<PAGE>   1

                                                                    EXHIBIT 10.1

                                MULTIFAMILY NOTE

US $5,172,300.00                                                   June 28, 1999


        FOR VALUE RECEIVED, the undersigned ("BORROWER") jointly and severally
(if more than one) promises to pay to the order of BANC ONE CAPITAL FUNDING
CORPORATION, an Ohio corporation, the principal sum of Five Million One Hundred
Seventy Two Thousand Three Hundred and 00/100ths Dollars (US $5,172,300.00),
with interest on the unpaid principal balance at the annual rate of Nine and
Fifteen One Hundredths percent (9.15%).

        1.      DEFINED TERMS. As used in this Note, (i) the term "LENDER" means
the holder of this Note, and (ii) the term "INDEBTEDNESS" means the principal
of, interest on, or any other amounts due at any time under, this Note, the
Security Instrument or any other Loan Document, including prepayment premiums,
late charges, default interest, and advances to protect the security of the
Security Instrument under Section 12 of the Security Instrument. Event of
Default, Key Principal and other capitalized terms used but not defined in this
Note shall have the meanings given to such terms in the Security Instrument (as
defined in Paragraph 5).

        2.      ADDRESS FOR PAYMENT. All payments due under this Note shall be
payable at 150 E. Gay Street, 24th Floor, Columbus, Ohio 43215, or such other
place as may be designated by written notice to Borrower from or on behalf of
Lender.

        3.      PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall
be paid as follows:

        (a)     Unless disbursement of principal is made by Lender to Borrower
on the first day of the month, interest for the period beginning on the date of
disbursement and ending on and including the last day of the month in which such
disbursement is made shall be payable simultaneously with the execution of this
Note. Interest under this Note shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.

        (b)     Consecutive monthly installments of principal and interest, each
in the amount of Forty Three Thousand Nine Hundred Thirty Eight and 27/100ths
Dollars (US $43,938.27), shall be payable on the first day of each month
beginning on August 1, 1999, until the Maturity Date or the Extended Maturity
Date (as defined in Section 20 herein), if applicable, until the entire unpaid
principal balance evidenced by this Note is fully paid. Any accrued interest
remaining past due for 30 days or more shall be added to and become part of the
unpaid principal balance and shall bear interest at the rate or rates specified
in this Note, and any reference below to "accrued interest" shall refer to
accrued interest which has not become part of the unpaid principal balance.
Subject to Section 20 herein, any remaining principal and interest shall be due
and payable on July 1, 2001 or on any earlier date on which the unpaid principal
balance of this Note becomes due and payable, by acceleration or otherwise (the
"MATURITY DATE"). The unpaid principal balance shall continue to bear interest
after the Maturity Date or the Extended Maturity Date, if applicable, at the
Default Rate set forth in this Note until and including the date on which it is
paid in full.

        (c)     Any regularly scheduled monthly installment of principal and
interest that is received by Lender before the date it is due shall be deemed to
have been received on the due date solely for the purpose of calculating
interest due.

        4.      APPLICATION OF PAYMENTS. If at any time Lender receives, from
Borrower or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, Lender



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<PAGE>   2

may apply that payment to amounts then due and payable in any manner and in any
order determined by Lender, in Lender's discretion. Borrower agrees that neither
Lender's acceptance of a payment from Borrower in an amount that is less than
all amounts then due and payable nor Lender's application of such payment shall
constitute or be deemed to constitute either a waiver of the unpaid amounts or
an accord and satisfaction.

        5.      SECURITY. The Indebtedness is secured, among other things, by a
Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated as
of the date of this Note (the "SECURITY INSTRUMENT"), and reference is made to
the Security Instrument for other rights of Lender concerning the collateral for
the Indebtedness.

        6.      ACCELERATION. If an Event of Default has occurred and is
continuing, the entire unpaid principal balance, any accrued interest, the
prepayment premium payable under Paragraph 10, if any, and all other amounts
payable under this Note and any other Loan Document shall at once become due and
payable, at the option of Lender, without any prior notice to Borrower. Lender
may exercise this option to accelerate regardless of any prior forbearance.

        7.      LATE CHARGE. If any monthly amount payable under this Note or
under the Security Instrument or any other Loan Document is not received by
Lender within 10 days after the amount is due, Borrower shall pay to Lender,
immediately and without demand by Lender, a late charge equal to 5 percent of
such amount. Borrower acknowledges that its failure to make timely payments will
cause Lender to incur additional expenses in servicing and processing the loan
evidenced by this Note (the "LOAN"), and that it is extremely difficult and
impractical to determine those additional expenses. Borrower agrees that the
late charge payable pursuant to this Paragraph represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional expenses Lender will incur by reason of such late
payment. The late charge is payable in addition to, and not in lieu of, any
interest payable at the Default Rate pursuant to Paragraph 8.

        8.      DEFAULT RATE. So long as any monthly installment or any other
payment due under this Note remains past due for 30 days or more, interest under
this Note shall accrue on the unpaid principal balance from the earlier of the
due date of the first unpaid monthly installment or other payment due, as
applicable, at a rate (the "DEFAULT RATE") equal to the lesser of 4 percentage
points above the rate stated in the first paragraph of this Note or the maximum
interest rate which may be collected from Borrower under applicable law. If the
unpaid principal balance and all accrued interest are not paid in full on the
Maturity Date or Extended Maturity Date, if applicable, the unpaid principal
balance and all accrued interest shall bear interest from the Maturity Date or
Extended Maturity Date, if applicable, at the Default Rate. Borrower also
acknowledges that its failure to make timely payments will cause Lender to incur
additional expenses in servicing and processing the Loan, that, during the time
that any monthly installment or payment under this Note is delinquent for more
than 30 days, Lender will incur additional costs and expenses arising from its
loss of the use of the money due and from the adverse impact on Lender's ability
to meet its other obligations and to take advantage of other investment
opportunities, and that it is extremely difficult and impractical to determine
those additional costs and expenses. Borrower also acknowledges that, during the
time that any monthly installment or other payment due under this Note is
delinquent for more than 30 days, Lender's risk of nonpayment of this Note will
be materially increased and Lender is entitled to be compensated for such
increased risk. Borrower agrees that the increase in the rate of interest
payable under this Note to the Default Rate represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional costs and expenses Lender will incur by reason of the
Borrower's delinquent payment and the additional compensation Lender is entitled
to receive for the increased risks of nonpayment associated with a delinquent
loan.

