section 17 and in Section 18.1, terminate this
Lease by giving Lessee five (5) days
        




                                       33
<PAGE>   21
notice of such termination, and this Lease shall terminate.  Lessee shall, to
the fullest extent permitted by law, pay as Supplemental Rent all costs and
expenses incurred by or on behalf of Lessor, including fees and expenses of
counsel, as a result of any Lease Event of Default hereunder.
        
                 17.2   Final Liquidated Damages.  If a Lease Event of Default
shall have occurred and be continuing, Lessor shall have the right to recover,
by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor,
as and for final liquidated damages, but exclusive of the indemnities payable
under Section 13 of the Participation Agreement, and in lieu of all damages
beyond the date of such demand the sum of (a) the Termination Value, plus (b)
all other amounts owing in respect of Rent and Supplemental Rent theretofore
accruing under this Lease.  Upon payment of the amount specified pursuant to
the first sentence of this Section 17.2, Lessee shall be entitled to receive
from Lessor, at Lessee's request and cost, an assignment of Lessor's right,
title and interest in the Properties, in each case in recordable form and
otherwise in conformity with local custom and free and clear of the Lien of all
mortgages (including the Mortgages) and any Lessor Liens.  Lessee (or Lessee's
designee) shall execute and deliver to Lessor an assumption of all of Lessor's
obligations under the Ground Leases, if any.  The Properties shall be conveyed
to Lessee (or Lessee's designee) "AS IS" and in their then present physical
condition.  If any statute or rule of law shall limit the amount of such final
liquidated damages to less than the amount agreed upon, Lessor shall be
entitled to the maximum amount allowable under such statute or rule of law;
provided, that Lessee shall not be entitled to receive an assignment of
Lessor's interest under the Ground Leases, if any, or in the Properties unless
Lessee shall have paid in full the Termination Value of each of the Properties.

                 17.3   Lease Remedies.  Lessor and Lessee intend that for
commercial law and bankruptcy law purposes, this Lease will be treated as a
financing arrangement, as set forth in Section 7.  If, as a result of
applicable state law, which cannot be waived, this Lease is deemed to be a
lease of the Properties, rather than a financing arrangement, and Lessor is
unable to enforce the remedies set forth in Section 17.2, the following
remedies shall be available to Lessor:

                 (a)    Surrender of Possession.  If a Lease Event of Default
shall have occurred and be continuing, and whether or not this Lease shall have
been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days
written notice, surrender to Lessor possession of the Property and Lessee shall
quit the same.  Lessor may enter upon and repossess the Property by such means
as are available at law or in equity, and may remove Lessee and all other
Persons and any and all personal property and Lessee's equipment and personalty
and severable Modifications from the Property.  Lessor shall have no liability
by reason of any such entry, repossession or removal performed in accordance
with applicable law.

                 (b)    Reletting.  If a Lease Event of Default shall have
occurred and be continuing, and whether or not this Lease shall have been
terminated pursuant to Section 17.1, Lessor may, but shall be under no
obligation to, relet all, or any portion, of the Property, for the account of
Lessee or otherwise, for such term or terms (which may be greater or less than
the period which would otherwise have constituted the balance of the Term) and
on such conditions (which may include concessions or free rent) and for such
purposes as Lessor may determine, and Lessor may collect, receive and retain
the rents resulting from such reletting.





                                       34
<PAGE>   22
Lessor shall not be liable to Lessee for any failure to relet the Property or
for any failure to collect any rent due upon such reletting.

                 (c)    Damages.  None of (i) the termination of this Lease
pursuant to Section 17.1; (ii) the repossession of the Property; or (iii)
except to the extent required by applicable law, the failure of Lessor to relet
all, or any portion, of the Property, the reletting of all or any portion
thereof, nor the failure of Lessor to collect or receive any rentals due upon
any such reletting shall relieve Lessee of its liability and obligations
hereunder, all of which shall survive any such termination, repossession or
reletting.  If any Lease Event of Default shall have occurred and be continuing
and notwithstanding any termination of this Lease pursuant to Section 17.1,
Lessee shall forthwith pay to Lessor all Basic Rent and other sums due and
payable hereunder to and including the date of such termination.  Thereafter,
on the days on which the Basic Rent or Supplemental Rent, as applicable, are
payable under this Lease or would have been payable under this Lease if the
same had not been terminated pursuant to Section 17.1 and until the end of the
Term or what would have been the Term in the absence of such termination,
Lessee shall pay Lessor, as current liquidated damages (it being agreed that it
would be impossible accurately to determine actual damages) an amount equal to
the Basic Rent and Supplemental Rent that are payable under this Lease or would
have been payable by Lessee hereunder if this Lease had not been terminated
pursuant to Section 17.1, less the net proceeds, if any, which are actually
received by Lessor with respect to the period in question of any reletting of
the Property or any portion thereof; provided that Lessee's obligation to make
payments of Basic Rent and Supplemental Rent under this Section 17.4 shall
continue only so long as Lessor shall not have received the amounts specified
in Section 17.5 or Section 17.6.  In calculating the amount of such net
proceeds from reletting, there shall be deducted all of Lessor's, the Agent's
and any Lenders' expenses in connection therewith, including repossession
costs, brokerage commissions, fees and expenses for counsel and any necessary
repair or alteration costs and expenses incurred in preparation for such
reletting.  To the extent Lessor receives any damages pursuant to this Section
17.4, such amounts shall be regarded as amounts paid on account of Rent.

                 (d)    Acceleration of Rent.  If a Lease Event of Default
shall have occurred and be continuing, and this Lease shall not have been
terminated pursuant to Section 17.1, and whether or not Lessor shall have
collected any current liquidated damages pursuant to Section 17.3(c), Lessor
may upon written notice to Lessee accelerate all payments of Basic Rent due
hereunder and, upon such acceleration, Lessee shall immediately pay Lessor, as
and for final liquidated damages and in lieu of all current liquidated damages
on account of such Lease Event of Default beyond the date of such acceleration
(it being agreed that it would be impossible accurately to determine actual
damages) an amount equal to the sum of (a) all Basic Rent (assuming interest at
a rate per annum equal to the Overdue Rate), as applicable, due from the date
of such acceleration until the end of the Term, plus (b) the Maximum Residual
Guarantee Amount that would be payable under Section 21.1(c) assuming the
proceeds of the sale pursuant to such Section 21.1(c) are equal to zero, which
sum is then discounted to present value at a rate equal to the rate then being
paid on United States treasury securities with maturities corresponding to the
then remaining Term.  Following payment of such amount by Lessee, Lessee will
be permitted to stay in possession of the Property for the remainder of the
Term, subject to the terms and conditions of this Lease, including the
obligation to pay Supplemental Rent, provided that no further Lease Event of
Default shall occur and be continuing, following which Lessor shall have all
the rights and remedies set





                                       35
<PAGE>   23
forth in this Section 17 (but not including those set forth in this Section
17.3).  If any statute or rule of law shall limit the amount of such final
liquidated damages to less than the amount agreed upon, Lessor shall be
entitled to the maximum amount allowable under such statute or rule of law.

                 17.4   Waiver of Certain Rights.  If this Lease shall be
terminated pursuant to Section 17.1, Lessee waives, to the fullest extent
permitted by law, (a) any notice of re-entry or the institution of legal
proceedings to obtain re-entry or possession; (b) any right of redemption,
re-entry or repossession; (c) the benefit of any laws now or hereafter in force
exempting property from liability for rent or for debt; and (d) any other
rights which might otherwise limit or modify any of Lessor's rights or remedies
under this Section 17.

                 17.5   Assignment of Rights Under Contracts.  If a Lease Event
of Default shall have occurred and be continuing, and whether or not this Lease
shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's
demand immediately assign, transfer and set over to Lessor all of Lessee's
right, title and interest in and to each agreement executed by Lessee in
connection with the construction, renovation, development, use or operation of
the Property (including all right, title and interest of Lessee with respect to
all warranty, performance, service and indemnity provisions), as and to the
extent that the same relate to the construction renovation, and operation of
the Property.

                 17.6   Remedies Cumulative.  The remedies herein provided
shall be cumulative and in addition to (and not in limitation of) any other
remedies available at law, equity or otherwise including any mortgage
foreclosure remedies contained in the Memorandum of Lease.

                 17.7   Covenant Defaults.

                 (a)  The occurrence of any event which would give rise to a
         Lease Default or Lease Event of Default pursuant to Section 17.1(d)
         for the failure by the Lessee to observe or perform any term, covenant
         or condition of Lessee under this Lease or the Participation Agreement
         relating to a specific Property (a "Covenant Default") shall not be
         deemed to be a Lease Default or a Lease Event of Default so long as
         the following conditions shall be satisfied:

                        (i)       such Covenant Default does not relate to the
                 breach by the Lessee of any of its obligations under this
                 Lease or the other Operative Agreements with respect to any
                 environmental matters or Environmental Claims;

                        (ii)      such Covenant Default shall not have a
                 Material Adverse Effect;

                        (iii)     there is no material risk that such Covenant
                 Default will cause any lien (other than a Permitted Exception)
                 to attach to a Property or subject the Lessor or any Lender to
                 any criminal liability;

                        (iv)    there shall not at any time exist Covenant
                 Defaults relating to Properties which have an aggregate
                 Property Cost in excess of the lesser of (a) 10% of the
                 Property Costs of all of the Properties and (b) $7,500,000 and





                                       36
<PAGE>   24
                        (v)       the Lessee shall have delivered to Lessor an
                 Officer's Certificate stating that, in reasonable, good faith
                 judgment of Lessee, (a) the cost to remediate all such
                 Covenant Defaults will not exceed $3,000,000 and (b) the costs
                 to remediate any Covenant Default on a specific Property will
                 not exceed 10% of the Property Cost of such Property.

                 (b)    If (i) each of the foregoing conditions set forth in
         Section 17.7(a) shall not be satisfied or (ii) such Covenant Default
         shall not be cured prior to the date which is twelve months prior to
         the Maturity Date, a Lease Event of Default shall be deemed to have
         occurred.


                      SECTION 18.  LESSOR'S RIGHT TO CURE

                 18.1   Lessor's Right to Cure Lessee's Lease Defaults.
Lessor, without waiving or releasing any obligation or Lease Event of Default,
may (but shall be under no obligation to) remedy any Lease Event of Default for
the account and at the sole cost and expense of Lessee, including the failure
by Lessee to maintain any insurance required by Section 14, and may, to the
fullest extent permitted by law, and notwithstanding any right of quiet
enjoyment in favor of Lessee, enter upon any Property for such purpose and take
all such action thereon as may be necessary or appropriate therefor.  No such
entry shall be deemed an eviction of Lessee.  All out-of-pocket costs and
expenses so incurred (including the fees and expenses of counsel), together
with interest thereon at the Overdue Rate from the date on which such sums or
expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand as
Supplemental Rent.


                         SECTION 19.  LEASE TERMINATION

                 19.1   Provisions Relating to Lessee's Termination of this
Lease or Exercise of Purchase Option.  In connection with any termination of
this Lease with respect to any Property pursuant to the terms of Section 16.2,
or in connection with Lessee's exercise of its Purchase Option or Maturity Date
Purchase Option, upon the date on which this Lease is to terminate with respect
to the applicable Property or upon the Expiration Date with respect to the
applicable Property, and upon tender by Lessee of the amounts set forth in
Section 16.2(b), 20.1 or 20.2, as applicable:

                 (a)    Lessor shall execute and deliver to Lessee (or to
         Lessee's designee) at Lessee's cost and expense an assignment of
         Lessor's entire interest in the applicable Properties, in each case in
         recordable form and otherwise in conformity with local custom and free
         and clear of the Lien of the applicable Mortgage and any Lessor Liens;
         and

                 (b)    The applicable Property shall be conveyed to Lessee "AS
         IS" and in then present physical condition.

                 19.2     Aggregate Tranche A Percentage.  Notwithstanding any
other provision of this Lease or the other Operative Agreements, (i) the Lessee
shall not be permitted to





                                       37
<PAGE>   25
terminate this Lease with respect to a Property pursuant to Section 16 or
exercise its Purchase Option with respect to a Property pursuant to Section
20.1 and (ii) Lessee shall not permit a Property to be sold pursuant to Section
21.1(b) and Lessor shall not be obligated to accept a bid and sell a Property
pursuant to Section 21.1(b) if, in the case of either clause (i) or (ii) above,
the Aggregate Tranche A Percentage, after giving effect to the termination of
the Lease with respect to such Property, would be less than 82.50%.


                          SECTION 20.  PURCHASE OPTION

                 20.1   Purchase Option.  At any time prior to the commencement
of the Marketing Period and provided that neither the Agent nor any Lender has
commenced foreclosure proceedings or other proceedings initiating a sale of a
Property under any of the Mortgages, Lessee shall have the option (exercisable
by giving Lessor irrevocable written notice (the "Purchase Notice") of Lessee's
election to exercise such option not less than ten (10) days prior to the date
of purchase pursuant to such option) to purchase one or more of the Properties
on the date specified in such Purchase Notice at a price equal to the
Termination Value (the "Purchase Option Price") (which the parties do not
intend to be a "bargain" purchase price) of such Property.  If Lessee exercises
its option to purchase one or more of the Properties pursuant to this Section
20.1 (the "Purchase Option"), Lessor shall transfer to Lessee or Lessee's
designee all of Lessor's right, title and interest in and to such Property as
of the date specified in the Purchase Notice upon receipt of the Purchase
Option Price and all Rent and other amounts then due and payable under this
Lease and any other Operative Agreement, in accordance with Section 19.1.

                 20.2   Maturity Date Purchase Option.  Not less than twelve
months prior to the Maturity Date, Lessee may give Lessor and Agent irrevocable
written notice (the "Maturity Date Election Notice") that Lessee is electing to
exercise the Maturity Date Purchase Option.  If Lessee does not give a Maturity
Date Election Notice on or before the date twelve months prior to the Maturity
Date, then Lessee shall be obligated to remarket the Properties pursuant to
Section 21.1.  If Lessee has elected to exercise the Maturity Date Purchase
Option, then on the Maturity Date Lessee shall pay to Lessor an amount equal to
the Termination Value for all the Properties (which the parties do not intend
to be a "bargain" purchase price) and, upon receipt of such amount plus all
Rent and other amounts then due and payable under this Lease and any other
Operative Agreement, Lessor shall transfer to Lessee or Lessee's designee all
of Lessor's right, title and interest in and to the Properties in accordance
with Section 19.1.

                 20.3  Obligation to Purchase All Properties.  If on the date
which is twelve months prior to the Maturity Date the then Termination Value of
all the Properties (including any Substitute Property) is less than the Maximum
Purchase Option Amount, then the Lessee shall be required to exercise its
Purchase Option on the Maturity Date with respect to all remaining Properties.

                         SECTION 21.  SALE OF PROPERTY

                 21.1   Sale Procedure.  (a)  With respect to each Property, at
the expiration of the Term, unless Lessee shall have elected to purchase such
Property and has paid the Purchase Option Price with respect thereto, or
otherwise terminated this Lease with respect





                                       38
<PAGE>   26
thereto and paid the Termination Value with respect thereto, Lessee shall (i)
pay to Lessor the Maximum Residual Guarantee Amount for such Property, and (ii)
sell such Property to one or more third parties for cash in accordance with
Section 21.1(b).

                 (b)    During the Marketing Period, Lessee, as nonexclusive
broker for Lessor, shall use its best efforts to obtain bids for the cash
purchase of each Property being sold for the highest price available, shall
notify Lessor promptly of the name and address of each prospective purchaser
and the cash price which each prospective purchaser shall have offered to pay
for such Property and shall provide Lessor with such additional information
about the bids and the bid solicitation procedure as Lessor may request from
time to time.  Lessor may reject any and all bids and may assume sole
responsibility for obtaining bids by giving Lessee written notice to that
effect; provided, however, that notwithstanding the foregoing, Lessor may not
reject a bid if such bid is greater than or equal to the sum of the Limited
Recourse Amount and all costs and expenses referred to in Section 21.1(i) and
is a bona fide offer by a third party purchaser who is not an Affiliate of
Lessee.  If the price which a prospective purchaser shall have offered to pay
for all or any of the Properties is less than the sum of the Limited Recourse
Amount and all costs and expenses referred to in Section 21.1(i), Lessor may
elect to retain the Property by giving Lessee at least two Business Days' prior
written notice of Lessor's election to retain the Property, and upon receipt of
such notice, Lessee shall surrender the Property to Lessor pursuant to Section
10.1(c).  Unless Lessor shall have elected to retain the Property pursuant to
the preceding sentence, Lessor shall sell the Property free of any Lessor Liens
attributable to it, without recourse or warranty, for cash to the purchaser or
purchasers identified by Lessee or Lessor, as the case may be.  Lessee shall
surrender the Property so sold to each purchaser in the condition specified in
Section 10.1.

                 (c)    On each date during the Marketing Period on which a
Property is sold pursuant to Section 21.1(b), and on the Maturity Date with
respect to any Properties remaining unsold, Lessee shall pay to Lessor the
Maximum Residual Guarantee Amount for such Property.

                 21.2   Application of Proceeds of Sale.  Lessor shall apply
the proceeds of sale of each Property in the following order of priority:

                     (i)  FIRST, to pay or to reimburse Lessor for the payment
         of all reasonable costs and expenses incurred by Lessor in connection
         with the sale; and

                    (ii)  SECOND, the balance shall be paid to the Agent to be
         applied pursuant to the provisions of the Credit Agreement.

                 21.3   Indemnity for Excessive Wear.  If the proceeds of the
sale described in Section 21.1(b) with respect to any Property, less all
expenses incurred by Lessor in connection with such sale, shall be less than
the Limited Recourse Amount for such Property at the time of such sale and if
it shall have been determined (pursuant to the Appraisal Procedure) that the
Fair Market Sales Value of such Property shall have been impaired by greater
than expected wear and tear during the Term, Lessee shall pay to Lessor within
ten (10) days after receipt of Lessor's written statement (i) the amount of
such excess wear and tear determined by the Appraisal Procedure or (ii) the
amount of the Net Sale Proceeds Shortfall, whichever amount is less.





                                       39
<PAGE>   27
                 21.4   Appraisal Procedure.  For determining the Fair Market
Sales Value of a Property or any other amount which may, pursuant to any
provision of any Operative Agreement, be determined by an appraisal procedure,
Lessor and Lessee shall use the following procedure (the "Appraisal
Procedure").  Lessor and Lessee shall endeavor to reach a mutual agreement as
to such amount for a period of ten (10) days from commencement of the Appraisal
Procedure, and if they cannot agree within ten (10) days, then two qualified
appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree
thereupon, but if either party shall fail to choose an appraiser within twenty
(20) days after notice from the other party of the selection of its appraiser,
then the appraisal by such appointed appraiser shall be binding on Lessee and
Lessor.  If the two appraisers cannot agree within twenty (20) days after both
shall have been appointed, then a third appraiser shall be selected by the two
appraisers or, failing agreement as to such third appraiser within thirty (30)
days after both shall have been appointed, by the American Arbitration
Association.  The decisions of the three appraisers shall be given within
twenty (20) days of the appointment of the third appraiser and the decision of
the appraiser most different from the average of the other two shall be
discarded and such average shall be binding on Lessor and Lessee; provided that
if the highest appraisal and the lowest appraisal are equidistant from the
third appraisal, the third appraisal shall be binding on Lessor and Lessee.
The fees and expenses of all of the appraisers shall be paid by the Lessee.

                 21.5   Certain Obligations Continue.  During the Marketing
Period, the obligation of Lessee to pay Rent with respect to each Property
(including the installment of Basic Rent due on the Maturity Date) shall
continue undiminished until payment in full to Lessor of the sale proceeds, the
Maximum Residual Guarantee Amount, if any, the amount due under Section 21.3,
if any, and all other amounts due to Lessor with respect to the Property.
Lessor shall have the right, but shall be under no duty, to solicit bids, to
inquire into the efforts of Lessee to obtain bids or otherwise to take action
in connection with any such sale, other than as expressly provided in this
Section 21.


                           SECTION 22.  HOLDING OVER

                 22.1   Holding Over.  If Lessee shall for any reason remain in
possession of a Property after the expiration or earlier termination of this
Lease (unless the Property is conveyed to Lessee), such possession shall be as
a tenancy at sufferance during which time Lessee shall continue to pay
Supplemental Rent that would be payable by Lessee hereunder were the Lease then
in full force and effect with respect to such Property and Lessee shall
continue to pay Basic Rent at an annual rate equal to the rate payable
hereunder immediately preceding such expiration or earlier termination;
provided, however, that from and after the sixtieth (60th) day Lessee shall
remain in possession of such Property after such expiration or earlier
termination, Lessee shall pay Basic Rent at an annual rate equal to two hundred
percent (200%) of the Basic Rent payable hereunder immediately preceding such
expiration or earlier termination.  Such Basic Rent shall be payable from time
to time upon demand by Lessor.  During any period of tenancy at sufferance,
Lessee shall, subject to the second preceding sentence, be obligated to perform
and observe all of the terms, covenants and conditions of this Lease, but shall
have no rights hereunder other than the right, to the extent given by law to
tenants at sufferance, to continue its occupancy and use of the Property.
Nothing contained in this Section 22 shall constitute the consent, express or
implied, of Lessor to the holding over





                                       40
<PAGE>   28
of Lessee after the expiration or earlier termination of this Lease as to any
Property and nothing contained herein shall be read or construed as preventing
Lessor from maintaining a suit for possession of any Property or exercising any
other remedy available to Lessor at law or in equity.


                           SECTION 23.  RISK OF LOSS

                 23.1   Risk of Loss.       The risk of loss of or decrease in
the enjoyment and beneficial use of the Property as a result of the damage or
destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise is assumed by Lessee, and Lessor shall in no event be answerable or
accountable therefor.

                     SECTION 24.  SUBLETTING AND ASSIGNMENT

                 24.1   Subletting and Assignment.  Lessee may not assign this
Lease or any of its rights or obligations hereunder in whole or in part other
than to any Guarantor, provided that notwithstanding any such assignment,
Lessee shall not be released and shall remain obligated for all of its
obligations under this Lease and the other Operative Agreements.  Lessee may,
without the consent of Lessor, sublease the Property or a portion thereof to
any Person.  No sublease or other relinquishment of possession of the Property
shall in any way discharge or diminish any of Lessee's obligations to Lessor
hereunder and Lessee shall remain directly and primarily liable under this
Lease as to the Property, or any portion thereof, so sublet.  Any sublease of
the Property shall be made subject to and subordinate to this Lease and to the
rights of Lessor hereunder, and shall expressly provide for the surrender of
the Property after a Lease Event of Default hereunder and such sublease shall
expressly provide for termination at or prior to the Expiration Date.

                 24.2   Subleases.  Promptly following the execution and
delivery of any sublease permitted by this Section 24, Lessee shall deliver a
copy of such executed sublease to Lessor and the Agent.


                       SECTION 25.  ESTOPPEL CERTIFICATES

                 25.1   Estoppel Certificates.  At any time and from time to
time upon not less than twenty (20) days' prior request by Lessor, the Lessee
shall furnish to the Lessor a certificate signed by an individual having the
office of vice president or higher in the Certifying Party certifying that this
Lease is in full force and effect (or that this Lease is in full force and
effect as modified and setting forth the modifications); the dates to which the
Basic Rent and Supplemental Rent have been paid; to the best knowledge of the
signer of such certificate, whether or not the Lessor is in default under any
of its obligations hereunder (and, if so, the nature of such alleged default);
and such other matters under this Lease as the Lessor may reasonably request.
Any such certificate furnished pursuant to this Section 25 may be relied upon
by the Lessor, and any existing or prospective mortgagee, purchaser or lender,
and any accountant or auditor, of, from or to the Lessor (or any Affiliate
thereof).





                                       41
<PAGE>   29
                             SECTION 26.  NO WAIVER

                 26.1   No Waiver.  No failure by Lessor or Lessee to insist
upon the strict performance of any term hereof or to exercise any right, power
or remedy upon a default hereunder, and no acceptance of full or partial
payment of Rent during the continuance of any such default, shall constitute a
waiver of any such default or of any such term.  To the fullest extent
permitted by law, no waiver of any default shall affect or alter this Lease,
and this Lease shall continue in full force and effect with respect to any
other then existing or subsequent default.