        9.      LIMITS ON PERSONAL LIABILITY.



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        (a)     Except as otherwise provided in this Paragraph 9, Borrower shall
have no personal liability under this Note, the Security Instrument or any other
Loan Document for the repayment of the Indebtedness or for the performance of
any other obligations of Borrower under the Loan Documents, and Lender's only
recourse for the satisfaction of the Indebtedness and the performance of such
obligations shall be Lender's exercise of its rights and remedies with respect
to the Mortgaged Property and any other collateral held by Lender as security
for the Indebtedness. This limitation on Borrower's liability shall not limit or
impair Lender's enforcement of its rights against any guarantor of the
Indebtedness or any guarantor of any obligations of Borrower.

        (b)     Borrower shall be personally liable to Lender for the repayment
of a portion of the Indebtedness equal to any loss or damage suffered by Lender
as a result of (1) failure of Borrower to pay to Lender upon demand after an
Event of Default, all Rents to which Lender is entitled under Section 3(a) of
the Security Instrument and the amount of all security deposits collected by
Borrower from tenants then in residence; (2) failure of Borrower to apply all
insurance proceeds and condemnation proceeds as required by the Security
Instrument; (3) failure of Borrower to comply with Section 14(d) or (e) of the
Security Instrument relating to the delivery of books and records, statements,
schedules and reports; (4) fraud or written material misrepresentation by
Borrower, Key Principal or any officer, director, partner, member or employee of
Borrower in connection with the application for or creation of the Indebtedness
or any request for any action or consent by Lender; (5) the initiation by
Borrower or Key Principal of a voluntary bankruptcy or insolvency proceeding;
(6) the failure of Borrower to comply with Sections 18(a), (b), (c), (d), (g),
(h) and (i) of the Security Instrument; and (7) failure to apply Rents, first,
to the payment of reasonable operating expenses (other than Property management
fees that are not currently payable pursuant to the terms of an Assignment and
Subordination of Management Agreement or any other agreement with Lender
executed in connection with the Loan) and then to amounts ("DEBT SERVICE
AMOUNTS") payable under this Note, the Security Instrument or any other Loan
Document (except that Borrower will not be personally liable (i) to the extent
that Borrower lacks the legal right to direct the disbursement of such sums
because of a bankruptcy, receivership or similar judicial proceeding, or (ii)
with respect to Rents that are distributed in any calendar year if Borrower has
paid all operating expenses and Debt Service Amounts for that calendar year).

        (c)     Borrower shall become personally liable to Lender for the
repayment of all of the Indebtedness upon the occurrence of any of the following
Events of Default: (1) Borrower's acquisition of any property or operation of
any business not permitted by Section 33 of the Security Instrument; or (2) a
Transfer that is an Event of Default under Section 21 of the Security
Instrument.

        (d)     To the extent that Borrower has personal liability under this
Paragraph 9 and to the extent permitted by applicable law, Lender may exercise
its rights against Borrower personally without regard to whether Lender has
exercised any rights against the Mortgaged Property or any other security, or
pursued any rights against any guarantor, or pursued any other rights available
to Lender under this Note, the Security Instrument, any other Loan Document or
applicable law. For purposes of this Paragraph 9, the term "MORTGAGED PROPERTY"
shall not include any funds that (1) have been applied by Borrower as required
or permitted by the Security Instrument prior to the occurrence of an Event of
Default, or (2) Borrower was unable to apply as required or permitted by the
Security Instrument because of a bankruptcy, receivership, or similar judicial
proceeding.



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<PAGE>   4

        10.     VOLUNTARY AND INVOLUNTARY PREPAYMENTS.

        (a)     A prepayment premium shall be payable in connection with any
prepayment made under this Note as provided below:

                (1)     Upon the expiration of the eighteenth (18th) month
following the date of this Note (the "LOCKOUT PERIOD"), Borrower may voluntarily
prepay all (but not less than all) of the unpaid principal balance of this Note,
on the last Business Day of a calendar month if Borrower has given Lender at
least 30 days prior notice of its intention to make such prepayment. Such
prepayment shall be made by paying (A) the amount of principal being prepaid,
(B) all accrued interest, (C) all other sums due Lender at the time of such
prepayment, and (D) the prepayment premium calculated pursuant to Schedule A.
For all purposes, including the accrual of interest, any prepayment received by
Lender on any day other than the last calendar day of the month shall be deemed
to have been received on the last calendar day of such month. For purposes of
this Note, a "BUSINESS DAY" means any day other than a Saturday, Sunday or any
other day on which Lender is not open for business. If Borrower exercises its
right to voluntarily prepay all (but not less than all) of the principal balance
of this Note, contemporaneously with such prepayment, Borrower must also
voluntarily prepay in accordance with its terms, any other multi-family note of
even date herewith, from Borrower to Lender, except for that certain Note and
Agreement of even date herewith, from Borrower to Lender.

                (2)     Upon Lender's exercise of any right of acceleration
under this Note, Borrower shall pay to Lender, in addition to the entire unpaid
principal balance of this Note outstanding at the time of the acceleration, (A)
all accrued interest and all other sums due Lender under this Note and the other
Loan Documents, and (B) the prepayment premium calculated pursuant to Schedule
A.

                (3)     Any application by Lender of any collateral or other
security to the repayment of any portion of the unpaid principal balance of this
Note prior to the Maturity Date and in the absence of acceleration shall be
deemed to be a partial prepayment by Borrower, requiring the payment to Lender
by Borrower of a prepayment premium (if applicable). The amount of any such
partial prepayment shall be computed so as to provide to Lender a prepayment
premium, if any, computed pursuant to Schedule A without Borrower having to pay
out-of-pocket any additional amounts.

        (b)     Notwithstanding the provisions of Paragraph 10(a), no prepayment
premium shall be payable with respect to (A) any prepayment made no more than 90
days before the Extended Maturity Date, if applicable, (B) any prepayment made
following the Lockout Period and before the Maturity Date if Lender has not
exercised the Extension Option (as defined in Section 20(a)), (C) any prepayment
occurring as a result of the application of any insurance proceeds or
condemnation award under the Security Instrument, or (D) any prepayment made as
a result of Borrower's rebalancing obligations set forth in Exhibit B3 of the
Security Instrument.

        (c)     Schedule A is hereby incorporated by reference into this Note.

        (d)     Any required prepayment of less than the unpaid principal
balance of this Note shall not extend or postpone the due date of any subsequent
monthly installments or change the amount of such installments, unless Lender
agrees otherwise in writing.