                      SECTION 27.  ACCEPTANCE OF SURRENDER

                 27.1   Acceptance of Surrender.  Except as otherwise expressly
provided in this Lease, no surrender to Lessor of this Lease or of all or any
portion of the Property or of any interest therein shall be valid or effective
unless agreed to and accepted in writing by Lessor and, prior to the payment or
performance of all obligations under the Credit Documents, the Agent, and no
act by Lessor or the Agent or any representative or agent of Lessor or the
Agent, other than a written acceptance, shall constitute an acceptance of any
such surrender.


                        SECTION 28.  NO MERGER OF TITLE

                 28.1   No Merger of Title.  There shall be no merger of this
Lease or of the leasehold estate created hereby by reason of the fact that the
same Person may acquire, own or hold, directly or indirectly, in whole or in
part, (a) this Lease or the leasehold estate created hereby or any interest in
this Lease or such leasehold estate, (b) the fee estate in the Property, except
as may expressly be stated in a written instrument duly executed and delivered
by the appropriate Person, or (c) a beneficial interest in Lessor.


                              SECTION 29.  NOTICES

                 29.1   Notices.  Unless otherwise specifically provided
herein, all notices, consents, directions, approvals, instructions, requests
and other communications required or permitted by the terms hereof to be given
to any Person shall be given in writing by nationally recognized courier
service and any such notice shall become effective one Business Day after
delivery to such nationally recognized courier service specifying overnight
delivery and shall be directed to the address of such Person as indicated:

                 If to Lessee:

                 Living Centers Holding Company
                 15415 Katy Freeway, Suite 800
                 Houston, Texas  77094
                 Attn:  Mr. Boyd Gentry
                 Telecopy No.: (713) 578-4735





                                       42
<PAGE>   30
                 If to Lessor:

                 FBTC Leasing Corp.
                 Two World Trade Center
                 New York, New York  10048
                 Attn:  Mr. Carl Marcantonio
                 Telecopy No.: (212) 321-9408

                 with a copy to the Agent:

                 The Chase Manhattan Bank
                 270 Park Avenue
                 New York, New York
                 Attn:  Global Lease Finance
                 Telecopy No.: (212) 270-2132



or such additional parties and/or other address as such party may hereafter
designate.


                           SECTION 30.  MISCELLANEOUS

                 30.1   Miscellaneous.  Anything contained in this Lease to the
contrary notwithstanding, all claims against and liabilities of Lessee or
Lessor arising from events commencing prior to the expiration or earlier
termination of this Lease shall survive such expiration or earlier termination.
If any term or provision of this Lease or any application thereof shall be
declared invalid or unenforceable, the remainder of this Lease and any other
application of such term or provision shall not be affected thereby.  If any
right or option of Lessee provided in this Lease, including any right or option
described in Sections 15, 16, 22 or 21, would, in the absence of the limitation
imposed by this sentence, be invalid or unenforceable as being in violation of
the rule against perpetuities or any other rule of law relating to the vesting
of an interest in or the suspension of the power of alienation of property,
then such right or option shall be exercisable only during the period which
shall end twenty-one (21) years after the date of death of the last survivor of
the descendants of Franklin D. Roosevelt, the former President of the United
States, Henry Ford, the deceased automobile manufacturer, and John D.
Rockefeller, the founder of the Standard Oil Company, known to be alive on the
date of the execution and delivery of this Lease.

                 30.2   Amendments and Modifications.  Neither this Lease nor
any provision hereof may be amended, waived, discharged or terminated except by
an instrument in writing signed by Lessor and Lessee.

                 30.3   Successors and Assigns.  All the terms and provisions
of this Lease shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.





                                       43
<PAGE>   31
                 30.4   Headings and Table of Contents.  The headings and table
of contents in this Lease are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.

                 30.5   Counterparts.  This Lease may be executed in any number
of counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument.

                 30.6   GOVERNING LAW.  THIS LEASE HAS BEEN DELIVERED IN, AND
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, EXCEPT AS TO MATTERS RELATING TO THE CREATION,
PERFECTION AND ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF
REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE APPLICABLE PROPERTY IS
LOCATED.

                 30.7   Limitations on Recourse.  The parties hereto agree that
the Lessor shall have no personal liability whatsoever to the Lessee or its
respective successors and assigns for any claim based on or in respect of this
Lease or any of the other Operative Agreements or arising in any way from the
transactions contemplated hereby or thereby; provided, however, that the Lessor
shall be personally liable (a) for its own willful misconduct or gross
negligence, (b) for liabilities that result from its breach of any of its
covenants, agreements or obligations set forth in or from any misrepresentation
of Lessor in any of the Operative Agreements, (c) for any Tax based on or
measured by any fees, commission or compensation received by it for acting as
the Lessor as contemplated by the Operative Agreements or (d) as the other
Operative Agreements expressly provide that the Lessor shall have personal
liability.  It is understood and agreed that, except as provided in the
preceding proviso:  (i) the Lessor shall have no personal liability under any
of the Operative Agreements as a result of acting pursuant to and consistent
with any of the Operative Agreements; (ii) all obligations of the Lessor to the
Lessee are solely nonrecourse obligations and shall be enforceable solely
against the interest of the Lessor in the Properties; and (iii) all such
personal liability of the Lessor is expressly waived and released as a
condition of, and as consideration for, the execution and delivery of the
Operative Agreements by the Lessor.

                 30.8   Memorandum of Lease.  This Lease shall not be recorded,
but Lessor and Lessee shall, upon the execution and delivery of each Lease
Supplement, execute and deliver a memorandum of this Lease (a "Memorandum of
Lease") substantially in the form of Exhibit B  and otherwise in form suitable
for recording under the laws of the jurisdiction in which the Property covered
by such Memorandum of Lease is located, which memorandum shall be recorded at
Lessee's sole cost and expense.

                 30.9   Priority.  On and prior to the Maturity Date, the
Mortgages shall be subject and subordinate to this Lease and following the
Maturity Date, the Mortgages, at the sole election of the Agent, shall be
senior to this Lease without any further act by any Person.





                                       44
<PAGE>   32
                                  SECTION 31.

                 31.1  Ground Lease.  During the Basic Term, Lessee shall
observe and perform all of the obligations of Lessor under any Ground Lease
(including the payment of all rent and other amounts thereunder) and, in
connection therewith, shall, prior to the occurrence and continuation of a
Lease Event of Default, have the benefit of all of Lessor's rights as lessee
under any Ground Lease.





                                       45
<PAGE>   33
                 IN WITNESS WHEREOF, the parties have caused this Lease be duly
executed and delivered as of the date first above written.

                                        LIVING CENTERS HOLDING COMPANY


                                        By: /s/ Boyd P. Gentry
                                           ---------------------------
                                        Name:   Boyd P. Gentry
                                        Title:  Vice President


                                        FBTC LEASING CORP.


                                        By: /s/ Akihiro Hashimoto
                                           ---------------------------
                                        Name:   Akihiro Hashimoto
                                        Title:  Treasurer













                                       46





<PAGE>   34
================================================================================

                            PARTICIPATION AGREEMENT


                                     among


                        LIVING CENTERS HOLDING COMPANY,
                                   as Lessee,


                              FBTC LEASING CORP.,
                            a New York corporation,
                                   as Lessor,


                           THE CHASE MANHATTAN BANK,
                                as Agent for the
                                    Lenders,

         THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH,
               CREDIT LYONNAIS NEW YORK BRANCH and THE FUJI BANK,
                           LIMITED (HOUSTON AGENCY),
                                  as Co-Agents

                                      and

                           THE LENDERS PARTIES HERETO


                         ______________________________

                          Dated as of October 10, 1996 
                         ______________________________




                                       47
<PAGE>   35
<TABLE>
<CAPTION>
                                                    TABLE OF CONTENTS
                                                    -----------------
<S>                                                                                                                  <C>
                                                                                                                     Page
                                                                                                                     ----

SECTION 1.  THE LOANS.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

SECTION 2.  LESSOR CONTRIBUTION.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2

         2.1.     Lessor Contribution   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
         2.2.     Allocated Lessor Yield  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2

SECTION 3.  SUMMARY OF THE TRANSACTIONS.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2

         3.1.     Operative Agreements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
         3.2.     Property Purchase and Lease.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
         3.3.     Construction of Improvements; Lease of Improvements.  . . . . . . . . . . . . . . . . . . . . . . .   3
         3.4.     Aggregate Tranche A Percentage; Maximum Residual Guarantee Amount   . . . . . . . . . . . . . . . .   3

SECTION 4.  THE CLOSINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

         4.1.     Initial Closing Date  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
         4.2.     Subsequent Funding Dates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

SECTION 5.  FUNDING OF ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

         5.1.     General   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
         5.2.     Procedures for Funding  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

SECTION 6.  CONDITIONS OF THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5

         6.1.     Conditions to Loans and Lessor Contributions  . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
         6.2.     Conditions to the Lessor's and the Lenders' Obligations to Make Advances to pay Property
                  Acquisition Costs   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
         6.3.     Conditions to the Lessor's and the Lenders' Obligations to Make Advances to pay Project Costs
                  for Construction on any Property.     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

SECTION 7.  REPRESENTATIONS AND WARRANTIES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

         7.1.     Representations and Warranties of Lessor on the Initial Closing Date  . . . . . . . . . . . . . . .  12
         7.2.     Representations and Warranties of the Lessee on the Initial Closing Date. . . . . . . . . . . . . .  14
         7.3.     Representations and Warranties of the Lessee on Property Closing Dates  . . . . . . . . . . . . . .  18
         7.4.     Representations and Warranties of the Lessee Upon each Funding Date   . . . . . . . . . . . . . . .  21
</TABLE>





                                     xlviii
<PAGE>   36
<TABLE>
Caption>
                                                                                                                       Page
                                                                                                                       ----
<S>                                                                                                                    <C>
SECTION 8.  PAYMENT OF CERTAIN EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23

         8.1.  Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
         8.2.  Brokers' Fees and Stamp Taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
         8.3.  Certain Fees and Expenses  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
         8.4.  Credit Agreement and Related Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
         8.5.  Facility Fees  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24

SECTION 9.        OTHER COVENANTS AND AGREEMENTS.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24

         9.1.  Covenants of the Lessor  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
         9.2.  Repayment of Certain Amounts on Maturity Date  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
         9.3.  Amendment of Certain Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
         9.4.  Proceeds of Casualty or Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26

SECTION 10.  CREDIT AGREEMENT.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26

         10.1.  Lessee's Credit Agreement Rights  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26

SECTION 11.       TRANSFER OF INTEREST  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27

         11.1.  Restrictions on Transfer  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27
         11.2.  Effect of Transfer  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28

SECTION 12.  INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28

         12.1.  General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
         12.2.  General Tax Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  29

SECTION 13.  MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33

         13.1.  Survival of Agreements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
         13.2.  No Broker, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
         13.3.  Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34
         13.4.  Counterparts  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.5.  Amendments and Termination  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.6.  Headings, etc.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.7.  Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.8.  GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.9.  Severability  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.10.  Rights of Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
         13.11.  Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36
</TABLE>





                                      xlix
<PAGE>   37
<TABLE>
Caption>
                                                                                                                       Page
                                                                                                                       ----
<S>              <C>                                                                                                   <C>
         13.12.  Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36
         13.13.  No Representation or Warranty  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36
         13.14.  Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36


Exhibits
--------

Exhibit A-1              Form of Mortgage and Security Agreement
Exhibit A-2              Form of Deed of Trust and Security Agreement
Exhibit B                Form of Assignment of Leases
Exhibit C                Form of Requisition
Exhibit D-1              Form of Opinion of Local Counsel
</TABLE>





                                       l
<PAGE>   38
                 PARTICIPATION AGREEMENT, dated as of October 10, 1996  (this
"Agreement"), among LIVING CENTERS HOLDING COMPANY, a Delaware corporation (the
"Lessee"); FBTC LEASING CORP., a New York corporation (the "Lessor"); THE CHASE
MANHATTAN BANK, a New York banking corporation, as agent (in such capacity, the
"Agent") for the Lenders, THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK
BRANCH, CREDIT LYONNAIS NEW YORK BRANCH and THE FUJI BANK, LIMITED (HOUSTON
AGENCY), as co-agents (each such co-agent, individually, a "Co-Agent";
collectively, the "Co-Agents") and each of the financial institutions listed on
the signature pages hereof (each, a "Lender"; collectively, the "Lenders").
Capitalized terms used but not otherwise defined in this Agreement shall have
the meanings set forth in Annex A hereto.

                             Preliminary Statement
                             ---------------------

                 In consideration of the mutual agreements herein contained and
other good and valuable consideration, receipt of which is hereby acknowledged,
the parties hereto hereby agree as follows:

                             SECTION 1.  THE LOANS.

                 The Lenders have agreed to make loans to the Lessor in an
aggregate principal amount of up to $67,000,000 in order for the Lessor to
acquire the Properties, to develop and construct the Improvements (if such
Property is not a Completed Property) in accordance with the Construction
Contract and the Agency Agreement, and to pay other Project Costs, and in
consideration of the receipt of the proceeds of such Loans, the Lessor will
issue the Tranche A Notes and the Tranche B Notes.

                 The Loans shall be made and the Notes shall be issued pursuant
to the Credit Agreement.  Pursuant to this Agreement and the Credit Agreement,
the Loans will be made to the Lessor from time to time at the request of the
Lessee for the purpose of providing funds to the Lessor to acquire one or more
parcels of Land, and, if such Property is not a Completed Property, to
construct the Improvements in accordance with the Plans and Specifications.

                 The Loans and the obligations of the Lessor under the Credit
Agreement shall be secured by, inter alia, (i) a first priority assignment of
the Lease, granted pursuant to the Assignment of Leases and consented to by the
Lessee pursuant to the Consent to Assignment (in each case in the respective
forms set forth in Exhibit B hereto), (ii) a first priority assignment of the
Agency Agreement, granted pursuant to the Contract Assignment and consented to
by the Construction Agent pursuant to the Consent to Contract Assignment; and
(iii) a first priority mortgage lien on each Property pursuant to a Mortgage in
the form set forth on Exhibit A-1 or Exhibit A-2 hereto, as applicable.

                 The obligations of the Lessor under the Credit Agreement shall
be guaranteed by each of the Guarantors to the extent provided in the
Guarantee.





                                       51
<PAGE>   39
                        SECTION 2.  LESSOR CONTRIBUTION.

                 2.1.   Lessor Contribution.  Subject to the terms and
conditions of this Agreement, and in reliance on the representations and
warranties of each of the parties hereto contained herein or made pursuant
hereto, on each Funding Date the Lessor shall make an equity contribution
(each, a "Lessor Contribution") in an amount equal to 3% of the amount of the
Advance requested by the Construction Agent in the Requisition for such Funding
Date.  The aggregate amount of Lessor Contributions made by the Lessor shall
not exceed the Lessor Commitment.  The Lessor shall use the Lessor
Contributions to pay a portion of the Project Costs simultaneously and pro rata
with the fundings by the Lenders.


                 2.2.   Allocated Lessor Yield.  With respect to each
Construction Period Property, on each date which is one Business Day prior to
any date on which the Lessor is entitled to a payment on account of the Lessor
Yield, the Construction Agent shall be deemed to have requested that the Lessor
make a Lessor Contribution in an amount equal to the Lessor Yield due and
payable on such date with respect to the Construction Period Properties solely
for the purpose of paying such Lessor Yield which is then due and payable.


                    SECTION 3.  SUMMARY OF THE TRANSACTIONS.

                 3.1.   Operative Agreements.  On the Initial Closing Date,
each of the respective parties thereto shall execute and deliver this
Agreement, the Lease, the Construction Contract, the Agency Agreement, the
Notes, the Guarantee, the Credit Agreement, the Contract Assignment, the
Consent to Contract Assignment and such other documents, instruments,
certificates and opinions of counsel as agreed to by the parties hereto.

                 3.2.   Property Purchase and Lease.  (a)  On each Property
Closing Date and subject to the terms and conditions of this Agreement and the
Credit Agreement (i) the Lessor will make a Lessor Contribution in accordance
with Section 2 hereof, (ii) the Lenders will make loans in accordance with
Section 5 hereof and the terms and provisions of the Credit Agreement, (iii)
the Lessor will purchase all right, title and interest in and to each Property
identified by the Construction Agent pursuant to the Agency Agreement with
respect to such Property Closing Date, and (iv) the Lessor will simultaneously
lease (or sublease, as the case may be) all of its right, title and interest in
the Property to the Lessee by delivering a Lease Supplement pursuant to the
Lease.

                 (b)  On each Property Closing Date, the Lessee shall certify
to the Agent on the Property Closing Certificate, delivered pursuant to Section
6.2(a), the Maximum Residual Guarantee Amount for each Property being acquired
on such Property Closing Date.  The Maximum Residual Guarantee Amount so
certified shall be the Maximum Residual Guarantee Amount for such Properties
for the duration of the Term.





                                       52
<PAGE>   40
                 (c)  No Property Closing Date shall occur after the sixth
anniversary of the Initial Closing Date.

         3.3.   Construction of Improvements; Lease of Improvements.
(a)  On each Property Closing Date (provided such Property is not a Completed
Property), the Lessor and Lessee will execute and deliver an Agency Agreement
Supplement, dated as of such Property Closing Date, pursuant to which the
Lessee will agree to act as Construction Agent and to perform the Lessor's
obligations under the Construction Contract in connection with the completion
of the construction of the Improvements on such Property.

                 (b)  On each Property Closing Date or the Construction
Commencement Date, if later, provided that the applicable Property Closing
Certificate indicates that the cost of the Land is greater than or equal to 25%
of the Property Cost for such Property (a "Twenty-Five Percent Property"), the
Lessor and the Lessee shall execute and deliver an additional Lease Supplement
pursuant to which the Lessor will lease (or sublease, as the case may be) all
of its right, title and interest in such Improvements to the Lessee.
Notwithstanding that the Improvements on a Twenty-Five Percent Property
(whether existing on the date of acquisition of the Land or to be constructed
pursuant to the Agency Agreement) may be leased by a separate Lease Supplement,
the term "Property" shall include the Land and the Improvements.

                 (c)  If the Property Closing Certificate indicates that the
cost of the Land is less than 25% of the Property Cost, no additional Lease
Supplement will be required to be delivered and the Land and the Improvements
will be leased on the Property Closing Date under the Lease Supplement
delivered pursuant to Section 6.2(d) and the term "Property" will be deemed to
mean Land and Improvements.

                 (d)  On each Property Closing Date, the Lessor and Lessee will
execute and deliver a Memorandum of Lease which will be recorded in the real
estate records in the county where such Property is located.


  3.4.   Aggregate Tranche A Percentage; Maximum Residual Guarantee Amount.

                 (a)  Notwithstanding any other provision of this Agreement or
the other Operative Agreements, the Lessee and the Lessor agree that in no
event shall the Lessor acquire and lease pursuant to the execution and delivery
of a Lease Supplement any Property if the Aggregate Tranche A Percentage after
giving effect to the acquisition and lease pursuant to the execution and
delivery of a Lease Supplement of such Property would be less than 82.5%.

                 (b)    Notwithstanding any other provision of this Agreement
or the other Operative Agreements, the Lessee and the Lessor agree that in no
event shall the Lessor acquire and lease pursuant to the execution and delivery
of a Lease Supplement any Property if the Maximum Residual Guarantee Amount
with respect to such Property would be less than





                                       53
<PAGE>   41
80% of Budgeted Total Property Costs with respect to such Property upon the
acquisition of such Property.

                          SECTION 4.  THE CLOSINGS.

                 4.1.   Initial Closing Date.   All documents and instruments
required to be delivered on the Initial Closing Date shall be delivered at the
offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New
York, or at such other location as may be determined by the Agent and the
Lessee.

                 4.2.   Subsequent Funding Dates.  The Lessee shall deliver to
the Lessor and the Agent a Requisition appropriately completed, in connection
with each Funding Date.


                       SECTION 5.  FUNDING OF ADVANCES.

                 5.1.   General.  To the extent funds have been made available
to the Borrower under the Credit Agreement, such funds, along with the Lessor
Contributions, will be applied by the Construction Agent from time to time in
accordance with the terms and conditions of this Agreement and the other
Operative Agreements in order to:  (i) allow the Lessor, at the direction of
the Lessee, to acquire the Land in accordance with the terms of this Agreement
and the other Operative Agreements; (ii) allow the Lessor, on behalf of the
Lessee, to pay Transaction Expenses; (iii) permit the Construction Agent to
construct the Improvements (provided that such Property is not a Completed
Property) in accordance with the Plans and Specifications and the terms of the
Construction Contract, the Agency Agreement, the Lease and the other Operative
Agreements; and (iv) pay all other Project Costs.

                 5.2.   Procedures for Funding.  (a)  Not less than three
Business Days prior to each proposed Funding Date, the Construction Agent shall
deliver to the Lessor and the Agent, a requisition (a "Requisition"),
appropriately completed, in the form of Exhibit C hereto.

                 (b)    Each Requisition shall: (i) be irrevocable; and (ii)
request funds in an amount of at least $500,000 (or such lesser amount as shall
be equal to the total aggregate of the Available Commitments plus the Available
Lessor Commitment at such time) for the payment of Property Acquisition Costs
or other Project Costs which have previously been incurred and were not the
subject of and funded pursuant to a prior Requisition, in each case as
specified in the Requisition.

                 (c)    So long as no Default or Event of Default has occurred
and is continuing and subject to the satisfaction of the conditions set forth
in Sections 6.1, 6.2 and/or 6.3, as applicable, on each Funding Date (i) the
Lenders shall make Loans to the Lessor in an aggregate amount equal to 97% of
the funds specified in any Requisition, up to an aggregate principal amount
equal to the aggregate Available Commitments; (ii) the Lessor shall make a
Lessor Contribution in an amount equal to 3% of the funds specified in any
Requisition, up to an amount equal to the Available Lessor Commitment; and
(iii) the total amount of such Loans





                                       54
<PAGE>   42
and Lessor Contribution made on such date shall be paid to the Disbursement
Account, provided, however, amounts requested to be disbursed into the
Disbursement Account may be used to pay Project Costs reasonably anticipated by
the Construction Agent to be incurred within 60 days of the applicable Funding
Date.  There shall in no event be an amount in excess of $2,600,000 in the
Disbursement Account and the Agent shall at all times retain the right to
demand that funds remaining in the Disbursement Account, after outstanding
checks have cleared, be immediately returned to the Agent for distribution to
the Lenders and the Lessor.  So long as no Default or Event of Default has
occurred and is continuing and subject to the satisfaction of the conditions
set forth in Sections 6.1, 6.2 and/or 6.3, as applicable, on each date on which
the Construction Agent is required to pay Project Costs the Construction Agent
shall cause funds to be disbursed from the Disbursement Account to pay such
Project Costs.  The Construction Agent may cause funds on account in the
Disbursement Account to be invested in Permitted Investments.

                 5.3.   Substitute Properties.  Neither the Lessor nor any
Lender shall have any commitment to fund any amount in excess of the principal
amount of Loans outstanding on the last day of the fourth Loan Year.  If,
however, during the fifth or sixth Loan Years, the Lessee purchases one or more
Properties pursuant to the provisions of the Lease and the Loans are prepaid in
accordance with Section 2.5 of the Credit Agreement, the Lessee may cause the
Lessor to purchase one or more substitute Properties (each, a "Substitute
Property", collectively, the "Substitute Properties"), provided that (a) the
Property Cost with respect to each Substitute Property may not be in excess of
the Property Cost of the Property for which it is being substituted, (b) the
aggregate Property Cost of all Substitute Properties may not exceed 20% of the
aggregate Property Cost of all of the Properties on the last day of the fourth
Loan Year, provided, however, any Substitute Property which is purchased by the
Lessor in substitution of a Property previously purchased by the Lessee in
order to cure an existing Covenant Default (as evidenced by an Officer's
Certificate of the Lessee) shall not be considered a Substitute Property for
the purposes of the foregoing limitation contained in this clause (b) and (c)
all of the conditions to the making of Advances and Lessor Contributions
contained in this Agreement, the Credit Agreement and any other Operative
Agreement shall have been satisfied on or prior to the applicable Funding Date.

              SECTION 6.  CONDITIONS OF THE CLOSINGS AND ADVANCES

                 6.1.   Conditions to Loans and Lessor Contributions.  The
agreement of each Lender to make Loans and the Lessor to make Lessor
Contributions, is subject to the satisfaction, immediately prior to or
concurrently with the making of such Loans and Lessor Contribution, of the
following conditions precedent:

                        (a)  Operative Agreements.  Each of the Operative
                 Agreements shall have been duly authorized, executed,
                 acknowledged and delivered by the parties thereto and shall be
                 in full force and effect, and no default shall exist
                 thereunder (both before and after giving effect to the
                 transactions contemplated by the Operative Agreements), and
                 the Agent, the Lenders and the Lessor shall have received a
                 fully executed copy of each





                                       55
<PAGE>   43
                 of the Operative Agreements (other than the Notes of which the
                 Agent shall have received the originals thereof);

                        (b)  Taxes.  All taxes, fees and other charges in
                 connection with the execution, delivery, and, where
                 applicable, recording, filing and registration of the
                 Operative Agreements shall have been paid or provisions for
                 such payment shall have been made to the satisfaction of the
                 Agent and the Lessor;

                        (c)  Governmental Approvals.  All necessary (or, in the
                 reasonable opinion of the Agent, the Lessor and their
                 respective counsel, advisable) Governmental Actions, in each
                 case required by any law or regulation enacted, imposed or
                 adopted on or after the date hereof or by any change in fact
                 or circumstances since the date hereof, shall have been
                 obtained or made and be in full force and effect;

                        (d)  Litigation.  No action or proceeding shall have
                 been instituted, nor to the knowledge of the Lessee shall any
                 action or proceeding be threatened before any Governmental
                 Authority, nor shall any order, judgment or decree have been
                 issued or proposed to be issued by any Governmental Authority
                 (i) to set aside, restrain, enjoin or prevent the full
                 performance of this Agreement, any other Operative Agreement
                 or any of the transactions contemplated hereby or thereby or
                 (ii) which is reasonably likely to have a Material Adverse
                 Effect;

                        (e)  Legal Requirements.  In the reasonable opinion of
                 the Agent, the Lessor and their respective counsel, the
                 transactions contemplated by the Operative Agreements do not
                 and will not violate in any respect any Legal Requirements and
                 do not and will not subject the Agent, any Lender or the
                 Lessor to any adverse regulatory prohibitions or constraints;

                        (f)  Corporate Proceedings of the Lessee and the
                 Guarantors.  On the Initial Closing Date, the Agent and the
                 Lessor shall have received a copy of the resolutions or
                 minutes, in form and substance satisfactory to the Agent and
                 the Lessor, of the Board of Directors of each of the Lessee
                 and the Guarantors authorizing the execution, delivery and
                 performance of this Agreement, the Guaranty and the other
                 Operative Agreements to which they are parties, certified by
                 the Secretary or an Assistant Secretary of the Lessee and each
                 Guarantor as of the Initial Closing Date, which certificate
                 shall be in form and substance satisfactory to the Agent and
                 the Lessor and shall state that the resolutions or minutes
                 thereby certified have not been amended, modified, revoked or
                 rescinded;

                        (g)  Lessee and Guarantor Incumbency Certificate.  On
                 the Initial Closing Date, the Agent and the Lessor shall have
                 received a certificate of the Lessee and each Guarantor, dated
                 the Initial Closing Date, as to the incumbency and signature
                 of the officers of the Lessee and such Guarantor executing any
                 Operative Agreement satisfactory in form and substance to the
                 Agent and the Lessor, executed by the





                                       56
<PAGE>   44
                 President or any Vice President and the Secretary or any
                 Assistant Secretary of the Lessee and such Guarantor;

                        (h)  Lessor Incumbency Certificate.  On the Initial
                 Closing Date, the Agent and the Lessee shall have received a
                 certificate of the Lessor, dated the Initial Closing Date, as
                 to the incumbency and signature of the officers of the Lessor
                 executing any Operative Agreements satisfactory in form and
                 substance to the Agent and the Lessee, executed by a Vice
                 President and the Secretary or an Assistant Secretary of the
                 Lessor;

                        (i)  Corporate Proceedings of the Lessor.  On the
                 Initial Closing Date, the Agent and the Lessee shall have
                 received a copy of the resolutions, in form and substance
                 satisfactory to the Agent and the Lessee, of the Board of
                 Directors of the Lessor authorizing the execution, delivery
                 and performance of the Operative Agreements to which it is a
                 party, certified by the Secretary or an Assistant Secretary of
                 the Lessor as of the Initial Closing Date, which certificate
                 shall be in form and substance satisfactory to the Agent and
                 the Lessee and shall state that the resolutions thereby
                 certified have not been amended, modified, revoked or
                 rescinded;

                        (j)  Corporate Documents.  On the Initial Closing Date
                 the Agent and the Lessor shall have received true and complete
                 copies of the articles of incorporation and by-laws of the
                 Lessee and each Guarantor, certified as of the Initial Closing
                 Date as complete and correct copies thereof by the Secretary
                 or an Assistant Secretary of the Lessee and such Guarantor;

                        (k)  Consents, Licenses and Approvals.  The Agent and
                 the Lessor shall have received a certificate of the Vice
                 President of the Lessee stating that all consents,
                 authorizations and filings required to consummate the
                 transaction contemplated by this Agreement have been obtained
                 and are in full force and effect, and each such consent,
                 authorization and filing shall be in form and substance
                 reasonably satisfactory to the Agent and the Lessor;

                        (l)  Fees.  The Agent and the Arranger shall have
                 received the fees to be paid on the Initial Closing Date
                 pursuant to the Fee Letter and the Lessor shall have received
                 the upfront fees agreed to between the Lessor and Living
                 Centers to be paid on the Initial Closing Date, which fees
                 shall not be paid using the proceeds of the Loans or Lessor
                 Contributions;

                        (m)  Legal Opinions.  On the Initial Closing Date (i)
                 the Agent, the Lenders and the Lessor shall have received the
                 executed legal opinion of Corporate Associate General Counsel
                 of Living Centers and Mayor, Day, Caldwell & Keeton, LLP,
                 special counsel to the Lessee and the Guarantors; and

                        (ii)      The Agent and the Lessee shall have received
                 the executed legal opinion of Mayor, Brown & Platt, counsel to
                 the Lessor;





                                       57
<PAGE>   45
                        (n)  Insurance.  The Agent and the Lessor shall have
                 received evidence in form and substance satisfactory to them
                 that all of the requirements of Section 14 of the Lease shall
                 have been satisfied;

                        (o)  Representations and Warranties.  The
                 representations and warranties of the Lessor, the Lessee and
                 each of the Guarantors contained herein and in each of the
                 other Operative Agreements shall be true and correct in all
                 material respects on and as of such Funding Date as if made on
                 and as of such Funding Date;

                        (p)  Performance of Operative Agreements.  The parties
                 hereto (other than the Lenders) shall have performed their
                 respective agreements contained herein and in the other
                 Operative Agreements on or prior to each such Funding Date;

                        (q)  Default.  There shall not have occurred and be
                 continuing any Default or Event of Default under any of the
                 Operative Agreements and no Default or Event of Default under
                 any of the Operative Agreements will have occurred after
                 giving effect to the Advance requested by such Requisition;
                 and

                        (r)  Material Adverse Change.  As of such Funding Date,
                 there shall not have occurred any Material Adverse Change.

                 6.2.   Conditions to the Lessor's and the Lenders' Obligations
to Make Advances to pay Property Acquisition Costs.

                 The obligations of the Lessor to make each Lessor
Contribution, and of the Lenders to make Loans to the Lessor, on a Property
Closing Date for the purpose of providing funds to the Lessor necessary to
acquire a Property are subject to the satisfaction or waiver of the following
conditions precedent:

                        (a)  Requisition; Property Closing Certificate.  The
                 Agent shall have received (i) a fully executed counterpart of
                 the Requisition dated as of such Property Closing Date (but
                 delivered at least two Business Days prior to the Property
                 Closing Date), appropriately completed; and (ii) a Property
                 Closing Certificate dated as of such Property Closing Date,
                 appropriately completed;

                 (b)    Deed; Ground Lease.  There shall have been delivered to
                 the Lessor (i) a bargain and sale deed with a covenant against
                 grantor's acts (or local equivalent) (a "Deed"), in form and
                 substance appropriate for recording with the applicable
                 Governmental Authorities, with respect to each Property (and
                 all Improvements located thereon) being purchased on such
                 Property Closing Date, conveying fee simple title to such
                 Property to the Lessor, subject only to the Permitted
                 Exceptions, or (ii) a Ground Lease with respect to each
                 Property being ground leased on such Property Closing Date
                 (such Ground Lease, or a Memorandum of Ground Lease, as
                 appropriate under applicable Legal Requirements, to be in form
                 and substance appropriate for recording with the applicable
                 Governmental Authorities), and the Agent and the Lessor shall
                 have





                                       58
<PAGE>   46
                 received a fully executed counterpart of such Ground Lease
                 and, if applicable, such Memorandum of Ground Lease;

                        (c)  Title; Location.  Title to all of the Properties
                 shall conform to the representations and warranties set forth
                 in Section 7.4(g) and each Property shall be located in the
                 United States;

                        (d)  Lease Supplement and Memorandum of Lease.  The
                 Lessee shall have delivered a Lease Supplement and a
                 Memorandum of Lease executed by the Lessee and the Lessor with
                 respect to each Property being acquired on such Property
                 Closing Date to the Agent;

                        (e)  Mortgage.  The Lessee shall have recorded in the
                 real estate records of the county where each Property is
                 located an original of the Mortgage executed by the Lessor and
                 Lessee with respect to each Property being acquired on such
                 Property Closing Date;

                        (f)  Assignment of Lease.  The Lessee shall have
                 recorded in the real estate records of the county where each
                 Property is located an original of an Assignment of Lease
                 executed by the Lessor with respect to each Property being
                 acquired on such Property Closing Date;

                        (g)  Consent to Assignment of Lease.  The Lessee shall
                 have delivered to the Agent a consent to the Assignment of
                 Lease executed by the Lessee with respect to each Property
                 being acquired on such Property Closing Date;

                        (h)  Environmental Audit.  (i)  The Agent, the Lenders
                 and the Lessor shall have received not less than 10 days prior
                 to such Property Closing Date an Environmental Audit with
                 respect to each Property being acquired on such Property
                 Closing Date, prepared by an environmental engineer (the
                 "Environmental Engineer") reasonably satisfactory to the Agent
                 and the Lessor and the results of the Environmental Audit
                 shall be in form and substance reasonably satisfactory to the
                 Agent, the Lenders and the Lessor; and

                        (ii)  the Agent, the Lenders and the Lessor shall have
                 received letters from the Environmental Engineer stating, 
                 among other things, that the Agent, the Lenders and the 
                 Lessor may rely on the Environmental Audit with respect to 
                 each Property being acquired on such Property Closing Date 
                 which were prepared by such firm as if they were originally 
                 addressed to them in all respects;

                        (i)  Appraisal.  The Agent, the Lenders and the Lessor
                 shall have received an Appraisal of each Property being
                 acquired on such Property Closing Date and such Appraisal
                 shall indicate a value (assuming Completion of the
                 Improvements on such Property) of at least six times the
                 amount of the Tranche B Loans which will be allocable to such
                 Property (based on the Budgeted Total Property Costs for such





                                       59
<PAGE>   47
                 Property as of such Property Closing Date or the Property 
                 Cost, a applicable) and otherwise be in form and substance 
                 reasonably acceptable to each Lender and the Lessor;

                        (j)  Survey.  The Agent, the Lenders and the Lessor
                 shall have received, and the Title Company shall have
                 received, a survey of each Property being acquired on such
                 Property Closing Date, certified to the Agent, the Lenders,
                 the Lessor and the Title Company in a manner satisfactory to
                 them, dated as of a date within ninety days of the Property
                 Closing Date, by an independent professionally licensed land
                 surveyor satisfactory to the Agent and the Lessor, which
                 survey shall be made in accordance with the Minimum Standard
                 Detail Requirements for Land Title Surveys jointly established
                 and adopted by the American Land Title Association and the
                 American Congress on Surveying and Mapping in 1992, and,
                 without limiting the generality of the foregoing, there shall
                 be surveyed and shown on such survey the following: (i) the
                 locations on such Property of all the buildings, structures
                 and other improvements, if any, and the established building
                 setback lines; (ii) the lines of streets abutting such
                 Property; (iii) all access and other easements appurtenant to
                 such Property; (iv) all roadways, paths, driveways, easements,
                 encroachments and overhanging projections and similar
                 encumbrances affecting such Property, whether recorded,
                 apparent from a physical inspection of the Property or
                 otherwise known to the surveyor; (v) any encroachments on any
                 adjoining property by the building, structures and
                 improvements on such Property; and (vi) if such Property is
                 described as being on a filed map, a legend relating the
                 survey to said map;

                        (k)  Mortgagee's Title Insurance Policy.  With respect
                 to each Property being acquired on such Property Closing Date,
                 the Agent shall have received with respect to the Mortgage a
                 mortgagee's title policy or marked up unconditional binder for
                 such insurance dated the Property Closing Date; such policy
                 shall (i) be in an amount equal to the aggregate amount shown
                 on the Budget for such Property (with a pending disbursements
                 clause, if applicable) or if such Property is a Completed
                 Property, in the amount of the  Acquisition Cost of such
                 Property; (ii) be issued at ordinary rates; (iii) insure that
                 the Mortgage insured thereby creates a valid first Lien on
                 such Property, free and clear of all defects and encumbrances,
                 except Permitted Exceptions; (iv) name the Agent for the
                 benefit of the Lenders as the insured thereunder; (v) be in
                 the form of ALTA Loan Policy - 1970 (Amended 10/17/70), if
                 available or another form of lenders' policy customarily used
                 in commercial transactions in the jurisdiction where such
                 Property is located; (vi) contain comprehensive, zoning,
                 access, subdivision, tax lot, revolving credit and such other
                 endorsements and affirmative coverage as the Agent may
                 reasonably request (if available and customarily issued in the
                 jurisdiction where the Property is located); and (vii) be
                 issued by the Title Company; the Agent shall have received
                 evidence reasonably satisfactory to it that all premiums in
                 respect of such policy, and all charges for any mortgage
                 recording tax with respect to the Mortgage have been paid or
                 provision made therefor;





                                       60
<PAGE>   48
                        (l)  Owner's Title Insurance Policy.  The Lessor shall
                 have received an owner's title policy, or marked up
                 unconditional binder for such insurance, dated the Property
                 Closing Date for each Property being acquired on such Property
                 Closing Date; and the Lessor shall have received evidence
                 reasonably satisfactory to it that all premiums in respect of
                 such policy have been paid or provision made therefor;

                        (m)  Agency Agreement Supplement.  The Lessee shall
                 have delivered an Agency Agreement Supplement executed by the
                 Lessee and the Lessor with respect to each Property (other
                 than any Completed Properties) being acquired on such Property
                 Closing Date to the Agent;

                        (n)  Recorded Documents.  The Agent and the Lessor
                 shall have received a legible copy of all recorded documents
                 referred to, or listed as exceptions to title in, the title
                 policy referred to above;

                        (o)  Legal Opinions.  With respect to (i) any Property
                 or (ii) any group of Properties which are acquired on the same
                 Property Closing Date or from the same seller and are located
                 in the same state, and which Property or group of Properties
                 have an estimated aggregate Property Cost in excess of $5
                 million, the Agent, the Lenders and the Lessor shall have
                 received an executed legal opinion of local counsel to the
                 Lessee and the Guarantors for each state in which such
                 Property or Properties are located, substantially in the form
                 of Exhibit D-1 hereto; and

                        (p)  Actions to Perfect Liens.  The Agent and the
                 Lessor shall have received evidence in form and substance
                 satisfactory to it that all filings, recordings, registrations
                 and other actions, including the filing of duly executed
                 Lender Financing Statements and Lessor Financing Statements,
                 the Mortgage, and the Memorandum of Lease, necessary or, in
                 the reasonable opinion of the Agent or the Lessor, desirable
                 to perfect the Liens created by the Security Documents shall
                 have been completed.

                 6.3.   Conditions to the Lessor's and the Lenders' Obligations
to Make Advances to pay Project Costs for Construction on any Property.  The
obligations of the Lessor to make each Lessor Contribution, and of the Lenders
to make Loans to the Lessor on a Funding Date for the purpose of providing
funds to the Lessor necessary to pay for the construction of the Improvements
or the payment of Transaction Costs or other Project Costs (other than Property
Acquisition Costs) are subject to the satisfaction or waiver of the following
conditions precedent:

                        (a)  Performance of Obligations.  The parties hereto
                 shall have performed their respective agreements contained
                 herein and in the other Operative Agreements on or prior to
                 such Funding Date;

                        (b)  Requisition.  The Agent shall have received a
                 fully executed counterpart of the Requisition, appropriately
                 completed;





                                       61
<PAGE>   49
                        (c)  Title.  Title to all of the Properties shall
                 conform to the representations set forth in Section 7.4(g);

                        (d)  Budget in Balance.  Based upon the Construction
                 Budgets, the Available Commitments and the Available Lessor
                 Commitment will be sufficient to complete the Improvements for
                 which the Requisition relates on such Properties.


                   SECTION 7.  REPRESENTATIONS AND WARRANTIES

                 7.1.   Representations and Warranties of Lessor on the Initial
Closing Date.  Lessor represents and warrants to each of the other parties
hereto as of the Initial Closing Date as follows:

                        (a)  Due Organization, etc.  Lessor is a duly organized
                 and validly existing corporation in good standing under the
                 laws of the State of New York and has the power and authority
                 to carry on its business as now conducted and to enter into
                 and perform its obligations under this Agreement, each
                 Operative Agreement to which it is or will be a party and each
                 other agreement, instrument and document executed and
                 delivered or to be executed and delivered by it in connection
                 with or as contemplated by each such Operative Agreement.

                        (b)  Authorization; No Conflict.  The execution,
                 delivery and performance of each Operative Agreement to which
                 it is or will be a party has been duly authorized by all
                 necessary action on its part and neither the execution and
                 delivery thereof by the Lessor, nor the consummation of the
                 transactions contemplated thereby by the Lessor, nor
                 compliance by it with any of the terms and provisions thereof
                 (i) requires or will require any approval of (which approval
                 has not been obtained) any party or approval or consent of any
                 trustee or holders of any indebtedness or obligations of the
                 Lessor (ii) contravenes or will contravene any Legal
                 Requirement applicable to or binding on it as of the date
                 hereof, (iii) does or will contravene or result in any breach
                 of or constitute any default under, or result in the creation
                 of any Lessor Lien upon the Property or any of the
                 Improvements, any indenture, mortgage, chattel mortgage, deed
                 of trust, conditional sales contract, bank loan or credit
                 agreement or other agreement or instrument to which it or its
                 properties may be bound or (iv) does or will require any
                 Governmental Action by any Governmental Authority.

                        (c)   Enforceability, etc.  Each Operative Agreement to
                 which it is or will be a party has been duly executed and
                 delivered by it and constitutes, or upon execution and
                 delivery will constitute, a legal, valid and binding
                 obligation enforceable against it in accordance with the terms
                 thereof, except as enforceability may be limited by applicable
                 bankruptcy, insolvency, reorganization, moratorium or similar
                 laws affecting the enforcement of creditors' rights generally
                 and by general equitable principles (whether enforcement is
                 sought by proceedings in equity or at law).





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<PAGE>   50
                        (d)  Litigation.  No litigation, investigation or
                 proceeding of or before any arbitrator or Governmental
                 Authority is pending or, to the knowledge of the Lessor,
                 threatened by or against the Lessor (a) with respect to any of
                 the Operative Agreements or any of the transactions
                 contemplated hereby or thereby, or (b) which could reasonably
                 be expected to have a material adverse effect on the assets,
                 liabilities, operations, business or financial condition of
                 the Lessor.

                        (e)  Assignment.  Lessor has not assigned or
                 transferred any of its right, title or interest in or under
                 the Lease, any other Operative Agreement or any of the
                 Properties, except in accordance with the Operative
                 Agreements.

                        (f)  No Default.  The Lessor is not in default under or
                 with respect to any of its Contractual Obligations in any
                 respect which could have a material adverse effect on the
                 assets, liabilities, operations, business or financial
                 condition of the Lessor.  No Default or Event of Default under
                 the Operative Agreements attributable to it has occurred and
                 is continuing.

                        (g)  Use of Proceeds.  The proceeds of the Loans and
                 the Lessor Contribution shall be applied by the Lessor solely
                 in accordance with the provisions of the Operative Agreements.

                        (h)  Chief Place of Business.  The Lessor's chief place
                 of business, chief executive office and office where the
                 documents, accounts and records relating to the transactions
                 contemplated by this Agreement and each other Operative
                 Agreement are kept are located at Two World Trade Center, New
                 York, New York.

                        (i)  Federal Reserve Regulations.  The Lessor is not
                 engaged principally in, and does not have as one of its most
                 important activities, the business of extending credit for the
                 purpose of purchasing or carrying any margin stock (within the
                 meaning of Regulation U of the Board), and no part of the
                 proceeds of the Loans will be used by it to purchase or carry
                 any margin stock or to extend credit to others for the purpose
                 of purchasing or carrying any such margin stock or for any
                 purpose that violates, or is inconsistent with, the provisions
                 of Regulations G, T, U or X of the Board.

                        (j)  Investment Company Act.  The Lessor is not an
                 "investment company" or a company controlled by an "investment
                 company" within the meaning of the Investment Company Act.

                        (k)  Securities Act.  Neither the Lessor nor any Person
                 authorized by the Lessor to act on its behalf has offered or
                 sold any interest in the Property or the Notes, or in any
                 similar security or interest relating to the Property, or in
                 any security the offering of which for the purposes of the
                 Securities Act would be deemed to be part of the same offering
                 as the offering of the aforementioned securities to, or
                 solicited any offer to acquire any of the same from, any
                 Person other than, in the case of the Notes, the Agent, and
                 neither the Lessor nor any Person authorized by the Lessor to
                 act on its





                                       63
<PAGE>   51
                 behalf will take any action which would subject the issuance
                 or sale of any interest in the Properties or the Notes to the
                 provisions of Section 5 of the Securities Act or require the
                 qualification of any Operative Agreement under the Trust
                 Indenture Act of 1939, as amended.

                        (l)  ERISA.  The Lessor is making the Lessor
                 Contribution contemplated to be made by it hereunder in the
                 ordinary course of its business, and no part of such amount
                 constitutes the assets of any Employee Benefit Plan.

                        (m)  Lessor Liens.  The Property is free and clear 
                 of all Lessor Liens.

                 7.2.    Representations and Warranties of the Lessee on the
Initial Closing Date.  The Lessee represents and warrants to each of the other
parties hereto as of the Initial Closing Date as follows:

                        (a)  Corporate Existence; Subsidiaries.  The Lessee is
                 a corporation duly organized, validly existing, and in good
                 standing under the laws of Delaware and in good standing and
                 qualified to do business in each jurisdiction where its
                 ownership or lease of property or conduct of its business
                 requires such qualification and where a failure to be
                 qualified would reasonably be expected to cause a Material
                 Adverse Effect.  Each Subsidiary of the Lessee is a
                 corporation duly organized, validly existing, and in good
                 standing under the laws of its jurisdiction of incorporation
                 and in good standing and qualified to do business in each
                 jurisdiction where its ownership or lease of property or
                 conduct of its business requires such qualification and where
                 a failure to be qualified would reasonably be expected to
                 cause a Material Adverse Effect.

                        (b)  Corporate Power.  The execution, delivery, and
                 performance by the Lessee of this Agreement and the other
                 Operative Agreements to which the Lessee is a party and the
                 consummation of the transactions contemplated hereby and
                 thereby (a) are within the Lessee's corporate powers, (b) have
                 been duly authorized by all necessary corporate action, (c) do
                 not contravene (i) the Lessee's certificate or articles, as
                 the case may be, of incorporation or by-laws or (ii) any law
                 or any contractual restriction binding on or affecting the
                 Lessee, the contravention of which would reasonably be
                 expected to cause a Material Adverse Effect and (d) will not
                 result in or require the creation or imposition of any Lien
                 prohibited by this Agreement.

                        (c)       Authorization and Approvals.  No
                 authorization or approval or other action by, and no notice to
                 or filing with, any Governmental Authority is required for the
                 due execution, delivery and performance by the Lessee of this
                 Agreement or the other Operative Agreements to which the
                 Lessee is a party.