        (e)     Borrower recognizes that any prepayment of the unpaid principal
balance of this Note during the period when a prepayment premium is applicable,
whether voluntary or involuntary or resulting from a default by Borrower, will
result in Lender's incurring loss, including reinvestment loss, additional
expense and frustration or impairment of Lender's ability to meet its
commitments to third parties. Borrower agrees to pay to Lender upon demand
damages for the detriment caused by any prepayment, and agrees that it is



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<PAGE>   5

extremely difficult and impractical to ascertain the extent of such damages.
Borrower therefore acknowledges and agrees that the formula for calculating
prepayment premiums set forth on Schedule A represents a reasonable estimate of
the damages Lender will incur because of a prepayment.

        (f)     Borrower further acknowledges that the prepayment premium
provisions of this Note are a material part of the consideration for the Loan,
and acknowledges that the terms of this Note are in other respects more
favorable to Borrower as a result of the Borrower's voluntary agreement to the
prepayment premium provisions.

        11.     COSTS AND EXPENSES. Borrower shall pay on demand all expenses
and costs, including fees and out-of-pocket expenses of attorneys and expert
witnesses and costs of investigation, incurred by Lender as a result of any
default under this Note or in connection with efforts to collect any amount due
under this Note, or to enforce the provisions of any of the other Loan
Documents, including those incurred in post- judgment collection efforts and in
any bankruptcy proceeding (including any action for relief from the automatic
stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure
proceeding.

        12.     FORBEARANCE. Any forbearance by Lender in exercising any right
or remedy under this Note, the Security Instrument, or any other Loan Document
or otherwise afforded by applicable law, shall not be a waiver of or preclude
the exercise of that or any other right or remedy. The acceptance by Lender of
any payment after the due date of such payment, or in an amount which is less
than the required payment, shall not be a waiver of Lender's right to require
prompt payment when due of all other payments or to exercise any right or remedy
with respect to any failure to make prompt payment. Enforcement by Lender of any
security for Borrower's obligations under this Note shall not constitute an
election by Lender of remedies so as to preclude the exercise of any other right
or remedy available to Lender.

        13.     WAIVERS. Presentment, demand, notice of dishonor, protest,
notice of acceleration, notice of intent to demand or accelerate payment or
maturity, presentment for payment, notice of nonpayment, grace, and diligence in
collecting the Indebtedness are waived by Borrower, Key Principal, and all
endorsers and guarantors of this Note and all other third party obligors.

         14. LOAN CHARGES. (a) If any applicable law limiting the amount of
interest or other charges permitted to be collected from Borrower in connection
with the Loan is interpreted so that any interest or other charge provided for
in any Loan Document, whether considered separately or together with other
charges provided for in any other Loan Document, violates that law, and Borrower
is entitled to the benefit of that law, that interest or charge is hereby
reduced to the extent necessary to eliminate that violation. The amounts, if
any, previously paid to Lender in excess of the permitted amounts shall be
applied by Lender to reduce the unpaid principal balance of this Note. For the
purpose of determining whether any applicable law limiting the amount of
interest or other charges permitted to be collected from Borrower has been
violated, all Indebtedness that constitutes interest, as well as all other
charges made in connection with the Indebtedness that constitute interest, shall
be deemed to be allocated and spread ratably over the stated term of the Note.
Unless otherwise required by applicable law, such allocation and spreading shall
be effected in such a manner that the rate of interest so computed is uniform
throughout the stated term of the Note.



                                       5
<PAGE>   6

                (b)     Borrower agrees to pay an effective rate of interest
equal to the sum of the interest rate provided for in this Note and any
additional rate of interest resulting from any other charges of interest or in
the nature of interest paid or to be paid in connection with the Loan and any
other fees or amounts to be paid by Borrower pursuant to any of the other Loan
Documents. Neither this Note nor any of the other Loan Documents shall be
construed to create a contract for the use, forbearance or detention of money
requiring payment of interest at a rate greater than the maximum interest rate
permitted to be charged under applicable law.

        15.     COMMERCIAL PURPOSE. Borrower represents that the Indebtedness is
being incurred by Borrower solely for the purpose of carrying on a business or
commercial enterprise, and not for personal, family or household purposes.

        16.     COUNTING OF DAYS. Except where otherwise specifically provided,
any reference in this Note to a period of "days" means calendar days, not
Business Days.

        17.     GOVERNING LAW. This Note shall be governed by the law of the
jurisdiction in which the Land is located.

        18.     CAPTIONS. The captions of the paragraphs of this Note are for
convenience only and shall be disregarded in construing this Note.

        19.     NOTICES. All notices, demands and other communications required
or permitted to be given by Lender to Borrower pursuant to this Note shall be
given in accordance with Section 31 of the Security Instrument.

        20.     OPTION TO EXTEND MATURITY DATE.

        (a)     Lender shall have the option to extend the Maturity Date (the
"EXTENSION OPTION") by a period of ten (10) additional years from the date of
exercise of the Extension Option (the "EXTENDED MATURITY DATE"). The Extension
Option shall be exercisable by Lender in its sole and absolute discretion at any
time prior to the last ninety (90) days of the original term of the Note, upon
prior written notice from Lender to Borrower. During the last ninety (90) days
of the original term of the Note, Lender shall have the right to exercise the
Extension Option only with consent of the Borrower. Nothing contained herein or
within any of the other Loan Documents shall constitute or be deemed an
obligation of Lender to exercise the Extension Option.

        (b)     If and to the extent Lender exercises the Extension Option,
Borrower shall have the right to voluntarily prepay all (but not less than all)
of the unpaid principal balance of this Note together with all Other
Indebtedness pursuant to the terms of Section 10 herein.

        21.     CONSENT TO JURISDICTION AND VENUE. Borrower and Key Principal
each agrees that any controversy arising under or in relation to this Note shall
be litigated exclusively in the jurisdiction in which the Land is located (the
"PROPERTY JURISDICTION"). The state and federal courts and authorities with
jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over
all controversies which shall arise under or in relation to this Note. Borrower
and Key Principal each irrevocably consents to service, jurisdiction, and venue
of such courts for any such litigation and waives any other venue to which it
might be entitled by virtue of domicile, habitual residence or otherwise.

        22.     WAIVER OF TRIAL BY JURY. BORROWER, KEY PRINCIPAL AND LENDER EACH
(A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES AS LENDER, KEY PRINCIPAL AND
BORROWER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY
JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR
IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH
PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.



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<PAGE>   7

     ATTACHED SCHEDULES. THE FOLLOWING SCHEDULES ARE ATTACHED TO THIS NOTE:

        [X]     SCHEDULE A PREPAYMENT PREMIUM (REQUIRED)

        [X]     SCHEDULE B MODIFICATIONS TO MULTIFAMILY NOTE

        IN WITNESS WHEREOF, Borrower has signed and delivered this Note or has
caused this Note to be signed and delivered by its duly authorized
representative.