                        (d)  Enforceable Obligations.  This Agreement and the
                 other Operative Agreements to which the Lessee is a party have
                 been duly executed and delivered by the Lessee.  Each
                 Operative Agreement to which the Lessee is a party is the
                 legal, valid, and binding obligation of the Lessee enforceable
                 against the Lessee in accordance





                                       64
<PAGE>   52
                 with its terms, except as such enforceability may be limited
                 by any applicable bankruptcy, insolvency, reorganization,
                 moratorium, or similar law affecting creditors' rights
                 generally and by general principles of equity (whether
                 considered in proceeding at law or in equity).

                        (e)  Litigation.  There is no pending or, to the best
                 knowledge of the Lessee, threatened action or proceeding
                 affecting the Lessee or any of its Subsidiaries before any
                 court, Governmental Agency or arbitrator, which would
                 reasonably be expected to have a Material Adverse Effect or
                 which purports to affect the legality, validity, binding
                 effect or enforceability of this Agreement or any other
                 Operative Agreement or the consummation of any of the
                 transactions contemplated hereby or thereby.

                        (f)  Investment Company Act.  Neither the Lessee nor
                 any of its Subsidiaries is an "investment company" or a
                 company "controlled" by an "investment company" within the
                 meaning of the Investment Company Act of 1940, as amended.

                        (g)  Public Utility Holding Company Act.  Neither the
                 Lessee nor any of its Subsidiaries is a "holding company", or
                 a "subsidiary company" of a "holding company", or an
                 "affiliate" of a "holding company" or of a "subsidiary
                 company" of a "holding company", within the meaning of the
                 Public Utility Holding Company  Act of 1935, as amended.

                        (h)  No Defaults.  The Lessee is not in default under
                 or with respect to any contract, agreement, lease or other
                 instrument to which the Lessee is a party and which would
                 reasonably be expected to have a Material Adverse Effect.  To
                 the knowledge of a Responsible Officer of the Lessee, the
                 Lessee has not received any notice of default under any
                 contract, agreement, lease or other instrument to which the
                 Lessee is a party which is continuing and which, if not cured,
                 would reasonably be expected to have a Material Adverse
                 Effect.

                        (ii)      No Default has occurred and is continuing.

                        (i)  Environmental Condition. (i) The Lessee (A) has
                 obtained all Environmental Permits necessary for the ownership
                 and operation of its material properties and the conduct of
                 its business of which the failure to obtain would reasonably
                 be expected to have a Material Adverse Effect; (B) has been
                 and is in compliance with all terms and conditions of such
                 Environmental Permits and with all other material requirements
                 of applicable Environmental Laws of which the failure to
                 comply would reasonably be expected to have a Material Adverse
                 Effect; (C) has not received notice of any violation or
                 alleged violation of any Environmental Law or Environmental
                 Permit the violation of which would reasonably be expected to
                 have a Material Adverse Effect; and (D) is not subject to any
                 actual or contingent Environmental Claim, which Environmental
                 Claim would reasonably be expected to have a Material Adverse
                 Effect.





                                       65
<PAGE>   53
                        (ii) To the knowledge of any Responsible Officer of the
                 Lessee, none of the present or previously owned or operated
                 property of the Lessee, wherever located, (A) has been placed
                 on or proposed to be placed on the National Priorities List,
                 the Comprehensive Environmental Response Compensation
                 Liability Information System list, or their state or local
                 analogs, or have been otherwise designated, listed, or
                 identified as a potential site for removal, remediation,
                 cleanup, closure, restoration, reclamation, or other response
                 activity under any Environmental Laws; (B) is subject to a
                 Lien, arising under or in connection with any Environmental
                 Laws, that attaches to any revenues or to any property owned
                 or operated by the Lessee, wherever located, which Lien would
                 reasonably be expected to have a Material Adverse Effect; or
                 (C) has been the site of any Release of Hazardous Substances
                 or Hazardous Wastes from present or past operations which has
                 caused at the site or at any third-party site any condition
                 that has resulted in or would reasonably be expected to result
                 in the need for Response that would have a Material Adverse
                 Effect.

                        (iii) Without limiting the foregoing, the present and,
                 to the best knowledge of any Responsible Officer of the
                 Lessee, future liability, if any, of the Lessee, which would
                 reasonably be expected to arise in connection with
                 requirements under Environmental Laws will not have a Material
                 Adverse Effect.

                        (j)  Permits, Licenses, etc.  The Lessee possesses all
                 permits, licenses, patents, patent rights or licenses,
                 trademarks, trademark rights, trade names rights and
                 copyrights which the failure to possess could reasonably be
                 expected to have a Material Adverse Effect.  The Lessee
                 manages and operates its business in accordance with all
                 applicable Legal Requirements which the failure to so manage
                 or operate would reasonably be expected to have a Material
                 Adverse Effect.

                        (k)  Health Care Regulatory Matters. (i) To the
                 knowledge of any Responsible Officer of the Lessee, all
                 necessary steps have been or are being taken to secure the
                 renewal of any Health Facility License, Medicaid Provider
                 Agreement or Medicare Provider Agreement issued with respect
                 to any Facility which the failure to renew could reasonably be
                 expected to have a Material Adverse Effect and that is to
                 expire within 60 days after the date of this Agreement, and
                 there is no reasonable basis known to any Responsible Officer
                 of the Lessee that any such renewal will not be obtained.

                        (ii)      There are no proceedings pending, or, to the
                 best of the Lessee's knowledge, threatened by any Governmental
                 Authority seeking nor, to the knowledge of any Responsible
                 Officer of the Lessee, has the Lessee taken any action to the
                 effect of which would be to adversely modify, revoke,
                 withdraw, or suspend any CON, Health Facility License,
                 Medicaid Provider Agreement, Medicare Provider Agreement,
                 Medicare Certification or Medicaid Certification in a manner
                 that would reasonably be expected to have a Material Adverse
                 Effect.  To the Lessee's knowledge, there is no decision to
                 fail to renew or deny payments under any Medicaid Provider
                 Agreement or Medicare Provider Agreement which failure or
                 denial would reasonably be expected to have a Material Adverse
                 Effect.





                                       66
<PAGE>   54
                        (l)  Lease.  Upon the execution and delivery of each
                 Lease Supplement to the Lease, (i) the Lessee will have
                 unconditionally accepted the Property subject to the Lease
                 Supplement, and will have a valid and subsisting leasehold
                 interest in the Property and (ii) no offset will exist with
                 respect to any Rent or other sums payable under the Lease.

                 7.3.   Representations and Warranties of the Lessee on
Property Closing Dates.  The Lessee hereby represents and warrants as of each
Property Closing Date as follows:

                        (a)  Representations and Warranties; No Default.  The
                 representations and warranties of the Construction Agent, the
                 Lessee and the Guarantors set forth in the Operative
                 Agreements are true and correct and to the best of Lessee's
                 knowledge, the representations and warranties of the Lessor
                 are true and correct on and as of such date as if made on and
                 as of such date.  To the best of Lessee's knowledge, the
                 Lessor is in compliance with its respective obligations under
                 the Operative Agreements.  The Construction Agent, the Lessee
                 and the Guarantors are in compliance with their respective
                 obligations under the Operative Agreements and there exists no
                 Default or Event of Default under any of the Operative
                 Agreements.  No Default or Event of Default will occur under
                 any of the Operative Agreements as a result of, or after
                 giving effect to, the Advance requested by the Requisition on
                 such Property Closing Date.

                        (b)  Authorization by the Lessee.  The execution and
                 delivery of each Lease Supplement, Memorandum of Lease,
                 Consent to Assignment and other Operative Agreement delivered
                 by the Lessee on such Property Closing Date and the
                 performance of the obligations of the Lessee under each such
                 Lease Supplement, Memorandum of Lease, Consent to Assignment
                 and other Operative Agreements have been duly authorized by
                 all requisite corporate action of the Lessee.

                        (c)  Execution and Delivery by the Lessee.  Each Lease
                 Supplement, Memorandum of Lease, Consent to Assignment and
                 other Operative Agreement delivered on such Property Closing
                 Date by the Lessee have been duly executed and delivered by
                 the Lessee.

                        (d)  Valid and Binding Obligations.  Each Lease
                 Supplement, Memorandum of Lease, Consent to Assignment and
                 other Operative Agreement delivered by the Lessee on such
                 Property Closing Date is a legal, valid and binding obligation
                 of the Lessee, enforceable against the Lessee in accordance
                 with its respective terms.

                        (e)  Recording of Documents.  Each of the Deed, the
                 Lease Supplement, the Memorandum of Lease, the Assignment of
                 Lease, the Consent to the Assignment of Lease and the Mortgage
                 delivered on such Property Closing Date will be filed for
                 recordation with the appropriate Governmental Authorities in
                 the order set forth in this paragraph, and the UCC Financing
                 Statements with respect to the Property being acquired will be
                 filed with the appropriate Governmental Authorities.





                                       67
<PAGE>   55
                        (f)  Priority of Liens. (i) Upon proper recordation,
                 each Mortgage, each Assignment of Lease and each Memorandum of
                 Lease delivered on such Property Closing Date, will constitute
                 a valid and perfected first lien on each applicable Property
                 and the Improvements located thereon in an amount not less
                 than the Property Cost with respect to such Property, subject
                 only to the Permitted Exceptions, and (ii) upon proper filing,
                 the Lessor Financing Statements will protect the Lessor's
                 interest under the Lease to the extent the Lease is a security
                 agreement governed by Article 9 of the Uniform Commercial
                 Code.

                        (g)  Flood Zone.  No portion of any Property being
                 acquired by the Lessor on such Property Closing Date is
                 located in an area identified as a special flood hazard area
                 by the Federal Emergency Management Agency or other applicable
                 agency, or if any such Property is located in an area
                 identified as a special flood hazard area by the Federal
                 Emergency Management Agency or other applicable agency, then
                 flood insurance has been obtained for such Property in
                 accordance with Section 14.2(b) of the Lease and in accordance
                 with the National Flood Insurance Act of 1968, as amended.

                        (h)  Insurance Coverage.  The Lessee maintains
                 insurance coverage for each Property being acquired by the
                 Lessor on such Property Closing Date which meets the
                 requirements of Section 14.1 of the Lease and all of such
                 coverage is in full force and effect.

                        (i)  Legal Requirements.  Each Property being acquired
                 by the Lessor on such Property Closing Date complies with all
                 Legal Requirements (including all zoning and land use laws and
                 Environmental Laws) in all material respects.

                        (j)  Consents, etc.  All material consents, licenses
                 and building permits required by all Legal Requirements for
                 construction, completion, occupancy and operation, as to be
                 operated by Lessee or Lessee's sublessees, of each Property
                 being acquired on such Property Closing Date, to the extent
                 such consents, licenses and building permits are required to
                 have been obtained on or before such Property Closing Date,
                 have been obtained and are in full force and effect.

                        (k)  Utilities.  All utility services and facilities
                 necessary for the use of the Improvements existing, or to be
                 constructed, on the Land (including gas, electrical, water and
                 sewage services and facilities) will be available to the
                 Property on or prior to the Outside Completion Date.

                        (l)  Environmental Matters.  To the best knowledge 
                 of the Lessee or Construction Agent:
                                                             

                             (i)  the Property being acquired on the Property
                        Closing Date does not contain any Hazardous Substances
                        in amounts or concentrations which (a) constitute a
                        violation of, or (b) would give rise to liability
                        under, any Environmental Law.
        
                             (ii)  the Property and all operations at the
                        Property are in compliance in all material respects
                        with all applicable Environmental Laws, and there is no
        




                                       68
<PAGE>   56
                        contamination at, on or under the Property or violation
                        of any Environmental Law with respect to the Property
                        or the business operated by Lessee or any of its
                        Subsidiaries at the Property (the "Business") that
                        would constitute a violation of any applicable
                        Environmental Law.
        
                             (iii)  neither the Lessee nor any of its
                        Subsidiaries has received any written notice of
                        violation, alleged violation, non-compliance, liability
                        or potential liability regarding compliance with
                        Environmental Laws with regard to the Property, nor
                        does the Lessee have knowledge that any such notice
                        will be received or is being threatened.
        
                             (iv)  Hazardous Substances have not been
                        transported or disposed of from the Property in
                        violation of any Environmental Law, nor have any
                        Hazardous Substances been generated, treated, stored or
                        disposed of at, on or under the Property in violation
                        of any applicable Environmental Law.
        
                             (v)  no judicial proceeding or governmental or
                        administrative action is pending or, to the best
                        knowledge of the Lessee, threatened, under any
                        Environmental Law to which the Lessee or any Subsidiary
                        is named as a party with respect to the Property, nor
                        are there any consent decrees or other decrees, consent
                        orders, administrative orders or other orders, or other
                        administrative or judicial requirements outstanding
                        under any Environmental Law with respect to the
                        Property or the Business.
        
                             (vi)  there has been no Release of Hazardous
                        Substances at or from the Property, or arising from or
                        related to the operations of the Lessee or any
                        Subsidiary in connection with the Property, in
                        violation of or in amounts or in a manner that could
                        reasonably be expected to give rise to any material
                        liability under any Environmental Laws.
        
                             (m)  Title to the Properties.  Upon the
                 acquisition of each Property on such Property Closing Date,
                 the Lessor will have marketable title to the Property in fee
                 simple, subject only to the Permitted Exceptions.  Upon the
                 acquisition of each Property on such Property Closing Date,
                 the Lessor will have the right to grant the Mortgage on the
                 Property.  The Lessor will at all times have marketable title
                 to the Building and any other Improvements, subject only to
                 Permitted Exceptions.

                             (n)  Conditions Precedent in Operative Agreements.
                 All conditions precedent  contained in this Agreement and in
                 the other Operative Agreements to the acquisition of the
                 Property being acquired on such Property Closing Date by the
                 Lessor have been satisfied in full.

                 7.4.    Representations and Warranties of the Lessee Upon each
Funding Date.  The Lessee hereby represents and warrants as of each Funding
Date as follows:





                                       69
<PAGE>   57
                        (a)  Representations and Warranties; No Default.  The
                 representations and warranties of the Construction Agent, the
                 Lessee and the Guarantors set forth in the Operative
                 Agreements are true and correct and to the best of Lessee's
                 knowledge, the representations and warranties of the Lessor
                 are true and correct, on and as of such date as if made on and
                 as of such date.  To the best of Lessee's knowledge, the
                 Lessor is in compliance with its respective obligations under
                 the Operative Agreements and there exists no Default or Event
                 of Default under any of the Operative Agreements.  The
                 Construction Agent, the Lessee and the Guarantors are in
                 compliance with their respective obligations under the
                 Operative Agreements and there exists no Default or Event of
                 Default under any of the Operative Agreements.  No Default or
                 Event of Default will occur under any of the Operative
                 Agreements as a result of, or after giving effect to, the
                 Advance requested by the Requisition on such date.

                        (b)  Priority of Liens.  Each Mortgage, Supplement to
                 the Assignment of Lease and Memorandum of Lease constitutes a
                 valid and perfected first lien on each applicable Property and
                 the Improvements located thereon in an amount not less than
                 the Property Cost with respect to such Property, subject only
                 to Permitted Exceptions.

                        (c)  Execution and Delivery by the Construction Agent.
                 The execution and delivery of each Operative Agreement
                 delivered by the Construction Agent on such date and the
                 performance of the Construction Agent's obligations under each
                 Agency Agreement Supplement and other Operative Agreement have
                 been duly authorized by all requisite corporate action of the
                 Construction Agent.

                        (d)  Agency Agreement Supplements.  Each Operative
                 Agreement delivered by the Construction Agent on such date has
                 been duly executed and delivered by the Construction Agent.

                        (e)  Valid and Binding Obligations of the Lessee and
                 the Construction Agent.  Each Operative Agreement delivered by
                 the Lessee and the Construction Agent on such date is a legal,
                 valid and binding obligation of the Lessee and the
                 Construction Agent, enforceable against the Lessee and the
                 Construction Agent in accordance with its terms.

                        (f)  Insurance.  The Construction Agent has obtained
                 insurance coverage covering the Property which meets the
                 requirements of the Agency Agreement, the Lease and the other
                 Operative Agreements before commencing construction, repairs
                 or Modifications, as the case may be, and such coverage is in
                 full force and effect.

                        (g)  Property-Related Matters.  The Property, as
                 improved in accordance with the Plans and Specifications, will
                 comply in all material respects with all Legal Requirements
                 (including all applicable zoning and land use laws and
                 Environmental Laws) and Insurance Requirements.   The Plans
                 and Specifications have been or will be prepared so as to
                 comply with all applicable Legal Requirements (including all
                 applicable Environmental Laws and building, planning, zoning
                 and fire codes) and upon completion of the applicable
                 Improvements in accordance with the Plans and Specifications,
                 such Improvements on the Property will not encroach in any
                 manner onto any adjoining land (except as permitted by





                                       70
<PAGE>   58
                 express written easements or variance) and such Improvements
                 and the use thereof by the Lessee and its agents, assignees,
                 employees, invitees, lessees, licensees and tenants will
                 comply in all material respects with all applicable Legal
                 Requirements (including all applicable Environmental Laws and
                 building, planning, zoning and fire codes).  There is no
                 action, suit or proceeding (including any proceeding in
                 condemnation or eminent domain or under any applicable
                 Environmental Law) pending or, to the best knowledge of Lessee
                 threatened which adversely affects the title to, or materially
                 affects the use, operation or value of, the Properties.   No
                 fire or other casualty with respect to the Properties has
                 occurred which fire or other casualty has had a material
                 adverse effect on the Lessee's ability to perform its
                 obligations under the Agency Agreement and the other Operative
                 Agreements.  All utilities serving the Properties, or proposed
                 to serve the Properties in accordance with the Plans and
                 Specifications, are located in, and in the future will be
                 located in, and vehicular access to the Improvements on each
                 of the Properties is provided by, either public rights-of-way
                 abutting the Property or Appurtenant Rights.  All applicable
                 material licenses, approvals, authorizations, consents,
                 permits (including, without limitation, building, demolition
                 and environmental permits, licenses, approvals, authorizations
                 and consents), easements and rights-of-way, including proof of
                 dedication, required for (i) the use, treatment, storage,
                 transport, disposal or disposition of any Hazardous Substance
                 on, at, under or from the Properties during the construction
                 of the Improvements thereon and the use and operation of the
                 Improvements following such construction, (ii) the
                 construction of the Improvements in accordance with the Plans
                 and Specifications and the Agency Agreement and (iii) the use
                 and operation of the Improvements following such construction
                 as permitted pursuant to the Lease have been obtained, to the
                 extent necessary at the time of this representation, from the
                 appropriate Governmental Authorities having jurisdiction or
                 from private parties.

                        (h)  Lease Requirements.  The Improvements, when
                 completed, will comply in all material respects with all
                 requirements and conditions set forth in the Lease and all
                 other conditions and requirements of the Operative Documents.

                        (i)  Conditions Precedent contained in the Operative
                 Agreements.  All conditions precedent contained in this
                 Agreement and in the other Operative Agreements relating to
                 the relevant Advance have been satisfied in full.

                        (j)  Projected Completion Value.  The Property Cost of
                 each Improvement as established by the Construction Budget
                 shall not exceed an amount equal to the Projected Completion
                 Value.



                    SECTION 8.  PAYMENT OF CERTAIN EXPENSES.

         Lessee agrees, for the benefit of the Lessor, the Agent, the Co-Agents
and each of the Lenders, to:





                                       71
<PAGE>   59
                        8.1.  Transaction Expenses.  (a) On the Initial Closin
Date, pay, or  cause to be paid, all fees, expenses and disbursements of each 
of the Lessor's and the Agent's counsel in connection with the transactions
contemplated by the Operative Agreements and incurred in connection with such
Initial Closing Date, including all Transaction Expenses, and all other expenses
in connection with such Initial Closing Date, including all expenses relating to
all fees, taxes and expenses for the recording, registration and filing of
documents.

                        (b)  On each Property Closing Date, pay, or cause to be
                 paid, all fees, expenses and disbursements of each of the
                 Lessor's and the Agent's counsel in connection with the
                 transactions contemplated by the Operative Agreements and
                 incurred in connection with such Property Closing Date,
                 including all Transaction Expenses arising from such Property
                 Closing Date, and all other expenses in connection with such
                 Property Closing Date, including all expenses relating to each
                 Appraisal, and all fees, taxes and expenses for the recording,
                 registration and filing of documents.

                        8.2.  Brokers' Fees and Stamp Taxes.  Pay or cause to be
paid brokers' fees and any and all stamp, transfer and other similar taxes, fees
and excises, if any, including any interest and penalties, which are payable in
connection with the transactions contemplated by this Agreement and the other
Operative Agreements.

                        8.3.  Certain Fees and Expenses.  Pay or cause to bepaid
(i) all costs and expenses incurred by the Lessee, the Agent or the Lessor in
entering into any future amendments or supplements with respect to any of the
Operative Agreements, whether or not such amendments or supplements are
ultimately entered into, or giving or withholding of waivers of consents hereto
or thereto, which have been requested by the Lessee, and (ii) all costs and
expenses incurred by the Lessor, the Lessee, or the Agent in connection with any
purchase of any Property by the Lessee pursuant to Article XX of the Lease.

                        8.4.  Credit Agreement and Related Obligations.  (a)
Pay, before the due date thereof, all costs and expenses (other than principal
and interest on the Loans, but including breakage costs and interest on overdue
amounts pursuant to Section 2.8(c) of the Credit Agreement or otherwise)
required to be paid by the Lessor under the Credit Agreement, the Mortgage, the
Assignment of Lease and the Contract Assignment.

                        (b)  Pay the Agent all fees specified in the Fee Letter
                 at the time and in the manner required by the Fee Letter,
                 which fees may not be paid by using the proceeds of the Loans
                 or Lessor Contribution.

                        8.5.  Facility Fees.  (a) Pay to the Agent for
the account of each Lender the Facility Fee on each Facility Fee Payment Date.

                        (b)  Pay to the Lessor a facility fee (the "Lessor
                 Facility Fee"), computed at a rate per annum equal to the
                 product of (i) the Lessor Commitment and (ii) the Applicable
                 Margin, payable quarterly in arrears on each Facility Fee
                 Payment Date.  The Lessor Facility Fee shall be calculated on
                 the basis of a 365- (or 366-, as the case may be) day year for
                 the





                                       72
<PAGE>   60
                 actual days elapsed.  If all or a portion of the Lessor
                 Facility Fee shall not be paid when due, such overdue amount
                 shall bear interest, payable by the Lessee on demand, at a
                 rate per annum equal to the rate described in the definition
                 of Lessor Yield plus 2%, from the date of such non-payment
                 until such amount is paid in full (as well after as before
                 judgment).


                 SECTION 9.  OTHER COVENANTS AND AGREEMENTS.

                             9.1.  Covenants of the Lessor.  The Lessor hereby
agrees that so long as this Agreement is in effect:

                             (a)   Discharge of Liens.  The Lessor will not
                 create or permit to exist at any time, and will, at its own
                 cost and expense, promptly take such action as may be
                 necessary duly to discharge, or to cause to be discharged, all
                 Lessor Liens on the Property attributable to it; provided,
                 however, that the Lessor shall not be required to so discharge
                 any such Lessor Lien while the same is being contested in good
                 faith by appropriate proceedings diligently prosecuted so long
                 as such proceedings shall not involve any material danger of
                 impairment of the Liens of the Security Documents or of the
                 sale, forfeiture or loss of, and shall not interfere with the
                 use or disposition of, any Property or title thereto or any
                 interest therein or the payment of Rent.

                             (b)  No Voluntary Bankruptcy.  The Lessor shall
                 not (i) commence any case, proceeding or other action under
                 any existing or future law of any jurisdiction, domestic or
                 foreign, relating to bankruptcy, insolvency, reorganization,
                 arrangement, winding-up, liquidation, dissolution, composition
                 or other relief with respect to it or its debts, or (ii) seek
                 appointment of a receiver, trustee, custodian or other similar
                 official for it or for all or any substantial benefit of its
                 creditors; and the Lessor shall not take any action in
                 furtherance of, or indicating its consent to, approval of, or
                 acquiescence in, any of the acts set forth in this paragraph.

                             (c)  Change of Chief Place of Business.  The
                 Lessor shall give prompt notice to the Lessee and the Agent if
                 the Lessor's chief place of business or chief executive
                 office, or the office where the records concerning the
                 accounts or contract rights relating to the Property are kept,
                 shall cease to be located at Two World Trade Center, New York,
                 New York or if it shall change its name.