                                        BORROWER

                                        RETIREMENT INNS III, LLC,
                                        a Delaware limited liability company

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


                                        Borrower's Employer ID Number:
                                        33-0842525



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<PAGE>   8

                                   SCHEDULE A

                               PREPAYMENT PREMIUM

        Any prepayment premium payable under Paragraph 10 of this Note shall be
computed as follows:

        The prepayment premium shall be the greater of:

                (i)     1% of the unpaid principal balance of this Note; or

                (ii)    The product obtained by multiplying:

                        (A)     the amount of principal being prepaid,

                        by

                        (B)     the positive difference, if any, obtained by
                                subtracting from the interest rate on this Note
                                the yield rate (the "YIELD RATE") on the 5.5%
                                U.S. Treasury Security due May, 2009 (the
                                "SPECIFIED U.S. TREASURY SECURITY"), as the
                                Yield Rate is reported in The Wall Street
                                Journal on the fifth Business Day preceding (x)
                                the date notice of prepayment is given to Lender
                                where prepayment is voluntary, or (y) the date
                                Lender accelerates the Loan,(1)

                        by

                        (C)     the present value factor calculated using the
                                following formula:

                                        1 - (1 + r)-n
                                        -------------
                                              r
                                        [r =     Yield Rate

                                        n = the number of 365-day years (or
                                            366-day years, if applicable), and
                                            any fraction thereof, remaining
                                            between the Prepayment Date and the
                                            date which is six (6) months prior
                                            to the Maturity Date or Extended
                                            Maturity Date, as applicable]

                                            In the event that no Yield Rate is
                                            published for the Specified U.S.
                                            Treasury Security, then the nearest
                                            equivalent U.S. Treasury Security
                                            shall be selected at Lender's
                                            discretion. If the publication of
                                            such Yield Rates in The Wall Street
                                            Journal is

----------

(1)     If Lender exercises the Extension Option (as defined in Section 20(a)),
        the Specified U.S. Treasury Security shall be changed as of the date of
        exercise of the Extension Option, and shall thereafter be the U.S.
        Treasury Security due in the month which is six (6) months prior to the
        Extended Maturity Date.



                                      A-1

<PAGE>   9





                                            discontinued, Lender shall determine
                                            such Yield Rates from another source
                                            selected by Lender.

                                            For purposes of subparagraph
                                            (ii)(C), the "PREPAYMENT DATE"
                                            shall be (x) in the case of a
                                            voluntary prepayment, the date on
                                            which the prepayment is made, and
                                            (y) in any other case, the date on
                                            which Lender accelerates the unpaid
                                            principal balance of this Note.

                                            ------------------------------------
                                                       INITIAL(S)



                                      A-2

<PAGE>   10



                                   SCHEDULE B

                        MODIFICATIONS TO MULTIFAMILY NOTE


                                      B-1



<PAGE>   11

                           MULTIFAMILY DEED OF TRUST,
                               ASSIGNMENT OF RENTS
                             AND SECURITY AGREEMENT
                                    (ARIZONA)





<PAGE>   12

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>      <C>                                                             <C>
1.       DEFINITIONS.......................................................1
2.       UNIFORM COMMERCIAL CODE SECURITY AGREEMENT........................6
3.       ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER;
         LENDER IN POSSESSION..............................................7
4.       ASSIGNMENT OF LEASES; LEASES AFFECTING THE
         MORTGAGED PROPERTY................................................9
5.       PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN
         DOCUMENTS; PREPAYMENT PREMIUM....................................11
6.       EXCULPATION......................................................11
7.       DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES..................11
8.       COLLATERAL AGREEMENTS............................................12
9.       APPLICATION OF PAYMENTS..........................................12
10.      COMPLIANCE WITH LAWS.............................................13
11.      USE OF PROPERTY..................................................13
12.      PROTECTION OF LENDER'S SECURITY..................................13
13.      INSPECTION.......................................................14
14.      BOOKS AND RECORDS; FINANCIAL REPORTING...........................14
15.      TAXES; OPERATING EXPENSES........................................16
16.      LIENS; ENCUMBRANCES..............................................16
17.      PRESERVATION, MANAGEMENT AND MAINTENANCE OF
         MORTGAGED PROPERTY...............................................17
18.      ENVIRONMENTAL HAZARDS............................................17
19.      PROPERTY AND LIABILITY INSURANCE.................................23
20.      CONDEMNATION.....................................................25
21.      TRANSFERS OF THE MORTGAGED PROPERTY OR
         INTERESTS IN BORROWER............................................25
22.      EVENTS OF DEFAULT................................................29
23.      REMEDIES CUMULATIVE..............................................30
24.      FORBEARANCE......................................................30
25.      LOAN CHARGES.....................................................31
26.      WAIVER OF STATUTE OF LIMITATIONS.................................31
27.      WAIVER OF MARSHALLING............................................31
28.      FURTHER ASSURANCES...............................................31
29.      ESTOPPEL CERTIFICATE.............................................31
30.      GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.................32
31.      NOTICE...........................................................32
32.      SALE OF NOTE; CHANGE IN SERVICER.................................33
33.      SINGLE ASSET BORROWER............................................33
34.      SUCCESSORS AND ASSIGNS BOUND.....................................33
35.      JOINT AND SEVERAL LIABILITY......................................33
36.      RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY..............33
37.      SEVERABILITY; AMENDMENTS.........................................33
38.      CONSTRUCTION.....................................................33
</TABLE>


                                       i


<PAGE>   13

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>      <C>                                                             <C>
39.      LOAN SERVICING...................................................34
40.      DISCLOSURE OF INFORMATION........................................34
41.      NO CHANGE IN FACTS OR CIRCUMSTANCES..............................34
42.      SUBROGATION......................................................34
43.      ACCELERATION; REMEDIES...........................................34
44.      RELEASE..........................................................35
45.      SUBSTITUTE TRUSTEE...............................................35
46.      TIME OF ESSENCE..................................................35
47.      WAIVERS BY SURETY................................................35
48.      WAIVER OF TRIAL BY JURY..........................................35
</TABLE>

                                       ii


<PAGE>   14

                           MULTIFAMILY DEED OF TRUST,
                               ASSIGNMENT OF RENTS
                             AND SECURITY AGREEMENT

        THIS MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY
AGREEMENT (the "INSTRUMENT") is dated as of the _____ day of June, 1999, by
RETIREMENT INNS III, LLC, a limited liability company, organized and existing
under the laws of the State of Delaware, whose address is 245 Fischer Avenue,
D-1, Costa Mesa, California 92626, as trustor ("BORROWER"), to FIDELITY NATIONAL
TITLE INSURANCE COMPANY, whose address is 2390 East Camelback Road, Suite 140,
Phoenix, Arizona 85016, as trustee ("TRUSTEE"), for the benefit of BANC ONE
CAPITAL FUNDING CORPORATION, a corporation organized and existing under the laws
of the State of Ohio, whose address is 150 E. Gay Street, 24th Floor, Columbus,
Ohio 43215, as beneficiary ("LENDER").

        Borrower, in consideration of the Indebtedness and the trust created by
this Instrument, irrevocably grants, conveys and assigns to Trustee, in trust,
with power of sale, the Mortgaged Property, including the Land located in
Maricopa County, State of Arizona and described in Exhibit A attached to this
Instrument.

        TO SECURE TO LENDER the repayment of the Indebtedness evidenced by
Borrower's Multifamily Note payable to Lender, dated as of the date of this
Instrument, in the principal amount of $5,172,300.00, and all renewals,
extensions and modifications of the Indebtedness, and the performance of the
covenants and agreements of Borrower contained in the Loan Documents.

        Borrower represents and warrants that Borrower is lawfully seized of the
Mortgaged Property and has the right, power and authority to grant, convey and
assign the Mortgaged Property, and that the Mortgaged Property is unencumbered.
Borrower covenants that Borrower will warrant and defend generally the title to
the Mortgaged Property against all claims and demands, subject to any easements
and restrictions listed in a schedule of exceptions to coverage in any title
insurance policy issued to Lender contemporaneously with the execution and
recordation of this Instrument and insuring Lender's interest in the Mortgaged
Property.

COVENANTS. Borrower and Lender covenant and agree as follows:

        1.      DEFINITIONS. The following terms, when used in this Instrument
(including when used in the above recitals), shall have the following meanings:

        (a)     "BORROWER" means all persons or entities identified as
"Borrower" in the first paragraph of this Instrument, together with their
successors and assigns.

        (b)     "COLLATERAL AGREEMENT" means any separate agreement between
Borrower and Lender for the purpose of establishing replacement reserves for the
Mortgaged Property, establishing a fund to assure completion of repairs or
improvements specified in that agreement, or assuring reduction of the
outstanding principal balance of the Indebtedness if the occupancy of or income
from the Mortgaged Property does not increase to a level specified in that
agreement, or any other



<PAGE>   15

agreement or agreements between Borrower and Lender which provide for the
establishment of any other fund, reserve or account.

        (c)     "ENVIRONMENTAL PERMIT" means any permit, license, or other
authorization issued under any Hazardous Materials Law with respect to any
activities or businesses conducted on or in relation to the Mortgaged Property.

        (d)     "EVENT OF DEFAULT" means the occurrence of any event listed in
Section 22.

        (e)     "FIXTURES" means all property which is so attached to the Land
or the Improvements as to constitute a fixture under applicable law, including:
machinery, equipment, engines, boilers, incinerators, installed building
materials; systems and equipment for the purpose of supplying or distributing
heating, cooling, electricity, gas, water, air, or light; antennas, cable,
wiring and conduits used in connection with radio, television, security, fire
prevention, or fire detection or otherwise used to carry electronic signals;
telephone systems and equipment; elevators and related machinery and equipment;
fire detection, prevention and extinguishing systems and apparatus; security and
access control systems and apparatus; plumbing systems; water heaters, ranges,
stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers,
dryers and other appliances; light fixtures, awnings, storm windows and storm
doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors;
cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants;
swimming pools; and exercise equipment.

        (f)     "GOVERNMENTAL AUTHORITY" means any board, commission, department
or body of any municipal, county, state or federal governmental unit, or any
subdivision of any of them, that has or acquires jurisdiction over the Mortgaged
Property or the use, operation or improvement of the Mortgaged Property.

        (g)     "HAZARDOUS MATERIALS" means petroleum and petroleum products and
compounds containing them, including gasoline, diesel fuel and oil; explosives;
flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs")
and compounds containing them; lead and lead-based paint; asbestos or
asbestos-containing materials in any form that is or could become friable;
underground or above-ground storage tanks, whether empty or containing any
substance; any substance the presence of which on the Mortgaged Property is
prohibited by any federal, state or local authority; any substance that requires
special handling; and any other material or substance now or in the future
defined as a "hazardous substance," "hazardous material," "hazardous waste,"
"toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the
meaning of any Hazardous Materials Law.

        (h)     "HAZARDOUS MATERIALS LAWS" means all federal, state, and local
laws, ordinances and regulations and standards, rules, policies and other
governmental requirements, administrative rulings and court judgments and
decrees in effect now or in the future and including all amendments, that relate
to Hazardous Materials and apply to Borrower or to the Mortgaged Property.
Hazardous Materials Laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601,
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., the Toxic Substance Control Act, 15 U.S.C.


                                       2

<PAGE>   16

Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and
the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, et seq., and
their state analogs.

        (i)     "IMPOSITIONS" and "IMPOSITION DEPOSITS" are defined in Section
7(a).

        (j)     "IMPROVEMENTS" means the buildings, structures, improvements,
and alterations now constructed or at any time in the future constructed or
placed upon the Land, including any future replacements and additions.

        (k)     "INDEBTEDNESS" means the principal of, interest on, and all
other amounts due at any time under, the Note, this Instrument or any other Loan
Document, including prepayment premiums, late charges, default interest, and
advances as provided in Section 12 to protect the security of this Instrument.

        (l)     [Intentionally omitted.]

        (m)     "KEY PRINCIPAL" means the natural person(s) or entity identified
as such at the foot of this Instrument, and any person or entity who becomes a
Key Principal after the date of this Instrument and is identified as such in an
amendment or supplement to this Instrument.

        (n)     "LAND" means the land described in Exhibit A.

        (o)     "LEASES" means all present and future leases, subleases,
licenses, concessions or grants or other possessory interests now or hereafter
in force, whether oral or written, covering or affecting the Mortgaged Property,
or any portion of the Mortgaged Property (including proprietary leases or
occupancy agreements if Borrower is a cooperative housing corporation), and all
modifications, extensions or renewals.

        (p)     "LENDER" means the entity identified as "Lender" in the first
paragraph of this Instrument and its successors and assigns, or any subsequent
holder of the Note.

        (q)     "LOAN DOCUMENTS" means the Note, this Instrument, all
guaranties, all indemnity agreements, all Collateral Agreements, O&M Programs,
and any other documents now or in the future executed by Borrower, Key
Principal, any guarantor or any other person in connection with the loan
evidenced by the Note, as such documents may be amended from time to time.