                             (d)  Loan Documents.  Provided that no Event of
                 Default is continuing, none of the Lenders, the Lessor, the
                 Lessee nor the Agent shall consent to or permit any amendment,
                 supplement, waiver or other modification of the terms and
                 provisions of the Credit Agreement, the Notes or the Security
                 Documents, in each case without the prior written consent of
                 the Lessee.

                             (e)  Compliance with Operative Agreements.  The
                 Lessor shall at all times observe and perform all of the
                 covenants, conditions and obligations required to be performed
                 by it under each Operative Agreement to which it is a party.





                                       73
<PAGE>   61
                                9.2.  Repayment of Certain Amounts on Maturity
Date.  The Lessor and the Agent hereby agree that if (i) on the Maturity Date
(after giving effect to all payments made by the Lessee under the Lease and the
application of all sales proceeds pursuant to Section 8 of the Credit Agreement)
there remains any outstanding principal or accrued and unpaid principal under
the Tranche B Notes (the aggregate amount of such outstanding principal, the
"Tranche B Deficit") and (ii) during the Marketing Period the Lessor has
received any Marketing Period Equity Return, then on the Maturity Date the
Lessor shall pay to the Agent an amount up to the amount of the Tranche B
Deficit, but in no event greater than the Marketing Period Equity Return
received by it.

                                9.3.  Amendment of Certain Documents.  The
Agent, for itself and on behalf of the Lenders, hereby agrees for the benefit of
the Lessor that it will not amend, alter or otherwise modify, or consent to any
amendment, alteration or modification of, the Lease (including the definitions
of any terms used in such document) without the prior written consent of the
Lessor, if such amendment, alteration or modification would materially and
adversely affect the interests of the Lessor.  Provisions requiring consent,
include any amendment, alteration or modification that would release the Lessee
from any of its obligations in respect of the payment of Basic Rent,
Supplemental Rent, Termination Value, Maximum Residual Guarantee Amount or the
Purchase Option Price or any other payments in respect of the Properties as set
forth in the Lease, or reduce the amount of, or change the time or manner of
payment of, obligations of the Lessee as set forth in the Lease, or create or
impose any obligation on the part of the Lessor under the Lease, or extend or
shorten the duration of the Term, or modify the provisions of this Section 9.3.

                                9.4.  Proceeds of Casualty or Condemnation. 
The Lessor agrees, for the benefit of the Agent and the Lenders, that if at any
time the Lessor receives any proceeds as a result, directly or indirectly, of
any Casualty or Condemnation with respect to the Property which the Lessor is
entitled to retain and hold in accordance with the terms of the Lease, the
Lessor agrees that it will promptly deposit such amounts in an account with the
Agent.  The Lessor also agrees that it will execute and deliver such documents
and instruments as the Agent may request in order to grant the Agent, for the
benefit of the Lenders, a valid and perfected, first priority security interest
in such proceeds.


                        SECTION 10.  CREDIT AGREEMENT.

                                10.1.  Lessee's Credit Agreement Rights. 
Notwithstanding anything to the contrary contained in the Credit Agreement, 
the Agent, the Lessee and the Lessor hereby agree that:

                                (a)  the Lessee shall have the right to give 
                 the notice referred to in Section 2.3 of the Credit Agreement;

                                (b)  the Lessee shall have the right to 
                 convert or continue Loans in accordance with Section 2.6 of 
                 the Credit Agreement;





                                       74
<PAGE>   62
                             (c)  the Lessee shall receive copies of all
                 notices delivered to the Lessor under the Credit Agreement and
                 the other Operative Agreements and such notices shall not be
                 effective until received;

                             (d)  the Lessee shall have the right to select
                 Interest Periods in accordance with the terms of the Credit
                 Agreement;

                             (e)  the Lessee shall have the right to give
                 notice of prepayment of the Loans in accordance with the
                 Credit Agreement;

                             (f)  the Lessee shall have the right to cure, to
                 the extent susceptible to a cure, any Default or Event of
                 Default of the Lessor under the Credit Agreement;

                             (g)  the Lessee shall have the right to approve
                 any successor Agent pursuant to Section 7.9 of the Credit
                 Agreement;

                             (h)  the Lessee shall have the right, on behalf of
                 the Lessor, to select any person or persons (including the
                 Lessee) to whom funds may be paid at the discretion of the
                 Lessor in accordance with Sections 8.1 and 8.2 of the Credit
                 Agreement;

                             (i)  the Lessee shall have the right to consent to
                 any assignment by a Lender if required pursuant to Section 9.5
                 of the Credit Agreement; and

                             (j)  the Lessee shall have the right to designate
                 the portion of the Loans on which interest is due and payable
                 for purposes of the definitions of "Allocated Interest" and
                 "Allocated Lessor Yield";
        
                             (k)  the Lessee shall have the right to request
                 that another lending office be designated pursuant to Section
                 2.15 of the Credit Agreement;

                             (l)  the Lessee shall have the obligation to
                 notify the Agent of the amounts or information specified in
                 Section 5.8 of the Credit Agreement; and

                             (m)  without limiting the foregoing clauses (a)
                 through (l), and in addition thereto, (x) the Lessor shall not
                 exercise any right under the Credit Agreement without giving
                 the Lessee at least ten (10) Business Days' prior written
                 notice (or such shorter period as may be required but in no
                 case less than two (2) Business Days) and, following such
                 notice, the Lessor shall take such action, or forbear from
                 taking such action, as the Lessee shall direct and (y) the
                 Lessee shall have the right to exercise any other right of the
                 Lessor under the Credit Agreement upon not less than two (2)
                 Business Days' prior written notice from the Lessee to the
                 Lessor.





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<PAGE>   63
                   SECTION 11.       TRANSFER OF INTEREST.

                            11.1.  Restrictions on Transfer.  (a) The Lessor may
not, directly or indirectly, assign, convey or otherwise transfer any of its
right, title or interest in or to any of the Properties without the consent of
the Agent, the Required Lenders and the Lessee, which consent shall not be
unreasonably withheld or delayed.  Any transfer by the Lessor as above provided,
shall be effected pursuant to an agreement in form and substance reasonably
satisfactory to the Agent, the Required Lenders, the Lessor, the Lessee and
their respective counsel; provided, however, that no such consent for any such
transfer shall be required if, in the Lessor's sole discretion, the continued
ownership of the Properties, or any part thereof, would violate or conflict with
any Requirement of Law or interpretation thereof, provided, further, however, in
such event, Lessor may only transfer its interest in the Properties upon not
less than 30 days prior written notice to the Agent (who will notify the
Lenders) and the Lessee and only to an institutional investor whose net worth is
at least $50,000,000 or whose obligations under the Operative Agreements are
guaranteed by an entity whose net worth is at least $50,000,000.

                             (b)  In the event that the Lessor shall be in
                 breach of any of its material obligations under the Operative
                 Agreements which breach continues uncured for a period of 30
                 days or more after written notice thereof by the Lessee or the
                 Agent, then at the request of the Lessee, the Lessor shall
                 promptly transfer and assign its interest in the Properties to
                 a third party, reasonably acceptable to the Agent and the
                 Required Lenders, designated by the Lessee.  If the Agent has
                 obtained knowledge of a default by the Lessor, it shall notify
                 the Lessee of such default.

                        11.2.  Effect of Transfer.  From and after any transfer
effected in accordance with this Section 11, the transferor shall be released,
to the extent of such transfer, from its liability hereunder and under the other
documents to which it is a party in respect of obligations to be performed on or
after the date of such transfer.  Upon any transfer byr the Lessor as above
provided, any such transferee shall assume the obligations of the Lessor, and
the Lessor, and shall be deemed the "Lessor" for all purposes of such documents
andn on each reference herein to the transferor shall thereafter be deemed a
reference to such transferee for all purposes, except as provided in the
preceding sentence.  Notwithstanding anye transfer of all or a portion of the
transferor's interest as provided in this Section 11, the transferor shall be
entitled to all benefits accrued and all rights vested prior to such transfer
including rights to indemnification under any such document.

                       SECTION 12.      INDEMNIFICATION.

                        12.1.  General Indemnity.  The Lessee, whether or not
any of the transactions contemplated hereby shall be consummated, hereby 
assumes liability for and agrees to defend, indemnify and hold harmless each
Indemnified Person on an After Tax Basis from and against any Claims which may 
be imposed on, incurred by or asserted against an Indemnified Person in any way
relating to or arising or alleged to arise out of (a) the financing,
refinancing,    


                                      76
<PAGE>   64
purchase, acceptance, rejection, ownership, design, construction, delivery,
acceptance, nondelivery, leasing, subleasing, possession, use, operation,
repair, modification, transportation, condition, sale, return, repossession
(whether by summary proceedings or otherwise), or any other disposition of the
Property or any part thereof; (b) any latent or other defects in any property
whether or not discoverable by an Indemnified Person or the Lessee; (c) a
violation of Environmental Laws, Environmental Claims or other loss of or damage
relating to the Properties; (d) the Operative Agreements, or any transaction
contemplated thereby; (e) any breach by the Lessee of any of its representations
or warranties under the Operative Agreements or failure by the Lessee to perform
or observe any covenant or agreement to be performed by it under any of the
Operative Agreements; and (f) personal injury, death or property damage relating
to the Properties, including Claims based on strict liability in tort; but in
any event excluding (x) Claims to the extent such Claims arise solely out of
events occurring after the expiration of the Term and after the Lessee's
discharge of all its obligations under the Lease or (y) Claims to the extent
such Claims arise solely out of the gross negligence or willful misconduct of an
Indemnified Person.  The Lessee shall be entitled to control, and shall assume
full responsibility for the defense of any Claim; provided, however, that the
Lessor and the Agent named in such Claim, may each retain separate counsel at
the expense of the Lessee in the event of and to the extent of a conflict or a
potential conflict.  The Lessee and each Indemnified Person agree to give each
other prompt written notice of any Claim hereby indemnified against but the
giving of any such notice by an Indemnified Person shall not be a condition to
the Lessee's obligations under this Section 12.1, except to the extent failure
to give such notice materially prejudices Lessee's rights hereunder.  After an
Indemnified Person has been fully indemnified for a Claim pursuant to this
Section 12.1, and so long as no Event of Default under the Lease shall have
occurred and be continuing, the Lessee shall be subrogated to any right of such
Indemnified Person with respect to such Claim.  None of the Indemnified Persons
shall settle a Claim without the consent of the Lessee, which consent shall not
be unreasonably withheld or delayed.

                        12.2.  General Tax Indemnity.  (a)  The Lessee shall pay
and assume liability for, and does hereby agree to indemnify, protect and defend
the Property and all Tax Indemnitees, and hold them harmless against, all
Impositions on an After Tax Basis.  Each Tax Indemnitee further agrees to comply
with recommendations made by the Lessee regarding techniques to minimize Taxes
indemnifiable hereunder, provided that (i) the Lessee agrees to make payments to
(or otherwise indemnify) such Tax Indemnitee against any cost or expense arising
from instituting the Lessee's recommendations and (ii) such Tax Indemnitee
determines in its reasonable discretion that such recommendations will not have
an adverse impact on such Tax Indemnitee.

                             (b)  Provided that no Event of Default has
                 occurred and is continuing, if any Tax Indemnitee obtains a
                 refund or a reduction in a liability (but only if such
                 reduction relates to a Tax not otherwise indemnifiable
                 hereunder and has not been taken into account in determining
                 the amount of a payment on an After Tax Basis) as a result of
                 any Imposition paid or reimbursed by the Lessee (in whole or
                 in part), such Tax Indemnitee shall promptly pay to the Lessee
                 the lesser of (x) the amount of such refund or reduction in
                 liability and (y) the





                                       77
<PAGE>   65
                 amount previously so paid or advanced by the Lessee, in each
                 case net of reasonable expenses not already paid or reimbursed
                 by the Lessee.

                             (c)  (i)  Subject to the terms of Section 12.2(g),
                 the Lessee shall pay or cause to be paid all Impositions
                 directly to the taxing authorities where feasible and
                 otherwise to the Tax Indemnitee, as appropriate, and the
                 Lessee shall at its own expense, upon such Tax Indemnitee's
                 reasonable request, furnish to such Tax Indemnitee copies of
                 official receipts or other satisfactory proof evidencing such
                 payment.

                             (ii)  In the case of Impositions for which no
                 contest is conducted pursuant to Section 12.2(g) and which the
                 Lessee pays directly to the taxing authorities, the Lessee
                 shall pay such Impositions prior to the latest time permitted
                 by the relevant taxing authority for timely payment.  In the
                 case of Impositions for which the Lessee reimburses a Tax
                 Indemnitee, the Lessee shall do so within thirty (30) days
                 after receipt by the Lessee of demand by such Tax Indemnitee
                 describing in reasonable detail the nature of the Imposition
                 and the basis for the demand (including the computation of the
                 amount payable), but in no event shall the Lessee be required
                 to pay such reimbursement prior to thirty (30) days before the
                 latest time permitted by the relevant taxing authority for
                 timely payment.  In the case of Impositions for which a
                 contest is conducted pursuant to Section 12.2(g), the Lessee
                 shall pay such Impositions or reimburse such Tax Indemnitee
                 for such Impositions, to the extent not previously paid or
                 reimbursed pursuant to subsection (a), prior to the latest
                 time permitted by the relevant taxing authority for timely
                 payment after conclusion of all contests under Section
                 12.2(g).

                             (iii)  Impositions imposed for a billing period
                 during which the Lease expires or terminates with respect to
                 the Property (unless the Lessee has exercised the Purchase
                 Option with respect to the Properties) shall be adjusted and
                 prorated by the Agent on a daily basis between the Lessee and
                 the Lessor, whether or not such Imposition is imposed before
                 or after such expiration or termination and each party shall
                 pay or reimburse the other for each party's pro rata share
                 thereof.

                             (iv)  At the Lessee's request, the amount of any
                 indemnification payment by the Lessee pursuant to subsection
                 (a) shall be verified and certified by an independent public
                 accounting firm mutually acceptable to the Lessee and the Tax
                 Indemnitee.  The fees and expenses of such independent public
                 accounting firm shall (i) in the case of the Trust Company or
                 the Lessor, be paid by the Lessee, and (ii) in the case of all
                 other Tax Indemnitees, be paid by the Lessee unless such
                 verification shall result in an adjustment in the Lessee's
                 favor of 10% or more of the payment as computed by such Tax
                 Indemnitee, in which case such fee shall be paid by such Tax
                 Indemnitee.

                             (d)  (i)  The Lessee shall be responsible for
                 preparing and filing any real and personal property or ad
                 valorem tax returns in respect of the Property.  In case any
                 other report or tax return shall be required to be made with
                 respect to any obligations of the Lessee under or arising out
                 of subsection (a) and of which the Lessee has knowledge, the
                 Lessee, at its sole cost and expense, shall notify the
                 relevant Tax Indemnitee of such requirement and





                                       78
<PAGE>   66
                 except if such Tax Indemnitee notifies the Lessee that such
                 Person intends to file such report or return) (A) to the
                 extent required or permitted by and consistent with Legal
                 Requirements, make and file in its own name such return,
                 statement or report; and (B) in the case of any other such
                 return, statement or report required to be made in the name of
                 such Tax Indemnitee, advise such Tax Indemnitee of such fact
                 and prepare such return, statement or report for filing by
                 such Tax Indemnitee or, where such return, statement or report
                 shall be required to reflect items in addition to any
                 obligations of the Lessee under or arising out of subsection
                 (a), provide such Tax Indemnitee at the Lessee's expense with
                 information sufficient to permit such return, statement or
                 report to be properly made with respect to any obligations of
                 the Lessee under or arising out of subsection (a).  Such Tax
                 Indemnitee shall, upon the Lessee's request and at the
                 Lessee's expense, provide any data maintained by such Tax
                 Indemnitee (and not otherwise within the control of the
                 Lessee) with respect to the Property which the Lessee may
                 reasonably require to prepare any required tax returns or
                 reports;

                             (e)  If directly as a result of the payment or
                 reimbursement by the Lessee of any expenses of the Lessor, the
                 Lessor or any of its Affiliates, shall suffer a net increase (
                 taking into account any available credits or deductions) in
                 any federal, state or local income tax liability, the Lessee
                 shall indemnify the Lessor or its respective Affiliates
                 (without duplication of any indemnification required by
                 subsection (a)) on an After Tax Basis for the amount of such
                 increase.  The calculation of any such net increase shall take
                 into account any current or future tax savings realized or
                 reasonably expected to be realized by the Lessor or such
                 Affiliate, in respect thereof, as well as any interest,
                 penalties and additions to tax payable by the Lessor or such
                 Affiliate, in respect thereof;

                             (f)  As between the Lessee and the Lessor, the
                 Lessee shall be responsible for, and the Lessee shall
                 indemnify and hold harmless the Lessor (without duplication of
                 any indemnification required by subsection (a)) on an After
                 Tax Basis against, any obligation for United States
                 withholding taxes imposed in respect of the interest payable
                 on the Notes to the extent, but only to the extent, Lessor has
                 actually paid funds to a taxing authority with respect to such
                 withholding taxes (and, if the Lessor receives a demand for
                 such payment from any taxing authority, the Lessee shall
                 discharge such demand on behalf of the Lessor).
                 Notwithstanding the foregoing, the Lessee shall not be
                 responsible for any obligation for United States withholding
                 taxes imposed in respect of the interest payable on the Notes
                 or in respect of the Lessor Yield to the extent the Lessor is
                 not a United States person for purposes of the Code;

                             (g)  (i) If a written claim is made against any
                 Impositions Indemnitee or if any proceeding shall be commenced
                 against such Impositions Indemnitee (including a written
                 notice of such proceeding), for any Impositions, such
                 Impositions Indemnitee shall promptly notify Lessee in writing
                 and shall not take action with respect to such claim or
                 proceeding without the consent of Lessee for thirty (30) days
                 after the receipt of such notice by Lessee; provided, that, in
                 the case of any such claim or proceeding, if action shall be
                 required by law regulation to be taken prior to the end of
                 such 30-day period, such Impositions Indemnitee shall, in such
                 notice to Lessee, inform Lessee, and no action shall be taken
                 with respect to





                                       79
<PAGE>   67
                 such claim or proceeding without the consent of Lessee before
                 the end of such shorter period; provided, further, that the
                 failure of such Impositions Indemnitee to give the notices
                 referred to this sentence shall not diminish Lessee's
                 obligation hereunder except to the extent such failure
                 adversely affects the ability of the Lessee to contest all or
                 part of such claim.

                             (ii)  If, within thirty (30) days of receipt of
                 such notice from the Impositions Indemnitee (or such shorter
                 period as the Impositions Indemnitee has noticed Lessee is
                 required by law or regulation for the Impositions Indemnitee
                 to commence such contest), Lessee shall request in writing
                 that such Impositions Indemnitee contest such Imposition, the
                 Impositions Indemnitee shall, at the expense of Lessee, in
                 good faith conduct and control such contest (including by
                 pursuit of appeals) relating to the validity, applicability or
                 amount of such impositions (provided, however, that (A) if
                 such contest can be pursued independently from any other
                 proceeding involving a tax liability of such Impositions
                 Indemnitee, the Impositions Indemnitee, at Lessee's request,
                 shall allow Lessee to conduct and control such contest and (B)
                 in the case of any contest that Lessee is not entitled to
                 control, the Impositions Indemnitee may request Lessee to
                 conduct and control such contest if possible or permissible
                 under applicable law or regulation) by, in the sole discretion
                 of the Person conducting and controlling such contest, (1)
                 resisting payment thereof, (2) not paying the same except
                 under protest, if protest is necessary and proper, (3) if the
                 payment be made, using reasonable efforts to obtain a refund
                 thereof in appropriate administrative and judicial
                 proceedings, or (4) taking such other action as is reasonably
                 requested by Lessee from time to time.

                             (iii)  The party controlling any contest shall
                 consult in good faith with the non- controlling party and
                 shall keep the non-controlling party reasonably informed as to
                 the conduct of such contest; provided that all decisions
                 ultimately shall be made in the sole discretion of the
                 controlling party.  The parties agree that an Impositions
                 Indemnitee may at any time decline to take further action with
                 respect to the contest of any Imposition and may settle such
                 contest if such Impositions Indemnitee shall waive its rights
                 to any indemnity from Lessee that otherwise would be payable
                 in respect of such claim (and any future claim by any taxing
                 authority with respect to other taxable periods that are
                 based, in whole or in part, upon the resolution of such claim)
                 and shall pay to Lessee any amount previously paid or advanced
                 by Lessee pursuant to this Section 12.2 by way of
                 indemnification or advance for the payment of an Imposition,
                 and no other then future liability of the Lessee is likely
                 with respect to such Imposition.

                             (iv)  Notwithstanding the foregoing provisions of
                 this Section 12.2, an Impositions Indemnitee shall not be
                 required to take any action and Lessee shall not be permitted
                 to contest any Impositions in its own name or that of the
                 Impositions Indemnitee unless (A) Lessee shall pay to such
                 Impositions Indemnitee on demand and on an After Tax Basis all
                 reasonable costs, losses and expenses that such Impositions
                 Indemnitee actually incurs in connection with contesting such
                 Impositions, including, without limitation, all reasonable
                 legal, accounting and investigatory fees and disbursements,
                 (B) in the case of a claim that must be pursued in the name of
                 an Impositions Indemnitee (or an Affiliate thereof), the
                 amount of the potential indemnity (taking into account all
                 similar or logically related claims that have been or could be
                 raised in any audit involving such Impositions Indemnitee for
                 which Lessee





                                       80
<PAGE>   68
                 may be liable to pay an indemnity under this Section 12.2) is
                 less than $1,000,000, unless the pursuit of such contest is in
                 a manner mutually satisfactory to the Imposition Indemnitee
                 and the Lessee, but in no event shall such right prevent the
                 Lessee from prosecuting or continuing such contest, (C) the
                 Impositions Indemnitee shall have reasonably determined that
                 the action to be taken will not result in any material danger
                 of sale, forfeiture or loss of any Property, or any part
                 thereof or interest therein, will not interfere with the
                 payment of Rent, and will not result in risk of criminal
                 liability, (D) if such contest shall involve the payment of
                 the Imposition prior to the contest, Lessee shall provide to
                 the Impositions Indemnitee an interest-free advance in an
                 amount equal to the Imposition that the Impositions Indemnitee
                 is required to pay (with no additional net after-tax cost to
                 such Impositions Indemnitee), (E) in the case of a claim that
                 must be pursued in the name of an Impositions Indemnitee (or
                 an Affiliate thereof), Lessee shall have provided to such
                 Impositions Indemnitee an opinion of independent tax counsel
                 selected by the Lessee and reasonably satisfactory to such
                 Imposition Indemnitee stating that a reasonable basis exists
                 to contest such claim (or, in the case of an appeal of an
                 adverse determination, an opinion of such counsel to the
                 effect that there is substantial authority for the position
                 asserted in such appeal) and (F) no Event of Default shall
                 have occurred and be continuing.


                          SECTION 13.  MISCELLANEOUS.

                        13.1.  Survival of Agreements.  The representations,
warranties, covenants, indemnities and agreements of the parties provided for in
the Operative Agreements, and the parties' obligations under any and all
thereof, shall survive the execution and delivery of this Agreement, the
transfer of the Property to the Lessor, the construction of any Improvements,
any disposition of any interest of the Lessor in the Property or the
Improvements, the payment of the Notes and any disposition thereof and shall be
and continue in effect notwithstanding any investigation made by any party and
the fact that any party may waive compliance with any of the other terms,
provisions or conditions of any of the Operative Agreements.  Except as
otherwise expressly set forth herein or in other Operative Agreements, the
indemnities of the parties provided for in the Operative Agreements shall
survive the expiration or termination of any thereof.

                        13.2.  No Broker, etc.  Each of the parties hereto
represents to the others that it has not retained or employed any broker, finder
or financial adviser to act on its behalf in connection with this Agreement, nor
has it authorized any broker, finder or financial adviser retained or employed
by any other Person so to act, except for the Arranger, the fees of which shall
be paid by the Lessee.  Any party who is in breach of this representation shall
indemnify and hold the other parties harmless from and against any liability
arising out of such breach of this representation.