        (r)     "LOAN SERVICER" means the entity that from time to time is
designated by Lender to collect payments and deposits and receive notices under
the Note, this Instrument and any other Loan Document, and otherwise to service
the loan evidenced by the Note for the benefit of Lender. Unless Borrower
receives notice to the contrary, the Loan Servicer is the entity identified as
"Lender" in the first paragraph of this Instrument.

        (s)     "MORTGAGED PROPERTY" means all of Borrower's present and future
right, title and interest in and to all of the following:

                (1)     the Land;


                                       3

<PAGE>   17

                (2)     the Improvements;

                (3)     the Fixtures;

                (4)     the Personalty;

                (5)     all current and future rights, including air rights,
                        development rights, zoning rights and other similar
                        rights or interests, easements, tenements,
                        rights-of-way, strips and gores of land, streets,
                        alleys, roads, sewer rights, waters, watercourses, and
                        appurtenances related to or benefitting the Land or the
                        Improvements, or both, and all rights-of-way, streets,
                        alleys and roads which may have been or may in the
                        future be vacated;

                (6)     all proceeds paid or to be paid by any insurer of the
                        Land, the Improvements, the Fixtures, the Personalty or
                        any other part of the Mortgaged Property, whether or not
                        Borrower obtained the insurance pursuant to Lender's
                        requirement;

                (7)     all awards, payments and other compensation made or to
                        be made by any municipal, state or federal authority
                        with respect to the Land, the Improvements, the
                        Fixtures, the Personalty or any other part of the
                        Mortgaged Property, including any awards or settlements
                        resulting from condemnation proceedings or the total or
                        partial taking of the Land, the Improvements, the
                        Fixtures, the Personalty or any other part of the
                        Mortgaged Property under the power of eminent domain or
                        otherwise and including any conveyance in lieu thereof;

                (8)     all contracts, options and other agreements for the sale
                        of the Land, the Improvements, the Fixtures, the
                        Personalty or any other part of the Mortgaged Property
                        entered into by Borrower now or in the future, including
                        cash or securities deposited to secure performance by
                        parties of their obligations;

                (9)     all proceeds from the conversion, voluntary or
                        involuntary, of any of the above into cash or liquidated
                        claims, and the right to collect such proceeds;

                (10)    all Rents and Leases;

                (11)    all earnings, royalties, accounts receivable, issues and
                        profits from the Land, the Improvements or any other
                        part of the Mortgaged Property, and all undisbursed
                        proceeds of the loan secured by this Instrument and, if
                        Borrower is a cooperative housing corporation,
                        maintenance charges or assessments payable by
                        shareholders or residents;

                (12)    all Imposition Deposits;



                                       4

<PAGE>   18
                (13)    all refunds or rebates of Impositions by any municipal,
                        state or federal authority or insurance company (other
                        than refunds applicable to periods before the real
                        property tax year in which this Instrument is dated);

                (14)    all tenant security deposits which have not been
                        forfeited by any tenant under any Lease; and

                (15)    all names under or by which any of the above Mortgaged
                        Property may be operated or known, and all trademarks,
                        trade names, and goodwill relating to any of the
                        Mortgaged Property.

        (t)     "NOTE" means the Multifamily Note described on page 1 of this
Instrument, including the Acknowledgment and Agreement of Key Principal to
Personal Liability for Exceptions to Non- Recourse Liability (if any), and all
schedules, riders, allonges and addenda, as such Multifamily Note may be amended
from time to time.

        (u)     "O&M PROGRAM" is defined in Section 18(a).

        (v)     "PERSONALTY" means all furniture, furnishings, equipment,
machinery, building materials, appliances, goods, supplies, tools, books,
records (whether in written or electronic form), computer equipment (hardware
and software) and other tangible personal property (other than Fixtures) which
are used now or in the future in connection with the ownership, management or
operation of the Land or the Improvements or are located on the Land or in the
Improvements, and any operating agreements relating to the Land or the
Improvements, and any surveys, plans and specifications and contracts for
architectural, engineering and construction services relating to the Land or the
Improvements and all other intangible property and rights relating to the
operation of, or used in connection with, the Land or the Improvements,
including all governmental permits relating to any activities on the Land.

        (w)     "PROPERTY JURISDICTION" is defined in Section 30(a).

        (x)     "RENTS" means all rents (whether from residential or
non-residential space), revenues and other income of the Land or the
Improvements, including parking fees, laundry and vending machine income and
fees and charges for food, health care and other services provided at the
Mortgaged Property, whether now due, past due, or to become due, and deposits
forfeited by tenants.

        (y)     "TAXES" means all taxes, assessments, vault rentals and other
charges, if any, general, special or otherwise, including all assessments for
schools, public betterments and general or local improvements, which are levied,
assessed or imposed by any public authority or quasi-public authority, and
which, if not paid, will become a lien, on the Land or the Improvements.

        (z)     "TRANSFER" means (A) a sale, assignment, transfer or other
disposition (whether voluntary, involuntary or by operation of law); (B) the
granting, creating or attachment of a lien, encumbrance or security interest
(whether voluntary, involuntary or by operation of law); (C) the issuance or
other creation of an ownership interest in a legal entity, including a
partnership interest,



                                       5

<PAGE>   19
interest in a limited liability company or corporate stock; (D) the withdrawal,
retirement, removal or involuntary resignation of a partner in a partnership or
a member or manager in a limited liability company; or (E) the merger,
dissolution, liquidation, or consolidation of a legal entity. "Transfer" does
not include (i) a conveyance of the Mortgaged Property at a judicial or
non-judicial foreclosure sale under this Instrument or (ii) the Mortgaged
Property becoming part of a bankruptcy estate by operation of law under the
United States Bankruptcy Code. For purposes of defining the term "Transfer," the
term "partnership" shall mean a general partnership, a limited partnership, a
joint venture and a limited liability partnership, and the term "partner" shall
mean a general partner, a limited partner and a joint venturer.

        2.      UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is
also a security agreement under the Uniform Commercial Code for any of the
Mortgaged Property which, under applicable law, may be subject to a security
interest under the Uniform Commercial Code, whether acquired now or in the
future, and all products and cash and non-cash proceeds thereof (collectively,
"UCC Collateral"), and Borrower hereby grants to Lender a security interest in
the UCC Collateral. Borrower shall execute and deliver to Lender, upon Lender's
request, financing statements, continuation statements and amendments, in such
form as Lender may require to perfect or continue the perfection of this
security interest. Borrower shall pay all filing costs and all costs and
expenses of any record searches for financing statements that Lender may
require. Without the prior written consent of Lender, Borrower shall not create
or permit to exist any other lien or security interest in any of the UCC
Collateral. If an Event of Default has occurred and is continuing, Lender shall
have the remedies of a secured party under the Uniform Commercial Code, in
addition to all remedies provided by this Instrument or existing under
applicable law. In exercising any remedies, Lender may exercise its remedies
against the UCC Collateral separately or together, and in any order, without in
any way affecting the availability of Lender's other remedies. This Instrument
constitutes a financing statement with respect to any part of the Mortgaged
Property which is or may become a Fixture.

        3.      ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN
POSSESSION.

        (a)     As part of the consideration for the Indebtedness, Borrower
absolutely and unconditionally assigns and transfers to Lender all Rents. It is
the intention of Borrower to establish a present, absolute and irrevocable
transfer and assignment to Lender of all Rents and to authorize and empower
Lender to collect and receive all Rents without the necessity of further action
on the part of Borrower. Promptly upon request by Lender, Borrower agrees to
execute and deliver such further assignments as Lender may from time to time
require. Borrower and Lender intend this assignment of Rents to be immediately
effective and to constitute an absolute present assignment and not an assignment
for additional security only. For purposes of giving effect to this absolute
assignment of Rents, and for no other purpose, Rents shall not be deemed to be a
part of the "Mortgaged Property," as that term is defined in Section 1(s).
However, if this present, absolute and unconditional assignment of Rents is not
enforceable by its terms under the laws of the Property Jurisdiction, then the
Rents shall be included as a part of the Mortgaged Property and it is the
intention of the Borrower that in this circumstance this Instrument create and
perfect a lien on Rents in favor of Lender, which lien shall be effective as of
the date of this Instrument.



                                       6

<PAGE>   20
        (b)     After the occurrence of an Event of Default, Borrower authorizes
Lender to collect, sue for and compromise Rents and directs each tenant of the
Mortgaged Property to pay all Rents to, or as directed by, Lender. However,
until the occurrence of an Event of Default, Lender hereby grants to Borrower a
revocable license to collect and receive all Rents, to hold all Rents in trust
for the benefit of Lender and to apply all Rents to pay the installments of
interest and principal then due and payable under the Note and the other amounts
then due and payable under the other Loan Documents, including Imposition
Deposits, and to pay the current costs and expenses of managing, operating and
maintaining the Mortgaged Property, including utilities, Taxes and insurance
premiums (to the extent not included in Imposition Deposits), tenant
improvements and other capital expenditures. So long as no Event of Default has
occurred and is continuing, the Rents remaining after application pursuant to
the preceding sentence may be retained by Borrower free and clear of, and
released from, Lender's rights with respect to Rents under this Instrument. From
and after the occurrence of an Event of Default, and without the necessity of
Lender entering upon and taking and maintaining control of the Mortgaged
Property directly, or by a receiver, Borrower's license to collect Rents shall
automatically terminate and Lender shall without notice be entitled to all Rents
as they become due and payable, including Rents then due and unpaid. Borrower
shall pay to Lender upon demand all Rents to which Lender is entitled. At any
time on or after the date of Lender's demand for Rents, Lender may give, and
Borrower hereby irrevocably authorizes Lender to give, notice to all tenants of
the Mortgaged Property instructing them to pay all Rents to Lender, no tenant
shall be obligated to inquire further as to the occurrence or continuance of an
Event of Default, and no tenant shall be obligated to pay to Borrower any
amounts which are actually paid to Lender in response to such a notice. Any such
notice by Lender shall be delivered to each tenant personally, by mail or by
delivering such demand to each rental unit. Borrower shall not interfere with
and shall cooperate with Lender's collection of such Rents.

        (c)     Borrower represents and warrants to Lender that Borrower has not
executed any prior assignment of Rents (other than an assignment of Rents
securing indebtedness that will be paid off and discharged with the proceeds of
the loan evidenced by the Note), that Borrower has not performed, and Borrower
covenants and agrees that it will not perform, any acts and has not executed,
and shall not execute, any instrument which would prevent Lender from exercising
its rights under this Section 3, and that at the time of execution of this
Instrument there has been no anticipation or prepayment of any Rents for more
than two months prior to the due dates of such Rents. Borrower shall not collect
or accept payment of any Rents more than two months prior to the due dates of
such Rents.

        (d)     If an Event of Default has occurred and is continuing, Lender
may, regardless of the adequacy of Lender's security or the solvency of Borrower
and even in the absence of waste, enter upon and take and maintain full control
of the Mortgaged Property in order to perform all acts that Lender in its
discretion determines to be necessary or desirable for the operation and
maintenance of the Mortgaged Property, including the execution, cancellation or
modification of Leases, the collection of all Rents, the making of repairs to
the Mortgaged Property and the execution or termination of contracts providing
for the management, operation or maintenance of the Mortgaged Property, for the
purposes of enforcing the assignment of Rents pursuant to Section 3(a),
protecting the Mortgaged Property or the security of this Instrument, or for
such other purposes as Lender in its discretion may deem necessary or desirable.
Alternatively, if an Event of Default has occurred and is continuing, regardless
of the adequacy of Lender's security, without regard to Borrower's



                                       7

<PAGE>   21
solvency and without the necessity of giving prior notice (oral or written) to
Borrower, Lender may apply to any court having jurisdiction for the appointment
of a receiver for the Mortgaged Property to take any or all of the actions set
forth in the preceding sentence. If Lender elects to seek the appointment of a
receiver for the Mortgaged Property at any time after an Event of Default has
occurred and is continuing, Borrower, by its execution of this Instrument,
expressly consents to the appointment of such receiver, including the
appointment of a receiver ex parte if permitted by applicable law. Lender or the
receiver, as the case may be, shall be entitled to receive a reasonable fee for
managing the Mortgaged Property. Immediately upon appointment of a receiver or
immediately upon the Lender's entering upon and taking possession and control of
the Mortgaged Property, Borrower shall surrender possession of the Mortgaged
Property to Lender or the receiver, as the case may be, and shall deliver to
Lender or the receiver, as the case may be, all documents, records (including
records on electronic or magnetic media), accounts, surveys, plans, and
specifications relating to the Mortgaged Property and all security deposits and
prepaid Rents. In the event Lender takes possession and control of the Mortgaged
Property, Lender may exclude Borrower and its representatives from the Mortgaged
Property. Borrower acknowledges and agrees that the exercise by Lender of any of
the rights conferred under this Section 3 shall not be construed to make Lender
a mortgagee-in-possession of the Mortgaged Property so long as Lender has not
itself entered into actual possession of the Land and Improvements.