                        13.3.  Notices.  Unless otherwise specifically provided
herein, all notices, consents, directions, approvals, instructions, requests and
other communications required or permitted by the terms hereof to be given to
any Person shall be given in writing by nationally recognized courier service
and any such notice shall become effective five Business Days after





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<PAGE>   69
being deposited in the mails, certified or registered with appropriate postage
prepaid or one Business Day after delivery to a nationally recognized courier
service specifying overnight delivery and shall be directed to the address of
such Person as indicated:
    
    If to the Lessee, to it at:
    
    Living Centers Holding Company
    15415 Katy Freeway, Suite 800
    Houston, Texas  77094
    Attn:  Mr. Boyd P. Gentry
    Telecopy No.: (713) 578-4735
    
    If to the Lessor, to it at:
    
    FBTC Leasing Corp.
    Two World Trade Center
    New York, New York  10048
    Attn:  Mr. Carl Marcantonio
    Telecopy No.:  (212)  775-7276
    
    If to the Agent, to it at:
    
    The Chase Manhattan Bank
    Agent Bank Services
    140 East 45th Street
    New York, New York  10017
    Attn:  Janet Belden
    Telecopy No.: (212) 622-0002
    
    with a copy to:
    
    Simpson Thacher & Bartlett
    425 Lexington Avenue
    New York, New York  10017
    Attn:  C. Tanner Rose, Jr., Esq.
    Telecopy No.:  (212) 455-2502
    

From time to time any party may designate a new address for purposes of notice
hereunder by notice to each of the other parties hereto.
        
                             13.4.  Counterparts.  This Agreement may be
executed by the parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such counterparts shall
together constitute but one and the same instrument.
        




                                       82
<PAGE>   70
                            13.5.  Amendments and Termination.  Neither this
Agreement nor any of the terms hereof may be terminated, amended, supplemented,
waived or modified except by an instrument in writing signed by the party
against which the enforcement of the termination, amendment, supplement, waiver
or modification shall be sought.  This Agreement may be terminated by an
agreement signed in writing by the Lessor, the Lessee, the Agent and the
Lenders.

                            13.6.  Headings, etc..  The Table of Contents and
headings of the various Sections and Subsections of this Agreement are for
convenience of reference only and shall not modify, define, expand or limit any
of the terms or provisions hereof.

                            13.7.  Parties in Interest.  Except as expressly
provided herein, none of the provisions of this Agreement are intended for the
benefit of any Person except the parties hereto.

                            13.8.  GOVERNING LAW.  THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.

                            13.9.  Severability.  Any provision of this
Agreement that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

                            13.10.  Rights of Lessee.  Notwithstanding any
provision of the Operative Agreements, if at any time all obligations (i) of the
Lessor under the Credit Agreement and the Security Documents and (ii) of the
Lessee under the Operative Agreements have in each case been satisfied or
discharged in full, then the Lessee shall be entitled to (a) terminate the Lease
(to the extent not previously terminated) and (b) receive all amounts then held
under the Operative Agreements and all proceeds with respect to the Property.
Upon the fulfillment of the obligations contained in clauses (i) and (ii) above,
the Lessor shall transfer to the Lessee all of its right, title and interest in
and to the Property (to the extent not previously transferred to the Lessee in
accordance with the Lease) and any amounts or proceeds referred to in the
foregoing clause (b) shall be paid over to the Lessee.

                           13.11.  Further Assurances.  The parties hereto shall
promptly cause to be taken, executed, acknowledged or delivered, at the sole
expense of the Lessee, all such further acts, conveyances, documents and
assurances as the other parties may from time to time reasonably request in
order to carry out and effectuate the intent and purposes of this Agreement, the
other Operative Agreements and the transactions contemplated hereby and thereby
(including, without limitation, the preparation, execution and filing of any and
all Uniform Commercial Code financing statements and other filings or
registrations which the parties hereto may from time to time request to be filed
or effected).  The Lessee, at its own





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<PAGE>   71
expense, shall take such action as may be reasonably requested in order to
maintain and protect all security interests provided for hereunder or under any
other Operative Agreement.

                             13.12.  Successors and Assigns.  This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.

                             13.13.  No Representation or Warranty.  Nothing
contained herein, in any other Operative Agreement or in any other materials
delivered to the Lessee in connection with the transactions contemplated hereby
or thereby shall be deemed a representation or warranty by the Agent or the
Arranger or any of their Affiliates as to the proper accounting treatment or tax
treatment that should be afforded to the Lease and the Lessor's ownership of the
Properties and the Agent expressly disclaims any representation or warranty with
respect to such matters.

                             13.14.  Confidentiality.  Each of the Agent, the
Lessor and each Lender agrees that it will use its best efforts not to disclose
without the prior consent of Living Centers (other than to its subsidiaries and
affiliates conducting business related to the making and syndication of loans
and its and such subsidiaries and affiliates' employees, auditors or counsel or
to another Lender if the disclosing Lender or the disclosing Lender's holding or
parent company in its sole discretion determines that any such party should have
access to such information) any information with respect to any Guarantor which
is furnished pursuant to this Agreement or any other Operative Agreement and
which is designated by such party furnishing such information to the Lenders in
writing as confidential, provided that the Agent, the Lessor or any Lender may
disclose any such information (a) as has become generally available to the
public, (b) as may be required or appropriate in any report, statement, or
testimony submitted to any municipal, state or federal regulatory body having or
claiming to have jurisdiction over such Lender or to the Federal Reserve Board
or the FDIC or similar organizations (whether in the United States or
elsewhere), (c) as may be required or appropriate in response to any summons or
subpoena or in connection with any litigation, (d) in order to comply with any
law, order, regulation or ruling applicable to such Lender, and (e) to the
prospective transferee or participant in connection with any contemplated
transfer of any of the Notes or any interest therein by the Person disclosing
such information, provided that such prospective transferee or participant
executes an agreement with such Guarantor containing provisions substantially
identical to those contained in this Section.
                             




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<PAGE>   72
                 IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.


                                 LIVING CENTERS HOLDING COMPANY

                                 By:        /s/ Boyd P. Gentry
                                         ---------------------------------------
                                         Name:  Boyd P. Gentry
                                         Title: Vice President


                                 FBTC LEASING CORP., as Lessor

                                 By:        /s/ Akihiro Hashimoto
                                         ---------------------------------------
                                         Name:  Akihiro Hashimoto
                                         Title: Treasurer


                                 THE CHASE MANHATTAN BANK, as Agent and a Lender

                                 By:        /s/ Dawn Lee Lum
                                         ---------------------------------------
                                         Name:  Dawn Lee Lum
                                         Title: Vice President
                                 
                                 
                                 THE LONG-TERM CREDIT BANK OF JAPAN,
                                 LIMITED, NEW YORK BRANCH, as a Lender
                                 
                                 By:        /s/ Satoru Otsubo
                                         ---------------------------------------
                                         Name:  Satoru Otsubo
                                                    
                                         Title: Joint General Manager
                                 
                                 
                                 CREDIT LYONNAIS NEW YORK BRANCH, as a Lender 
                                 and Co-Agent
                                 
                                 By:     /s/    F. Tavangar
                                         ---------------------------------------
                                         Name:  Farboud Tavangar
                                         Title: Vice President
                                 




                                       85
<PAGE>   73
                                 THE FUJI BANK, LIMITED (HOUSTON AGENCY), as a 
                                 Lender

                                 By:         /s/ Nate Ellis 
                                         ---------------------------------------
                                          Name:  Nate Ellis
                                          Title: Vice President & Joint Manager


                                 THE SANWA BANK, LIMITED, DALLAS AGENCY, as a
                                 Lender

                                 By:         /s/ R. Blake Wright
                                         ---------------------------------------
                                          Name:  R. Blake Wright
                                          Title: Vice President





                                       86


<PAGE>   74


                                   GUARANTEE


                 GUARANTEE dated as of October 10, 1996 made by LIVING CENTERS
OF AMERICA, INC., a Delaware corporation ("Living Centers") and the other
guarantors which are signatories hereto (Living Centers and each such
guarantor, individually, a "Guarantor"; collectively, the "Guarantors"), in
favor of THE CHASE MANHATTAN BANK, as agent (in such capacity, the "Agent") for
the lenders (the "Lenders") parties to the Credit Agreement, dated as of the
date hereof (as amended, supplemented, extended or otherwise modified from time
to time, the "Credit Agreement"), among FBTC LEASING CORP. (the "Borrower"),
the Lenders and the Agent.


                             Preliminary Statement


                 Pursuant to the Credit Agreement, the Lenders have severally
agreed to make loans (the "Loans") to the Borrower upon the terms and subject
to the conditions set forth therein, to be evidenced by the notes issued by the
Borrower under the Credit Agreement.  The Borrower has entered into the Credit
Agreement for the purpose of facilitating the financing, with the proceeds of
the Loans, of the acquisition of the Properties and the construction of
Improvements thereon, which shall, in turn, be leased to Living Centers Holding
Company (the "Lessee") under a Lease pursuant to which Borrower is Lessor.

                 The Loans will be made from time to time at the request of the
Construction Agent in consideration for the agreement of the Construction
Agent, for the benefit of the Borrower, to perform its obligations under the
Agency Agreement.  Each Guarantor is an Affiliate of the Lessee and will derive
substantial direct and indirect benefit from the Lenders making the Loans.  It
is a condition precedent to the obligation of the Lenders to make their
respective Loans to the Borrower under the Credit Agreement that each Guarantor
shall have executed and delivered this Guarantee to the Agent for the ratable
benefit of the Lenders.

                 NOW, THEREFORE, in consideration of the premises and to induce
the Agent and the Lenders to enter into the Credit Agreement and to induce the
Lenders to make their respective Loans to the Borrower under the Credit
Agreement, each Guarantor hereby agrees with the Agent, for the ratable benefit
of the Lenders, as follows:

                 1.  Defined Terms; Calculations and Computations.  Capitalized
terms not otherwise defined herein shall have the meanings set forth on Annex A
to the Participation Agreement dated as of the date hereof among the Lessee,
the Lessor, the Agent, and the Lenders.



                                      87
<PAGE>   75
                                                                              88

                 2.  Guarantee  (a)  Subject to the provisions of Section 2(b)
and without duplication, the Guarantors hereby jointly and severally
unconditionally and irrevocably guarantee to the Agent, for the ratable benefit
of the Lenders and their respective successors, indorsees, transferees and
assigns, (i) the prompt and complete payment and performance by the Borrower
when due (whether at the stated maturity, by acceleration or otherwise) of each
of the following:  the unpaid principal of and interest on the Notes and all
other obligations and liabilities of the Borrower to the Agent or the Lenders
(including interest accruing at the then applicable rate provided in the Credit
Agreement after the maturity of the Loans and interest accruing at the then
applicable rate provided in the Credit Agreement after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization
or like proceeding, relating to the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding), whether
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter incurred, which may arise under, out of, or in connection with,
the Credit Agreement, the Notes, the other Operative Agreements or any other
document made, delivered or given in connection therewith, whether on account
of principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses or otherwise (including all reasonable fees and disbursements of
counsel to the Agent or to the Lenders that are required to be paid by the
Borrower pursuant to the terms of the Credit Agreement or any other Operative
Agreement) and (ii) the prompt and complete payment by the Lessee when due
(whether at stated maturity, by acceleration or otherwise) of all amounts
payable by the Lessee under any of the Operative Agreements (including
indemnities and Facility Fees) to the Agent and/or the Lenders and the Lessor
(each and all of the above obligations described in clauses (i) and (ii) above,
collectively, the "Guaranteed Obligations").

                 (b)  Anything herein or in any other Operative Agreement to
the contrary notwithstanding, no Guarantor shall at any time be required to
make any payment hereunder in respect of the principal of any Tranche B Loans
unless at such time a Lease Event of Default has occurred and is continuing.

The maximum liability of each Guarantor hereunder shall in no event exceed the
amount which can be guaranteed by each Guarantor under applicable federal and
state laws relating to the insolvency of debtors.

                 (c)  Each Guarantor further agrees to pay any and all expenses
(including all reasonable fees and disbursements of counsel) which may be paid
or incurred by the Agent or any Lender in enforcing, or obtaining advice of
counsel in respect of, any rights with respect to, or collecting, any or all of
the Guaranteed Obligations and/or enforcing any rights with respect to, or
collecting against, such Guarantor under this Guarantee.  This Guarantee shall
remain in full force and effect until the Guaranteed Obligations and all
amounts owing hereunder are paid in full and the Commitments are terminated,
notwithstanding that from time to time prior thereto the Borrower or the Lessee
may be free from any Guaranteed Obligations.

                 (d)  No payment or payments made by the Borrower, any
Guarantor or any other Person or received or collected by the Agent or any
Lender from the Borrower, any Guarantor or any other Person by virtue of any
action or proceeding or any set-off or appropriation or application at any time
or from time to time in reduction of or in payment of





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                                                                              89

the Guaranteed Obligations shall be deemed to modify, reduce, release or
otherwise affect the liability of any Guarantor hereunder which shall,
notwithstanding any such payment or payments remain liable for the Guaranteed
Obligations until the Guaranteed Obligations and all amounts owing hereunder
are paid in full and the Commitments are terminated.

                 (e)  Each Guarantor agrees that whenever, at any time, or from
time to time, it shall make any payment to the Agent or any Lender on account
of its liability hereunder, it will notify the Agent in writing that such
payment is made under this Guarantee for such purpose.

                 3.  Right of Set-off.  In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance
of an Event of Default, the Agent and each Lender is hereby authorized at any
time or from time to time, without presentment, demand, protest or other notice
of any kind to the Borrower, any Guarantor or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and apply
any and all deposits (general or special) and any other Debt at any time held
or owing by the Agent or such Lender (including by branches and agencies of the
Agent or such Lender wherever located) to or for the credit or the account of
any Guarantor against and on account of the obligations and liabilities of any
Guarantor hereunder or under any of the other Operative Agreements, and all
other claims of any nature or description arising out of or connected with this
Guarantee or any other Operative Agreement, irrespective of whether the Agent
or such Lender shall have made any demand hereunder.

                 4.  No Subrogation.  Notwithstanding any payment or payments
made by any Guarantor hereunder or any set-off or application of funds of such
Guarantor by any Lender, no Guarantor shall be entitled to exercise or enforce
any subrogation rights of the Agent or any Lender against the Borrower or any
other Guarantor or any collateral security or guarantee or right of offset held
by the Agent or any Lender for the payment of the Guaranteed Obligations, nor
shall any Guarantor seek or be entitled to seek any contribution or
reimbursement from the Borrower or any other Guarantor in respect of payments
made by any Guarantor hereunder, until all amounts owing to the Agent and the
Lenders by the Borrower on account of the Guaranteed Obligations and all
amounts owing hereunder are paid in full and the Commitments are terminated.
If any amount shall be paid to any Guarantor on account of such subrogation
rights at any time when all of the Guaranteed Obligations and all amounts owing
hereunder shall not have been paid in full or the Commitments shall not have
been terminated, such amount shall be held by such Guarantor in trust for the
Agent and the Lenders, segregated from other funds of such Guarantor, and
shall, forthwith upon receipt by such Guarantor, be turned over to the Agent in
the exact form received by such Guarantor (duly indorsed by such Guarantor to
the Agent, if required), to be applied against the Guaranteed Obligations,
whether matured or unmatured, in such order as the Agent may determine.

                 5.  Amendments, etc. with respect to the Guaranteed
Obligations; Waiver of Rights.  Each Guarantor shall remain obligated hereunder
notwithstanding that, without any reservation of rights against such Guarantor
and without notice to or further assent by such





                                       89
<PAGE>   77
                                                                              90

Guarantor, any demand for payment of any of the Guaranteed Obligations made by
the Agent or any Lender may be rescinded by such party and any of the
Guaranteed Obligations continued, and the Guaranteed Obligations, or the
liability of any other party upon or for any part thereof, or any collateral
security or guarantee therefor or right of offset with respect thereto, may,
from time to time, in whole or in part, be renewed, extended, amended,
modified, accelerated, compromised, waived, surrendered or released by the
Agent or any Lender, and the Credit Agreement, the Participation Agreement and
the other Operative Agreements may be amended, modified, supplemented or
terminated, in whole or in part, as the Agent (or the Required Lenders, as the
case may be) may deem advisable from time to time, and any collateral security,
guarantee or right of offset at any time held by the Agent or any Lender for
the payment of the Guaranteed Obligations may be sold, exchanged, waived,
surrendered or released.  Neither the Agent nor any Lender shall have any
obligation to protect, secure, perfect or insure any Lien at any time held by
it as security for the Guaranteed Obligations or for this Guarantee or any
property subject thereto.  When making any demand hereunder against any
Guarantor, the Agent or any Lender may, but shall be under no obligation to,
make a similar demand on the Borrower or any other Guarantor, and any failure
by the Agent or any Lender to make any such demand or to collect any payments
from the Borrower or any other Guarantor or any release of the Borrower or any
such other Guarantor shall not relieve any Guarantor, and shall not impair or
affect the rights and remedies, express or implied, or as a matter of law, of
the Agent or any Lender against such Guarantor.  For the purposes hereof
"demand" shall include the commencement and continuance of any legal
proceedings.

                 6.  Guarantee Absolute and Unconditional.  Each Guarantor
waives any and all notice of the creation, renewal, extension or accrual of any
of the Guaranteed Obligations and notice of or proof of reliance by the Agent
or any Lender upon this Guarantee or acceptance of this Guarantee; the
Guaranteed Obligations, and any of them, shall conclusively be deemed to have
been created, contracted or incurred, or renewed, extended, amended or waived,
in reliance upon this Guarantee; and all dealings between the Borrower and each
Guarantor, on the one hand, and the Agent and the Lenders, on the other hand,
with respect to the Guaranteed Obligations, likewise shall be conclusively
presumed to have been had or consummated in reliance upon this Guarantee.  Each
Guarantor waives diligence, presentment, protest, demand for payment and notice
of default or nonpayment to or upon the Borrower or such Guarantor with respect
to the Guaranteed Obligations.  Each Guarantor understands and agrees that this
Guarantee shall be construed as a continuing, absolute and unconditional
guarantee of payment without regard to (a) the validity, regularity or
enforceability of the Credit Agreement or any other Operative Agreement, any of
the Guaranteed Obligations or any other collateral security therefor or
guarantee or right of offset with respect thereto at any time or from time to
time held by the Agent or any Lender, (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by the Borrower or any Guarantor against the Agent
or any Lender, (c) any non-recourse provision contained in any Operative
Agreement, or (d) any other circumstance whatsoever (with or without notice to
or knowledge of the Borrower or such Guarantor) which constitutes, or might be
construed to constitute, an equitable or legal discharge of the Borrower for
the Guaranteed Obligations, or of any Guarantor under this Guarantee, in
bankruptcy or in any other instance.  When pursuing its rights and remedies





                                       90
<PAGE>   78
                                                                              91

hereunder against any Guarantor, the Agent and any Lender may, but shall be
under no obligation to, pursue such rights and remedies as it may have against
the Borrower or any other Person or against any collateral security or
guarantee for the Guaranteed Obligations or any right of offset with respect
thereto, and any failure by the Agent or any Lender to pursue such other rights
or remedies or to collect any payments from the Borrower or any such other
Person or to realize upon any such collateral security or guarantee or to
exercise any such right of offset, or any release of the Borrower or any such
other Person or any such collateral security, guarantee or right of offset,
shall not relieve any Guarantor of any liability hereunder, and shall not
impair or affect the rights and remedies, whether express, implied or available
as a matter of law, of the Agent and the Lenders against such Guarantor.  This
Guarantee shall remain in full force and effect and be binding in accordance
with and to the extent of its terms upon each Guarantor and the successors and
assigns thereof, and shall inure to the benefit of the Agent and the Lenders,
and their respective successors, indorsees, transferees and assigns, until all
the Guaranteed Obligations and the obligations of each Guarantor under this
Guarantee shall have been satisfied by payment in full and the Commitments
shall be terminated, notwithstanding that from time to time during the term of
the Credit Agreement the Borrower may be free from any Guaranteed Obligations.

                 7.  Reinstatement.  This Guarantee shall continue to be
effective, or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any of the Guaranteed Obligations is rescinded or must
otherwise be restored or returned by the Agent or any Lender upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower or any Guarantor, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrower or any Guarantor or any substantial part of its property, or
otherwise, all as though such payments had not been made.

                 8.  Payments.  Each Guarantor hereby guarantees that payments
hereunder will be paid to the Agent without set-off or counterclaim in U.S.
Dollars at the office of the Agent located at 270 Park Avenue, New York, New
York 10017.

                 9.  Representations, Warranties.  In order to induce the
Lenders to enter into the Credit Agreement and to make the Loans, each
Guarantor hereby represents and warrants to the Agent and each Lender hereto as
of the Initial Closing Date and as of each Funding Date as follows:

                 Section 9.1.     Corporate Existence; Compliance with Law;
         Subsidiaries.  Each Guarantor is a corporation duly organized, validly
         existing, and in good standing under the laws of its jurisdiction of
         incorporation and in good standing and qualified to do business in
         each jurisdiction where its ownership or lease of property or conduct
         of its business requires such qualification and where a failure to be
         qualified would reasonably be expected to cause a Material Adverse
         Effect and is in compliance with all Requirements of Law except where
         the failure to so comply would not reasonably be expected to have a
         Material Adverse Effect.  Living Centers has no Subsidiaries on the
         date of this Agreement other than the Subsidiaries listed on the
         attached Schedule 9.1, and Schedule 9.1 lists the jurisdiction of
         incorporation and the address of the principal office of each such
         Subsidiary existing on the date of this Agreement.





                                       91
<PAGE>   79
                                                                              92


                 Section 9.2.     Corporate Power.  The execution, delivery,
         and performance by each Guarantor of this Agreement and the other
         Operative Agreements to which any of them is a party and the
         consummation of the transactions contemplated hereby and thereby (a)
         are within the Guarantors' corporate powers, (b) have been duly
         authorized by all necessary corporate action, (c) do not contravene
         (i) any such Guarantor's certificate or articles, as the case may be,
         of incorporation or by-laws or (ii) any law or any contractual
         restriction binding on or affecting any such Guarantor, the
         contravention of which would reasonably be expected to cause a
         Material Adverse Effect and (d) will not result in or require the
         creation or imposition of any Lien prohibited by this Agreement.

                 Section 9.3.     Authorization and Approvals.  No
         authorization or approval or other action by, and no notice to or
         filing with, any Governmental Authority is required for the due
         execution, delivery and performance by any Guarantor of this Agreement
         or the other Operative Agreements to which any of them is a party.

                 Section 9.4.     Enforceable Obligations.  This Agreement and
         the other Operative Agreements to which any Guarantor is a party have
         been duly executed and delivered by such Guarantor.  Each Operative
         Agreement is the legal, valid, and binding obligation of each
         Guarantor which is a party to it enforceable against each such
         Guarantor in accordance with its terms, except as such enforceability
         may be limited by any applicable bankruptcy, insolvency,
         reorganization, moratorium, or similar law affecting creditors' rights
         generally and by general principles of equity (whether considered in
         proceeding at law or in equity).

                 Section 9.5.     Financial Statements; No Material Adverse
         Change.    (i)  The balance sheets of Living Centers and its
         Subsidiaries as at September 30, 1995, and the related statements of
         income, cash flow, and retained earnings of Living Centers and its
         Subsidiaries for the fiscal year then ended, copies of which have been
         furnished to each Lender, and the balance sheets of Living Centers and
         its Subsidiaries as at June 30, 1996, and the related statements of
         income and cash flow of Living Centers and its Subsidiaries for the
         nine months then ended, duly certified by an authorized financial
         officer of Living Centers, copies of which have been furnished to each
         Lender, fairly present, subject, in the case of said balance sheets as
         at June 30, 1996 and said statements of income and cash flow for the
         nine months then ended, to year-end audit adjustments and the absence
         of footnotes, the financial condition of Living Centers and its
         Subsidiaries as at such dates and the results of the operations of
         Living Centers and its Subsidiaries for the periods ended on such
         dates, and such balance sheets and statements of income, cash flow,
         and retained earnings were prepared in accordance with GAAP.

                         (ii)    No Material Adverse Change has occurred since 
         June 30, 1996.

                 Section 9.6.     True and Complete Disclosure.  No
         representation, warranty, or other statement made by the Guarantors
         (or on behalf of any Guarantor) in this





                                       92
<PAGE>   80
                                                                              93

         Agreement or any other Operative Agreement or in any other document or
         certificate furnished to the Agent, the Lessor or the Lenders, or any
         of them, by or on behalf of the Lessee or Living Centers in connection
         with the transaction contemplated by the Operative Agreements contains
         any untrue statement of a material fact or omits to state any material
         fact necessary to make the statements contained therein not misleading
         in light of the circumstances in which they were made as of the date
         of this Agreement the effect of which would reasonably be expected to
         have a Material Adverse Effect.  There is no fact known to any
         Responsible Officer of any Guarantor on the date of this Agreement and
         on the Effective Date that has not been disclosed to the Lenders which
         would reasonably be expected to have a Material Adverse Effect.  All
         projections, estimates, and pro forma financial information furnished
         by the Guarantors or on behalf of the Guarantors were prepared on the
         basis of assumptions, data, information, tests, or conditions believed
         to be reasonable at the time such projections, estimates, and pro
         forma financial information were furnished.

                 Section 9.7.     Litigation.  Except as otherwise disclosed to
         the Lenders in Schedule 1 hereto after the date of this Agreement,
         there is no pending or, to the best knowledge of the Guarantors,
         threatened action or proceeding affecting any Guarantor or any of its
         Subsidiaries before any court, Governmental Authority or arbitrator,
         which would reasonably be expected to have a Material Adverse Effect
         or which purports to affect the legality, validity, binding effect or
         enforceability of this Agreement or any other Operative Agreement or
         the consummation of any of the transactions contemplated hereby or
         thereby.

                 Section 9.8.     Investment Company Act.  None of the
         Guarantors nor any of their Subsidiaries is an "investment company" or
         a company "controlled" by an "investment company" within the meaning
         of the Investment Company Act of 1940, as amended.

                 Section 9.9.     Public Utility Holding Company Act.  None of
         the Guarantors nor any of their Subsidiaries is a "holding company",
         or a "subsidiary company" of a "holding company", or an "affiliate" of
         a "holding company" or of a "subsidiary company" of a "holding
         company", within the meaning of the Public Utility Holding Company
         Act of 1935, as amended.

                 Section 9.10.    Taxes.   (i)     Reports and Payments.  All
         Returns required to be filed by or on behalf of Living Centers, its
         Subsidiaries, or any member of the Controlled Group (hereafter
         collectively called the "Tax Group") have been duly filed on a timely
         basis or appropriate extensions have been obtained and such Returns
         are and will be true, complete and correct, except where the failure
         to so file would not be reasonably expected to have a Material Adverse
         Effect; and all Taxes shown to be payable on the Returns or on
         subsequent assessments with respect thereto will have been paid in
         full on a timely basis, and no other Taxes will be payable by the Tax
         Group with respect to items or periods covered by such Returns, except
         in each case to the extent of (i) reserves reflected in the Financial
         Statements, (ii) taxes that are being contested in good faith, or
         (iii) such Taxes, the failure to pay which would not have a





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         Material Adverse Effect.  The reserves for accrued Taxes reflected in
         the financial statements delivered to the Lenders under this Agreement
         are adequate in the aggregate for the payment of all unpaid Taxes,
         whether or not disputed, for the period ended as of the date thereof
         and for any period prior thereto, and for which the Tax Group may be
         liable in its own right, as withholding agent or as a transferee of
         the assets of, or successor to, any Person, except for such Taxes or
         reserves therefor, the failure to pay or provide for which does not
         and could not have a Material Adverse Effect.

                 (ii)  Taxes Definition.  "Taxes" in this clause (j) shall mean
         all taxes, charges, fees, levies, or other assessments imposed by any
         federal, state, local, or foreign taxing authority, including without
         limitation, income, gross receipts, excise, real or personal property,
         sales, occupation, use, service, leasing, environmental, value added,
         transfer, payroll, and franchise taxes (and including any interest,
         penalties, or additions to tax attributable to or imposed on with
         respect to any such assessment).

                 (iii)  Returns Definition.  "Returns" in this clause (j) shall
         mean any federal, state, local, or foreign report, estimate,
         declaration of estimated Tax, information statement or return relating
         to, or required to be filed in connection with, any Taxes, including
         any information return or report with respect to backup withholding or
         other payments of third parties.

                 Section 9.11.    Pension Plans.  No Termination Event has
         occurred with respect to any Plan, and each Plan has complied with and
         been administered in all material respects in accordance with
         applicable provisions of ERISA and the Code.  No "accumulated funding
         deficiency" (as defined in Section 302 of ERISA) has occurred and
         there has been no excise tax imposed under Section 4971 of the Code.
         To the knowledge of any Responsible Officer of Living Centers, no
         Reportable Event has occurred with respect to any Multiemployer Plan,
         and each Multiemployer Plan has complied with and been administered in
         all material respects with applicable provisions of ERISA and the
         Code.  The present value of all benefits vested under each Plan (based
         on the assumptions used to fund such Plan) did not, as of the last
         annual valuation date applicable thereto, exceed the value of the
         assets of such Plan allocable to such vested benefits in any amount
         that would reasonably be expected to have a Material Adverse Effect.
         Neither Living Centers nor any member of the Controlled Group has had
         a complete or partial withdrawal from any Multiemployer Plan for which
         there is any material withdrawal liability.  As of the most recent
         valuation date applicable thereto, neither Living Centers nor any
         member of the Controlled Group has received notice that any
         Multiemployer Plan is insolvent or in reorganization.  Based upon GAAP
         existing as of the date of this Agreement and current factual
         circumstances, Living Centers has no reason to believe that the annual
         cost during the term of this Agreement to Living Centers or any of its
         Subsidiaries for post-retirement benefits to be provided to the
         current and former employees of Living Centers or any of its
         Subsidiaries under welfare benefit plans (as defined in Section 3(1)
         of ERISA) could, in the aggregate, reasonably be expected to have a
         Material Adverse Effect.





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                 Section 9.12.    No Burdensome Restrictions; No Defaults.  
         (i) Neither the Guarantors nor any of their Subsidiaries is a party to
         any indenture, loan or credit agreement or any lease or other
         agreement or instrument or subject to any charter or corporate
         restriction or provision of applicable Legal Requirement which would
         reasonably be expected to have a Material Adverse Effect.  No
         Guarantor is in default under or with respect to any contract,
         agreement, lease or other instrument to which any Guarantor is a party
         and which would reasonably be expected to have a Material Adverse
         Effect.  To the knowledge of any Responsible Officer of any Guarantor,
         no Guarantor has received any notice of default under any contract,
         agreement, lease or other instrument to which such Guarantor is a
         party which is continuing and which, if not cured, would reasonably be
         expected to have a Material Adverse Effect.
        
                 (ii)     No Default has occurred and is continuing.

                 Section 9.13.    Environmental Condition.  The Guarantors and
         their Subsidiaries, taken as a whole, (A) have obtained all
         Environmental Permits necessary for the ownership and operation of
         their respective material properties and the conduct of their
         respective businesses of which the failure to obtain would reasonably
         be expected to have a Material Adverse Effect; (B) have been and are
         in compliance with all terms and conditions of such Environmental
         Permits and with all other material requirements of applicable
         Environmental Laws of which the failure to comply would reasonably be
         expected to have a Material Adverse Effect; (C) have not received
         notice of any violation or alleged violation of any Environmental Law
         or Environmental Permit the violation of which would reasonably be
         expected to have a Material Adverse Effect; and (D) are not subject to
         any actual or contingent Environmental Claim, which Environmental
         Claim would reasonably be expected to have a Material Adverse Effect.

                  To the knowledge of any Responsible Officer of any Guarantor,
         none of the present or previously owned or operated property of any
         Guarantor or of any of such Guarantor's present or former
         Subsidiaries, wherever located, (A) has been placed on or proposed to
         be placed on the National Priorities List, the Comprehensive
         Environmental Response Compensation Liability Information System list,
         or their state or local analogs, or have been otherwise designated,
         listed, or identified as a potential site for removal, remediation,
         cleanup, closure, restoration, reclamation, or other response activity
         under any Environmental Laws; (B) is subject to a Lien, arising under
         or in connection with any Environmental Laws, that attaches to any
         revenues or to any property owned or operated by any Guarantor or any
         of such Guarantor's Subsidiaries, wherever located, which Lien would
         reasonably be expected to have a Material Adverse Effect; or (C) has
         been the site of any Release of Hazardous Substances or Hazardous
         Wastes from present or past operations which has caused at the site or
         at any third-party site any condition that has resulted in or would
         reasonably be expected to result in the need for Response that would
         have a Material Adverse Effect.

                  Without limiting the foregoing, the present and, to the best
         knowledge of any Responsible Officer of any Guarantor, future
         liability, if any, of the Guarantors and their Subsidiaries, taken as
         a whole, which would reasonably be expected to arise in





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                                                                              96

         connection with requirements under Environmental Laws will not have a
         Material Adverse Effect.

                 Section 9.14.    Permits, Licenses, etc.  The Guarantors and
         their Subsidiaries possess all permits, licenses, patents, patent
         rights or licenses, trademarks, trademark rights, trade names rights
         and copyrights which the failure to possess could reasonably be
         expected to have a Material Adverse Effect.  The Guarantors and their
         Subsidiaries manage and operate their business in accordance with all
         applicable Legal Requirements which the failure to so manage or
         operate would reasonably be expected to have a Material Adverse
         Effect.

                 Section 9.15.    Health Care Regulatory Matters.  To the
         knowledge of any Responsible Officer of any Guarantor, all necessary
         steps have been or are being taken to secure the renewal of any Health
         Facility License, Medicaid Provider Agreement or Medicare Provider
         Agreement issued with respect to any Facility which the failure to
         renew could reasonably be expected to have a Material Adverse Effect
         and that is to expire within 60 days after the date of this Agreement,
         and there is no reasonable basis known to any Responsible Officer of
         any Guarantor or their Subsidiaries that any such renewal will not be
         obtained.

                          There are no proceedings pending, or, to the best of
         any Guarantor's knowledge, threatened by any Governmental Authority
         seeking nor, to the knowledge of any Responsible Officer of the
         Guarantors or any of their Subsidiaries, has any such Guarantor or any
         of its Subsidiaries taken any action to the effect of which would be
         to adversely modify, revoke, withdraw, or suspend any CON, Health
         Facility License, Medicaid Provider Agreement, Medicare Provider
         Agreement, Medicare Certification or Medicaid Certification in a
         manner that would reasonably be expected to have a Material Adverse
         Effect.  To the Guarantors' knowledge, there is no decision to fail to
         renew or deny payments under any Medicaid Provider Agreement or
         Medicare Provider Agreement which failure or denial would reasonably
         be expected to have a Material Adverse Effect.

                 10.  Affirmative Covenants of the Guarantor.  Living Centers
hereby covenants and agrees that so long as this Guarantee is in effect and
until the Commitments have terminated and the Guaranteed Obligations and all
amounts owing hereunder are paid in full:

                 Section 10.1.  Compliance with Laws, Etc.  Living Centers will
         comply, and cause each of its Subsidiaries to comply, with all Legal
         Requirements of which the failure to comply would reasonably be
         expected to have a Material Adverse Effect.  Without limiting the
         generality and coverage of the foregoing, Living Centers shall comply,
         and shall cause each of its Subsidiaries to comply, in all material
         respects, with all Environmental Laws and, in all material respects,
         all laws, regulations, or directives with respect to equal employment
         opportunity and employee safety in all jurisdictions in which Living
         Centers, or any of its Subsidiaries do business; provided, however,
         that this Section 10.1 shall not prevent Living Centers, or any of its
         Subsidiaries, in good faith and with reasonable diligence, from
         contesting the validity





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                                                                              97

         or application of any such laws or regulations by appropriate legal
         proceedings.  All requirements to comply with Legal Requirements
         relating to the Properties shall be governed by the Lease and the
         other Operative Agreements (other than this Guarantee).

                 Section 10.2.  Maintenance of Insurance.  Living Centers will
         maintain, and cause each of its Subsidiaries to maintain, insurance
         with responsible and reputable insurance companies or associations in
         such amounts and covering such risks as are usually carried by
         companies engaged in similar businesses and owning similar properties
         in the same general areas in which Living Centers or such Subsidiary
         operates, provided that Living Centers or such Subsidiary may
         self-insure to the extent and in the manner normal for similarly
         situated companies of like size, type and financial condition that are
         part of a group of companies under common control.  All requirements
         concerning insurance as it relates to the Properties shall be governed
         by the Lease.

                 Section 10.3.  Preservation of Corporate Existence, Etc.
         Living Centers will preserve and maintain, and cause each of its
         Subsidiaries to preserve and maintain, its corporate existence,
         rights, franchises and privileges in the jurisdiction of its
         incorporation, and qualify and remain qualified, and cause each such
         Subsidiary to qualify and remain qualified, as a foreign corporation
         in each jurisdiction in which qualification is necessary or desirable
         in view of its business and operations or the ownership of its
         properties, and, in each case, where failure to qualify or preserve
         and maintain its rights and franchises would reasonably be expected to
         have a Material Adverse Effect; provided, however, that nothing
         contained in this Section 10.3 shall prevent any transaction permitted
         by Section 11.4.

                 Section 10.4.  Payment of Taxes, Etc.  Living Centers will pay
         and discharge, and cause each of its Subsidiaries to pay and
         discharge, before the same shall become delinquent and which the
         failure to timely pay or discharge would reasonably be expected to
         have a Material Adverse Effect, (a) all taxes, assessments and
         governmental charges or levies imposed upon it or upon its income or
         profits or Property that are material in amount, prior to the date on
         which penalties attach thereto and (b) all lawful claims that are
         material in amount which, if unpaid, might by law become a Lien upon
         its property; provided, however, that neither Living Centers nor any
         such Subsidiary shall be required to pay or discharge any such tax,
         assessment, charge, levy, or claim which is being contested in good
         faith and by appropriate proceedings, and with respect to which
         reserves in conformity with GAAP have been provided.  All requirements
         concerning taxes as they relate to the Properties shall be governed by
         the Lease and the Participation Agreement.

                 Section 10.5.    Visitation Rights.  At any reasonable time
         and from time-to-time and so long as any visit or inspection will not
         interfere with patients' rights or unreasonably interfere with Living
         Center's or any of its Subsidiaries operations, upon reasonable
         notice, Living Centers will, and will cause its Subsidiaries to,
         permit the Agent and any Lender or any of its agents or
         representatives thereof, to examine and make copies of and abstracts
         from the records and books of account of, and visit and





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         inspect at its reasonable discretion the properties of, Living Centers
         and any such Subsidiary, to discuss the affairs, finances and accounts
         of Living Centers and any such Subsidiary with any of their respective
         officers or directors.

                 Section 10.6.  Reporting Requirements.  Living Centers will
         furnish to the Agent and each Lender:

                          (a)     Defaults.  As soon as possible and in any
                 event within five Business Days after the occurrence of any
                 Default by the Lessee or any Guarantor or any of Living
                 Centers' wholly-owned Subsidiaries relating to the Lease or
                 any other Operative Agreement, which Default is known to a
                 Responsible Officer of Living Centers and is continuing on the
                 date of such statement, a statement of an authorized financial
                 officer of Living Centers setting forth the details of such
                 Default and the actions which Living Centers has taken and
                 proposes to take with respect thereto;

                          (b)     Quarterly Financials.  As soon as available
                 and in any event not later than 45 days after the end of each
                 of the first three quarters of each fiscal year of Living
                 Centers, the balance sheets of Living Centers and its
                 Subsidiaries as of the end of such quarter and the statements
                 of income and cash flows of Living Centers and its
                 Subsidiaries for the period commencing at the end of the
                 previous fiscal year and ending with the end of such quarter,
                 all in reasonable detail and duly certified with respect to
                 such statements (subject to year-end audit adjustments) by an
                 authorized financial officer of Living Centers as having been
                 prepared in accordance with GAAP, together with a compliance
                 certificate duly executed by a Responsible Officer in
                 substantially the form of the attached Exhibit A;

                          (c)     Annual Financials.  As soon as available and
                 in any event not later than 90 days after the end of each
                 fiscal year of Living Centers, a copy of the annual audit
                 report for such year for Living Centers and its Subsidiaries,
                 including therein balance sheets of Living Centers and its
                 Subsidiaries as of the end of such fiscal year and statements
                 of income and retained earnings and of cash flows of Living
                 Centers and its Subsidiaries for such fiscal year, in each
                 case certified by Ernst & Young or other nationally recognized
                 independent certified public accountants or other independent
                 certified public accountants of recognized standing acceptable
                 to the Agent and including any management letters delivered by
                 such accountants to Living Centers in connection with such
                 audit, together with a compliance certificate duly executed by
                 a Responsible Officer in substantially the form of the
                 attached Exhibit A;

                          (d)     Securities Law Filings.  Promptly and in any
                 event within 15 days after the sending or filing thereof,
                 copies of all proxy material, reports and other information
                 which Living Centers or any of its Subsidiaries sends to or
                 files with the United States Securities and Exchange
                 Commission or sends to any shareholder of Living Centers;





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                                                                              99


                          (e)     Termination Events.  As soon as possible and
                 in any event (i) within 30 days after Living Centers knows or
                 has reason to know that any Termination Event described in
                 clause (a) of the definition of Termination Event with respect
                 to any Plan has occurred, and (ii) within 10 days after any
                 Responsible Officer of Living Centers knows or has reason to
                 know that any other Termination Event with respect to any Plan
                 has occurred, a statement of a Responsible Officer of Living
                 Centers describing such Termination Event and the action, if
                 any, which Living Centers or such Affiliate proposes to take
                 with respect thereto;

                          (f)     Termination of Plans.  Promptly and in any
                 event within two Business Days after the knowledge of any
                 Responsible Officer of Living Centers of receipt thereof by
                 Living Centers or any member of the Controlled Group from the
                 PBGC, copies of each notice received by Living Centers or any
                 such member of the Controlled Group of the PBGC's intention to
                 terminate any Plan or to have a trustee appointed to
                 administer any Plan;

                          (g)     Other ERISA Notices.  Promptly and in any
                 event within five Business Days after the knowledge of any
                 Responsible Officer of Living Centers of receipt thereof by
                 Living Centers or any member of the Controlled Group from a
                 Multiemployer Plan sponsor, a copy of each notice received by
                 Living Centers or any member of the Controlled Group
                 concerning the imposition of withdrawal liability pursuant to
                 Section 4202 of ERISA in an amount that could reasonably be
                 expected to have a Material Adverse Effect;

                          (h)     Environmental Notices.  Promptly upon the
                 knowledge of any Responsible Officer of Living Centers of
                 receipt thereof by Living Centers or any of its Subsidiaries,
                 a copy of any form of notice, summons or citation received
                 from the EPA, or any other Governmental Authority directly
                 engaged in protection of the Environment, concerning (i)
                 material violations or alleged violations of Environmental
                 Laws, which seeks to impose liability therefor and which,
                 based upon information reasonably available to Living Centers
                 at the time or after such violation, would reasonably be
                 expected to have a Material Adverse Effect, (ii) any action or
                 omission on the part of Living Centers or any of its
                 Subsidiaries in connection with Hazardous Waste or Hazardous
                 Substances which, based upon information reasonably available
                 to Living Centers at the time of such receipt, would
                 reasonably be expected to have a Material Adverse Effect,
                 (iii) any notice of potential responsibility under CERCLA
                 which would reasonably be expected to have a Material Adverse
                 Effect, or (iv) concerning the filing of a Lien other than a
                 Permitted Lien upon, against or in connection with Living
                 Centers, its present or former Subsidiaries, or any of their
                 leased or owned material property, wherever located, which
                 would reasonably be expected to have a Material Adverse
                 Effect.  In the event of a conflict between the foregoing
                 provisions and the provisions of the Lease regarding
                 environmental issues effecting any Property, the provisions of
                 the Lease shall govern;





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                                                                             100


                          (i)     Other Governmental Notices.  Promptly and in
                 any event within five Business Days after receipt thereof by
                 Living Centers or any Subsidiary and the knowledge of such
                 receipt by a Responsible Officer of Living Centers or any
                 inside counsel of Living Centers, (i) a copy of any notice,
                 summons, citation, or proceeding seeking to adversely modify
                 in any material respect, revoke, or suspend any CON, Health
                 Facility License, Medicaid Provider Agreement, Medicare
                 Provider Agreement, Medicaid Certification, or Medicare
                 Certification in a manner that would reasonably be expected to
                 have a Material Adverse Effect and (ii) any revocation or
                 involuntary termination of any  Medicaid Provider Agreement,
                 Medicare Provider Agreement, Medicaid Certification, or
                 Medicare Certification that would reasonably be expected to
                 have a Material Adverse Effect;

                          (j)     Material Changes.  Prompt written notice of
                 any condition or event of which any Responsible Officer of
                 Living Centers has knowledge, which condition or event has
                 resulted or could reasonably be expected to result in (i) a
                 Material Adverse Change or Material Adverse Effect or (ii) a
                 breach of or noncompliance with any term, condition, or
                 covenant of any contract to which Living Centers or any of its
                 Subsidiaries is a party or by which they or their properties
                 may be bound, which breach or noncompliance would reasonably
                 be expected to have a Material Adverse Effect;

                          (k)     Disputes, etc.  Prompt written notice of any
                 claims, proceedings, or disputes, or to the knowledge of any
                 Responsible Officer of Living Centers threatened, or affecting
                 Living Centers, or any of its Subsidiaries which, if adversely
                 determined, could reasonably be expected to have a Material
                 Adverse Effect; and

                          (l)     Other Information.  Such other information
                 respecting the business or properties, or the condition or
                 operations, financial or otherwise, of Living Centers, or any
                 of its Subsidiaries, as any Lender through the Agent may from
                 time-to-time reasonably request.

                 Section 10.7.  Maintenance of Property.  Living Centers shall,
         and shall cause each of its Subsidiaries to, (a) maintain all of its
         property necessary or useful in the proper conduct of its business in
         good working order and condition, except where the failure to do so
         would not reasonably be expected to have a Material Adverse Effect and
         (b) not knowingly or willfully permit the commission of waste or other
         injury, or the occurrence of pollution, contamination or any other
         condition in, on or about the owned or operated property involving the
         Environment that would reasonably be expected to have a Material
         Adverse Effect.  The provisions regarding maintenance as it relates to
         the Properties shall be governed by the Lease.

                 Section 10.8.  Additional Guaranties.  Upon the creation or
         acquisition after the Initial Closing Date of any Material Subsidiary
         or promptly after any Subsidiary which is not a Guarantor becomes a
         Material Subsidiary, Living Centers will cause such





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         Material Subsidiary to become a party to this Guarantee and to provide
         such evidence of corporate authority to enter into such Guarantee as
         the Agent may reasonably request; provided that as of the last day of
         any fiscal quarter Living Centers and the other Guarantors shall have
         at least 85% of Living Centers' Tangible Net Assets on such day and at
         least 85% of Living Centers' EBITDA for the four fiscal quarters
         ending on such day.  A "Living Centers Material Subsidiary" is any
         Subsidiary of Living Centers which on the date of its acquisition or
         formation or on any quarter end after the date of this Guarantee (a)
         has EBITDA for the four fiscal quarters ending immediately preceding
         such date equal to or greater than 5% of Living Centers' EBITDA for
         such period or (b) Tangible Net Assets equal to or greater than 5% of
         Living Centers' Tangible Net Assets.

                 11.      Negative Covenants.  Living Centers hereby agrees
that so long as this Guarantee is in effect and until the Commitments have
terminated and the Guaranteed Obligations and all amounts owing hereunder are
paid in full:

                 Section 11.1.  Liens, Etc.  Living Centers will not create,
         assume, incur or suffer to exist, or permit any of its Subsidiaries to
         create, assume, incur, or suffer to exist, any Lien on or in respect
         of any of its property whether now owned or hereafter acquired, or
         assign any right to receive income, except that Living Centers and its
         Subsidiaries may create, incur, assume or suffer to exist Liens:

                          (a)     securing the obligations under the Operative
                 Agreements or obligations under the Corporate Credit Agreement
                 and documents relating thereto;

                          (b)     for taxes, assessments or governmental
                 charges or levies on property of Living Centers or any other
                 Guarantor to the extent not required to be paid pursuant to
                 Sections 10.1 and 10.4;

                          (c)     imposed by law, such as landlords',
                 carriers', warehousemen's and mechanics' liens and other
                 similar Liens arising in the ordinary course of business
                 securing obligations which are not overdue for a period of
                 more than 30 days or which are being contested in good faith
                 and by appropriate proceedings if adequate reserves with
                 respect thereto are maintained on the books of Living Centers
                 and its Subsidiaries in accordance with GAAP;

                          (d)     arising in the ordinary course of business
                 out of pledges or deposits under workers' compensation laws,
                 unemployment insurance, old age pensions or other social
                 security or retirement benefits, or similar legislation or to
                 secure public or statutory obligations of Living Centers or
                 any of its Subsidiaries;

                          (e)     Liens securing purchase money Debt, Capital
                 Leases, and acquired Debt permitted under Section 11.2(k);
                 provided that (i) in the case of purchase money Debt and
                 Capital Leases, each such Lien only encumbers the





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                 property acquired in connection with the creation of such Debt
                 or Capital Lease and all proceeds therefrom and (ii) the fair
                 market value of the collateral securing any such Debt may
                 exceed the outstanding principal amount of such Debt only to
                 the extent such excess is within customary commercial bank
                 lending and collateralization requirements;

                          (f)     securing Debt listed on the attached Schedule
                 11.1; provided that the Debt of Living Centers or any
                 Subsidiary of Living Centers secured by such Liens shall not
                 be renewed, refinanced or extended if the amount of such Debt
                 so renewed is greater than the outstanding amount of such Debt
                 on the date of this Agreement;

                          (g)     arising from litigation and which are
                 effectively stayed from execution and would not otherwise
                 cause a Default to occur;

                          (h)     in the nature of utility easements, building
                 restrictions, and such other encumbrances or charges against
                 real property as are of a nature generally existing with
                 respect to properties of a similar character and which do not
                 in any material way affect the marketability of the same or
                 interfere with the use thereof in the business of Living
                 Centers or its Subsidiaries; and

                          (i)     in the nature of any interest or title of a
                 lessor in assets being leased to Living Centers or one of its
                 Subsidiaries.

                 Section 11.2.  Debts, Guaranties and Other Obligations.
         Living Centers will not, and will not permit any of its Subsidiaries
         to, create, assume, suffer to exist or in any manner become or be
         liable in respect of any Debt except:

                          (a)     Debt of Living Centers and its Subsidiaries
                 under the Operative Agreements and under the Corporate Credit
                 Agreement and documents relating thereto as of the date of
                 this Guarantee;

                          (b)     unsecured Debt listed on the attached
                 Schedule 11.2 and all renewals, extensions, rearrangements or
                 refinancings of any such credit arrangements on terms and for
                 amounts substantially similar to the terms and amounts
                 existing as of the date of this Guarantee;

                          (c)     intercompany Debt owed (i) by any
                 wholly-owned Subsidiary of Living Centers (other than a
                 Nonprofit Subsidiary) to Living Centers; (ii) by Living
                 Centers to any of its wholly-owned Subsidiaries; and (iii) any
                 wholly-owned Subsidiary of Living Centers to another
                 wholly-owned Subsidiary of Living Centers;

                          (d)     unsecured borrowings at a market rate of
                 interest with maturities of less than 180 days of Living
                 Centers not otherwise permitted by the preceding paragraphs
                 (a), (b), and (c) in an aggregate outstanding principal





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                 amount not to exceed at any time the lesser of (i)
                 $100,000,000.00 or (ii) the amount by which the Tranche A
                 Commitments exceeds the sum of the outstanding Tranche A
                 Advances, Letter of Credit Exposure, and Competitive Advances
                 (as each such term is defined in the Corporate Credit
                 Agreement);

                          (e)     Debt secured by the Liens permitted pursuant 
                 to paragraph (f) of Section 11.1;

                          (f)     current liabilities for the financing of
                 Living Centers' and its Subsidiaries' insurance premiums;

                          (g)     Living Centers' guaranty under the Contract
                 to Lease and Surviving Master Agreement for Leases of Mayer,
                 Trustee Nursing Homes dated as of May 1, 1994 among Living
                 Centers, Living Centers of Texas, Inc., and Clarence Mayer,
                 Trustee of the repayment of the residual value of the premises
                 leased thereby;

                          (h)     guaranties (i) by Living Centers'
                 Subsidiaries of any Debt of Living Centers permitted by this
                 Section 11.2 and (ii) by Living Centers of its wholly-owned
                 Subsidiaries' Debt permitted by this Section 11.2;

                          (i)     reimbursement obligations of Living Centers
                 in respect of any surety bonds or letters of credit otherwise
                 permitted under this Guarantee issued to secure payment of any
                 insurance premiums, regulatory obligations, or trust fund
                 obligations for Living Centers or any of its Subsidiaries;

                          (j)     unfunded vested liabilities under any Plan
                 that would not reasonably be expected to have a Material
                 Adverse Effect;

                          (k)     Debt incurred in connection with the purchase
                 of any property, Capital Leases, and Debt assumed in
                 connection with any Acquisition Expenditure in an aggregate
                 outstanding principal amount not to exceed at any time the
                 greater of (i) $75,000,000.00 or (ii) 15% of Living Centers'
                 Net Worth at such time; and

                          (l)     Subordinated Debt in an aggregate outstanding
                 principal amount not to exceed at any time $150,000,000.00.

                 Section 11.3.  Agreements Restricting Liens and Distributions.
         Living Centers will not, nor will it permit any of its Subsidiaries
         to, enter into any agreement (other than a Credit Document) which (a)
         except with respect to specific property encumbered to secure payment
         of Debt related to such property, imposes restrictions greater than
         those under this Guarantee upon the creation or assumption of any Lien
         upon its properties, revenues or assets, whether now owned or
         hereafter acquired or (b) limits Restricted Payments to or any advance
         by any of Living Centers' Subsidiaries to Living Centers.





                                      103
<PAGE>   91
                                                                             104


                 Section 11.4.  Merger or Consolidation; Asset Sales.  Living
         Centers will not, and will not permit any of its Subsidiaries to,

                          (a)     merge or consolidate with or into any other
                 Person, except that (i) Living Centers may merge with any of
                 its wholly-owned Subsidiaries and (ii) any of Living Centers'
                 wholly-owned Subsidiaries may merge with another of Living
                 Centers' wholly-owned Subsidiaries, provided that immediately
                 after giving effect to any such proposed transaction no
                 Default would exist and in the case of any such merger to
                 which Living Centers is a party, Living Centers is the
                 surviving corporation or

                          (b)     sell, lease, transfer, or otherwise dispose
                 of any asset (including stock of a Subsidiary) other than the
                 Devcon Stock Sale or the sale of certain assets acquired in
                 connection with Project QC if the fair market value of such
                 asset plus the fair market value of all assets (including
                 stock of a Subsidiary) disposed of during the four fiscal
                 quarters immediately preceding the date of such asset sale
                 would exceed 5% of Tangible Net Assets of Living Centers;
                 provided that, for sales of assets in a single transaction or
                 in a related series of transactions with a fair market value
                 in excess in $15,000,000.00, the Agent shall have received a
                 Compliance Certificate demonstrating pro forma financial
                 covenant compliance, including adjustments to Living Centers'
                 EBITDA for such divested assets.

         Upon the closing of any transaction permitted by this Section 11.4
         involving a Guarantor (other than Living Centers) the shares of stock
         of which is sold or that does not survive a merger, such Guarantor
         shall automatically be released from its obligations under its
         Guarantee, and, if requested by Living Centers, the Agent, on its
         behalf and the behalf of the Lenders, shall execute a release of such
         Guarantor from its Guarantee in favor of the Lenders.

                 Section 11.5.  Restricted Payments.  Neither Living Centers
         nor any of its subsidiaries will make or pay any Restricted Payment if
         a Default exists or would result therefrom.

                 Section 11.6.  Investments.  Living Centers will not, and will
         not permit any of its Subsidiaries to, make or permit to exist any
         loans, advances or capital contributions to, or make any investment
         in, or purchase or commit to purchase any stock or other securities or
         evidences of indebtedness of or interests in any Person, except the
         following:

                          (a)     the purchase of Liquid Investments;

                          (b)     trade and customer accounts receivable which
                 are for goods furnished or services rendered in the ordinary
                 course of business and are payable in accordance with
                 customary trade terms;





                                      104
<PAGE>   92
                                                                             105

                          (c)     ordinary course of business contributions,
                 loans or advances to, or investments in, (i) a direct or
                 indirect Subsidiary of Living Centers, other than a Nonprofit
                 Subsidiary or (ii) Living Centers;

                          (d)     Living Centers' ownership of the stock 
                 of any Nonprofit Subsidiary;

                          (e)     other capital investments not otherwise
                 permitted by this Section 11.6 in an aggregate amount of such
                 investments outstanding at any time not to exceed
                 $5,000,000.00;

                          (f)     holding of notes receivable included on
                 Living Centers' balance sheet at June 30, 1996 or received in
                 connection with asset sales permitted by Section 11.4 or
                 acquired in connection with acquisitions by Living Centers
                 permitted by Section 11.7; and

                          (g)     Acquisition Expenditures permitted under
                 Section 11.7.

                 Section 11.7.  Acquisition Expenditures.  Except for up to
         $25,000,000.00 of aggregate cash consideration paid during any
         consecutive four fiscal quarter period for all purchases of facilities
         which have been leased by Living Centers or any of its Subsidiaries
         for at least three years, Living Centers shall not and shall not
         permit any of its Subsidiaries to make any Acquisition Expenditure,
         unless (a) such Acquisition Expenditure is made in substantially the
         same or complementary lines of business of Living Centers and does not
         violate any other provision of this Guarantee; (b) except for Project
         QC, (i) the aggregate cash consideration paid during any four
         consecutive four fiscal quarter period plus (ii) assumptions of Debt
         for all Acquisition Expenditures made during such period does not
         exceed (A) $100,000,000.00 plus (B) an amount not less than zero, but
         equal to (1) the Net Cash Proceeds received from asset sales permitted
         by Section 11.4 during such period minus (2) the total automatic
         Commitment reductions made under Section 2.05(b) of the Corporate
         Credit Agreement during such period; (c) at the time of such
         Acquisition Expenditure no Default has occurred and is continuing or
         would occur upon the consummation of such acquisition; (d) for
         Acquisition Expenditures in excess of $15,000,000.00, the Agent shall
         have received a Compliance Certificate demonstrating pro forma
         financial covenant compliance, including adjustments to Living
         Centers' EBITDA for such acquired business; and (e) immediately
         following the making of such Acquisition Expenditure, the aggregate
         amount of the Commitments (as defined in the Corporate Credit
         Agreement) exceeds (as defined in the Corporate Credit Agreement) the
         aggregate outstanding principal amount of the Advances (as defined in
         the Corporate Credit Agreement), the Letter of Credit Exposure, and
         the outstanding principal amount of Debt permitted by Section 11.2(d)
         by at least $25,000,000.00.

                 Section 11.8.  Affiliate Transactions.  Except as expressly
         permitted elsewhere in this Guarantee or as contemplated by the Lease
         or other Operative Agreements, Living Centers will not, and will not
         permit any of its Subsidiaries to, make, directly





                                      105
<PAGE>   93
                                                                             106

         or indirectly: (a) any investment in any Affiliate (other than a
         wholly-owned Subsidiary of Living Centers); (b) any transfer, sale,
         lease, assignment or other disposal of any assets to any such
         Affiliate or any purchase or acquisition of assets from any such
         Affiliate; or (c) any arrangement or other transaction directly or
         indirectly with or for the benefit of any such Affiliate (including
         guaranties and assumptions of obligations of an Affiliate); provided
         that Living Centers and its Subsidiaries (i) may enter into any
         arrangement or other transaction with any such Affiliate providing for
         the leasing of property, the rendering or receipt of services or the
         purchase or sale of inventory and other assets in the ordinary course
         of business if the monetary or business consideration arising
         therefrom would be substantially as advantageous to Living Centers and
         its Subsidiaries as the monetary or business consideration which it
         would obtain in a comparable arm's length transaction with a Person
         not such an Affiliate and (ii) may maintain the arrangements listed on
         the attached Schedule 11.8.

                 Section 11.9.  Compliance with ERISA.  Living Centers will
         not, and will not permit any of its Subsidiaries to, (a) terminate any
         Plan so as to result in any material (in the opinion of the Required
         Lenders) liability of Living Centers or any of its Affiliates to the
         PBGC or (b) permit to exist any occurrence of any Reportable Event (as
         defined in Title IV of ERISA), or any other event or condition, which
         presents a material (in the opinion of the Required Lenders) risk of
         such a termination by the PBGC of any Plan under Section 4042 of
         ERISA.

                 Section 11.10.  Cash Flow Ratio.  Living Centers will not
         permit the ratio of (a) its Cash Flow as of the end of any fiscal
         quarter for the four fiscal quarters then ended to (b) Interest
         Expense for such period plusits current maturities of long-term debt
         as of the last day of such period plus its Lease Expense as of the
         last day of such period to be less than 1.30.

                 Section 11.11.  Leverage Ratio. Living Centers will not permit
         its Leverage Ratio as of the last day of any fiscal quarter to be
         greater than 3.25.

                 Section 11.12.  Net Worth.  Living Centers will not permit its
         Net Worth to be less than $295,000,000.00 plus 75% of its cumulative
         positive Net Income for each fiscal quarter after March 31, 1996
         (excluding Net Income for any fiscal quarter for which Net Income is
         negative) plus 50% of the increase of Net Worth caused by any issuance
         of capital stock after March 31, 1996.

                 Section 11.13.  Indemnification Agreement.  Living Centers
         shall not agree to amend any provision of the Indemnification
         Agreement if such amendment would increase Living Centers' obligations
         under the Indemnification Agreement.

                 12.  Authority of Agent.  Each Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guarantee with respect to
any action taken by the Agent or the exercise or non-exercise by the Agent of
any option, right, request, judgment or other right or remedy provided for
herein or resulting or arising out of this Guarantee shall, as between the
Agent and the Lenders, be governed by the Credit Agreement and by such other





                                      106
<PAGE>   94
                                                                             107

agreements with respect thereto as may exist from time to time among them, but,
as between the Agent and each Guarantor, the Agent shall be conclusively
presumed to be acting as agent for the Lenders with full and valid authority so
to act or refrain from acting, and no Guarantor shall be under any obligation,
or entitlement, to make any inquiry respecting such authority.

                 13.  Notices.  All notices, requests and demands to or upon
the Agent, any Lender or any Guarantor to be effective shall be in writing
(including by telecopy or telex), and, unless otherwise expressly provided
herein, shall be deemed to have been duly given or made when delivered by hand,
or three Business Days after being deposited in the mail, postage prepaid, or,
in the case of telecopy notice, confirmation of receipt received, or, in the
case of telex notice, when sent, answerback received, addressed as follows:

                 (a)  if to the Agent or any Lender, at its address or
         transmission number for notices provided in Section 9.2 of the Credit
         Agreement; and

                 (b)  if to any Guarantor, at its address or transmission
         number for notices set forth below.

                 The Agent, each Lender and each Guarantor may change its
address and transmission numbers for notices by notice in the manner provided
in this Section 9.2 of the Credit Agreement.

                 14.  Severability.  Any provision of this Guarantee which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

                 15.  Integration.  This Guarantee represents the agreement of
each Guarantor with respect to the subject matter hereof and there are no
promises or representations by the Agent or any Lender relative to the subject
matter hereof not reflected herein.

                 16.  Amendments in Writing; No Waiver; Cumulative Remedies
(a)  None of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except as provided in Section 9.1 of the
Credit Agreement.

                 (b)  Neither the Agent nor any Lender shall by any act (except
by a written instrument pursuant to Section 16(a) hereof), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any
of the terms and conditions hereof.  No failure to exercise, nor any delay in
exercising, on the part of the Agent or any Lender, any right, power or
privilege hereunder shall operate as a waiver thereof.  No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege.  A waiver by the Agent or any Lender of any right or remedy
hereunder on any one occasion shall not be construed as a bar to any right or
remedy which the Agent or such Lender would otherwise have on any future
occasion.





                                      107
<PAGE>   95
                                                                             108


                 (c)  The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any other
rights or remedies provided by law.

                 17.  Section Headings.  The section headings used in this
Guarantee are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.

                 18.  Successors and Assigns.  This Guarantee shall be binding
upon the successors and assigns of each Guarantor and shall inure to the
benefit of the Agent and the Lenders and their successors and assigns.

                 19.  SUBMISSION TO JURISDICTION; WAIVERS.  (a)  EACH GUARANTOR
HEREBY IRREVOCABLY AND UNCONDITIONALLY:

                    (i)   SUBMITS FOR ITSELF AND ITS PROPERTY IN ALL LEGAL
         ACTIONS OR PROCEEDINGS RELATING TO THIS GUARANTEE OR ANY OTHER
         OPERATIVE AGREEMENT TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND
         ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF TO THE NON-EXCLUSIVE
         GENERAL JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK,
         AND THE APPELLATE COURTS THEREOF AND WAIVES THE RIGHT TO REMOVE ANY
         SUCH ACTION OR PROCEEDING TO ANY FEDERAL COURT;

                    (ii)  CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
         BROUGHT IN SUCH COURT, WAIVES ANY OBJECTION THAT IT MAY HAVE NOW OR
         HEREAFTER TO THE VENUE OF ANY SUCH ACTION OR  PROCEEDING IN ANY SUCH
         COURT AND WAIVES ANY OBJECTION THAT SUCH ACTION OR PROCEEDING IN ANY
         SUCH COURT WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO
         PLEAD, CLAIM OR ASSERT THE SAME;

                   (iii)  AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
         PROCEEDING IN ANY SUCH COURT MAY BE EFFECTED BY MAILING A COPY THEREOF
         BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF
         MAIL), POSTAGE PREPAID TO, OR BY PERSONAL SERVICE AT, ITS ADDRESS SET
         FORTH HEREIN OR SUCH OTHER ADDRESS OF WHICH THE AGENT SHALL HAVE BEEN
         NOTIFIED PURSUANT HERETO, WHETHER OR NOT SUCH ADDRESS BE WITHIN THE
         JURISDICTION OF ANY SUCH COURT;

                    (iv)  AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
         EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
         SHALL LIMIT THE RIGHT OF THE AGENT (AND NOT OF GUARANTORS) TO SUE IN
         ANY OTHER JURISDICTION; AND





                                      108
<PAGE>   96
                                                                             109

                          (v)   WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED 
                 BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY 
                 LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SECTION 19 ANY 
                 SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES.

                 (b)      EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS
GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.

                 (c)      TO THE EXTENT ANY PROPERTY IS LOCATED IN THE STATE OF
CALIFORNIA, EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES THE
RIGHT TO ASSERT, ARGUE OR RAISE, IN ANY ACTION BROUGHT BY THE AGENT AGAINST ANY
GUARANTOR UNDER THIS GUARANTEE, THAT THE AGENT OR THE LENDERS STRUCTURED THE
TRANSACTION CONTEMPLATED BY THE OPERATIVE AGREEMENTS IN SUCH A MANNER PRIMARILY
TO CIRCUMVENT THE CALIFORNIA ONE-FORM-OF-ACTION AND ANTI-DEFICIENCY LAWS,
INCLUDING CALIFORNIA CODE OF CIVIL PROCEDURE Sections  580a, 580b, 580d AND
726.

                 (d)      To the extent any Property is located in the State of
California, each Guarantor hereby waives all of such Guarantor's rights of
subrogation and reimbursement and any other rights and defenses available to
such Guarantor by reason of California Civil Code Sections 2787 to 2855,
inclusive, including (a) any defenses such Guarantor may have to the
obligations undertaken by such Guarantor in this Guaranty by reason of an
election of remedies by Lender, and (b) any rights or defenses such Guarantor
may have by reason of protection afforded to Borrower with respect to the
obligations guaranteed hereby pursuant to the antideficiency or other laws of
the State of California limiting or discharging Borrower's indebtedness,
including California Code of Civil Procedure Section 580a, 580b, 580d or 726.
Each Guarantor's waiver of defenses under clause (a) above is made even though
an election of remedies by Lender, such as a nonjudicial foreclosure with
respect to security for a guaranteed obligation, destroys such Guarantor's
rights of subrogation and reimbursement against Borrower by the operation of
California Code of Civil Procedure Section 580d or otherwise.  The foregoing
waivers shall not be deemed a waiver of the defense that the Obligations have
been paid or the Commitments reduced.

                 20.  GOVERNING LAW.  THIS GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.





                                      109
<PAGE>   97
                                                                             110

                 IN WITNESS WHEREOF, the undersigned has caused this Guarantee
to be duly executed and delivered by its duly authorized officer as of the day
and year first above written.


                                        LIVING CENTERS OF AMERICA, INC.


                                        By:   /s/ Boyd P. Gentry
                                              ------------------
                                              Name:  Boyd P. Gentry
                                              Title: Vice President



                                        PROGRESSIVE CARE CENTERS OF AMERICA, 
                                        INC.


                                        By:   /s/ Boyd P. Gentry
                                              ------------------
                                              Name:  Boyd P. Gentry
                                              Title: Vice President



                                        AMERICAN GERIATRIC MANAGEMENT SERVICES,
                                        INC.

                                        By:   /s/ Boyd P. Gentry
                                              ------------------
                                              Name:  Boyd P. Gentry
                                              Title: Vice President



                                        LIVING CENTERS LTCP DEVELOPMENT COMPANY


                                        By:   /s/ Boyd P. Gentry
                                              ------------------
                                              Name:  Boyd P. Gentry
                                              Title: Vice President





                                      110
<PAGE>   98
                                                                             111


                                               BRIAN CENTER HEALTH &
                                               RETIREMENT/WALLACE, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               BRIAN CENTER HEALTH &
                                               REHABILITATION/TAMPA, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               BRIAN CENTER NURSING CARE/POWDER
                                               SPRINGS, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               BRIAN CENTER MANAGEMENT
                                               CORPORATION


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               BRIAN CENTER NURSING CARE/
                                               HICKORY, INC.
                                               

                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President





                                      111
<PAGE>   99
                                                                             112



                                               BRIAN CENTER NURSING CARE/
                                               AUSTELL, INC.
                                               


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               BRIAN CENTER OF CENTRAL COLUMBIA,
                                               INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               MED-CARE SALES AND RENTALS, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               REHABILITY HEALTH SERVICES, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               GULF COAST PHYSICAL THERAPY 
                                               GROUP, INC.
                                               


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                      112
<PAGE>   100
                                                                             113




                                               THERACARE HOME HEALTH AGENCY, 
                                               INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               LCA HOSPICE SERVICES CORPORATION


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               TOICA, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               LC MANAGEMENT COMPANY


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




                                               LCR, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President





                                      113
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                                                                             114




                                               LIVING CENTERS - SOUTHEAST
                                               DEVELOPMENT CORPORATION


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               BRIAN CENTER OF ASHEBORO, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               BRIAN CENTER HEALTH &
                                               RETIREMENT/ALLEGHANY, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               BRIAN CENTER HEALTH &
                                               RETIREMENT/BASTIAN, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President


                                               BRIAN CENTER NURSING
                                               CARE/FINCASTLE, INC.

                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President





                                      114
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                                                                             115




                                               DEVCON HOLDING COMPANY


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               LIVING CENTER - SOUTHEAST, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               AMERICAN PHARMACEUTICAL SERVICES,
                                               INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               LIVING CENTERS OF TEXAS, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               LIVING CENTERS - ROCKY MOUNTAIN,
                                               INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President





                                      115
<PAGE>   103
                                                                             116





                                               LIVING CENTERS - EAST, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               LIVING CENTERS HOLDING COMPANY


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               WORKHEALTH HEALTHCARE
                                               MANAGEMENT, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               AMERICAN REHABILITATION SERVICES,
                                               INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President


                                               AMERICAN REHABILITATION
                                               MANAGEMENT, INC.

                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President





                                      116
<PAGE>   104
                                                                             117




                                               AMERICAN THERAPY SERVICES, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               THERAPY MANAGEMENT INNOVATIONS,
                                               INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               QUEST REHAB, LLC


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President



                                               MED-THERAPY REHABILITATION
                                               SERVICES, INC.


                                               By:   /s/ Boyd P. Gentry
                                                     ------------------
                                                     Name:  Boyd P. Gentry
                                                     Title: Vice President




Address for Notices:

c/o Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094





                                      117