        (e)     If Lender enters the Mortgaged Property, Lender shall be liable
to account only to Borrower and only for those Rents actually received. Lender
shall not be liable to Borrower, anyone claiming under or through Borrower or
anyone having an interest in the Mortgaged Property, by reason of any act or
omission of Lender under this Section 3, and Borrower hereby releases and
discharges Lender from any such liability to the fullest extent permitted by
law.

        (f)     If the Rents are not sufficient to meet the costs of taking
control of and managing the Mortgaged Property and collecting the Rents, any
funds expended by Lender for such purposes shall become an additional part of
the Indebtedness as provided in Section 12.

        (g)     Any entering upon and taking of control of the Mortgaged
Property by Lender or the receiver, as the case may be, and any application of
Rents as provided in this Instrument shall not cure or waive any Event of
Default or invalidate any other right or remedy of Lender under applicable law
or provided for in this Instrument.

        4.      ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY.

        (a)     As part of the consideration for the Indebtedness, Borrower
absolutely and unconditionally assigns and transfers to Lender all of Borrower's
right, title and interest in, to and under the Leases, including Borrower's
right, power and authority to modify the terms of any such Lease, or extend or
terminate any such Lease. It is the intention of Borrower to establish a
present, absolute and irrevocable transfer and assignment to Lender of all of
Borrower's right, title and interest in, to and under the Leases. Borrower and
Lender intend this assignment of the Leases to be immediately effective and to
constitute an absolute present assignment and not an assignment for additional
security only. For purposes of giving effect to this absolute assignment of the
Leases, and for no other purpose, the Leases shall not be deemed to be a part of
the "Mortgaged Property," as



                                       8
<PAGE>   22
that term is defined in Section 1(s). However, if this present, absolute and
unconditional assignment of the Leases is not enforceable by its terms under the
laws of the Property Jurisdiction, then the Leases shall be included as a part
of the Mortgaged Property and it is the intention of the Borrower that in this
circumstance this Instrument create and perfect a lien on the Leases in favor of
Lender, which lien shall be effective as of the date of this Instrument.

        (b)     Until Lender gives notice to Borrower of Lender's exercise of
its rights under this Section 4, Borrower shall have all rights, power and
authority granted to Borrower under any Lease (except as otherwise limited by
this Section or any other provision of this Instrument), including the right,
power and authority to modify the terms of any Lease or extend or terminate any
Lease. Upon the occurrence of an Event of Default, the permission given to
Borrower pursuant to the preceding sentence to exercise all rights, power and
authority under Leases shall automatically terminate. Borrower shall comply with
and observe Borrower's obligations under all Leases, including Borrower's
obligations pertaining to the maintenance and disposition of tenant security
deposits.

        (c)     Borrower acknowledges and agrees that the exercise by Lender,
either directly or by a receiver, of any of the rights conferred under this
Section 4 shall not be construed to make Lender a mortgagee-in-possession of the
Mortgaged Property so long as Lender has not itself entered into actual
possession of the Land and the Improvements. The acceptance by Lender of the
assignment of the Leases pursuant to Section 4(a) shall not at any time or in
any event obligate Lender to take any action under this Instrument or to expend
any money or to incur any expenses. Lender shall not be liable in any way for
any injury or damage to person or property sustained by any person or persons,
firm or corporation in or about the Mortgaged Property. Prior to Lender's actual
entry into and taking possession of the Mortgaged Property, Lender shall not (i)
be obligated to perform any of the terms, covenants and conditions contained in
any Lease (or otherwise have any obligation with respect to any Lease); (ii) be
obligated to appear in or defend any action or proceeding relating to the Lease
or the Mortgaged Property; or (iii) be responsible for the operation, control,
care, management or repair of the Mortgaged Property or any portion of the
Mortgaged Property. The execution of this Instrument by Borrower shall
constitute conclusive evidence that all responsibility for the operation,
control, care, management and repair of the Mortgaged Property is and shall be
that of Borrower, prior to such actual entry and taking of possession.

        (d)     Upon delivery of notice by Lender to Borrower of Lender's
exercise of Lender's rights under this Section 4 at any time after the
occurrence of an Event of Default, and without the necessity of Lender entering
upon and taking and maintaining control of the Mortgaged Property directly, by a
receiver, or by any other manner or proceeding permitted by the laws of the
Property Jurisdiction, Lender immediately shall have all rights, powers and
authority granted to Borrower under any Lease, including the right, power and
authority to modify the terms of any such Lease, or extend or terminate any such
Lease.

        (e)     Borrower shall, promptly upon Lender's request, deliver to
Lender an executed copy of each residential Lease then in effect. All Leases for
residential dwelling units shall be on forms approved by Lender, shall be for
initial terms of at least six months and not more than two years, and shall not
include options to purchase. If customary in the applicable market, residential
Leases with terms of less than six months may be permitted with Lender's prior
written consent.



                                       9

<PAGE>   23
        (f)     Borrower shall not lease any portion of the Mortgaged Property
for non-residential use except with the prior written consent of Lender and
Lender's prior written approval of the Lease agreement. Borrower shall not
modify the terms of, or extend or terminate, any Lease for non-residential use
(including any Lease in existence on the date of this Instrument) without the
prior written consent of Lender. Borrower shall, without request by Lender,
deliver an executed copy of each non-residential Lease to Lender promptly after
such Lease is signed. All non-residential Leases, including renewals or
extensions of existing Leases executed after the date hereof, shall specifically
provide that (1) such Leases are subordinate to the lien of this Instrument
(unless waived in writing by Lender); (2) the tenant shall attorn to Lender and
any purchaser at a foreclosure sale, such attornment to be self-executing and
effective upon acquisition of title to the Mortgaged Property by any purchaser
at a foreclosure sale or by Lender in any manner; (3) the tenant agrees to
execute such further evidences of attornment as Lender or any purchaser at a
foreclosure sale may from time to time request; (4) the Lease shall not be
terminated by foreclosure or any other transfer of the Mortgaged Property; (5)
after a foreclosure sale of the Mortgaged Property, Lender or any other
purchaser at such foreclosure sale may, at Lender's or such purchaser's option,
accept or terminate such Lease; and (6) the tenant shall, upon receipt after the
occurrence of an Event of Default of a written request from Lender, pay all
Rents payable under the Lease to Lender.

        (g)     Borrower shall not receive or accept Rent under any Lease
(whether residential or non-residential) for more than two months in advance.

        5.      PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS;
PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance
with the terms of the Note and the other Loan Documents and shall perform,
observe and comply with all other provisions of the Note and the other Loan
Documents. Borrower shall pay a prepayment premium in connection with certain
prepayments of the Indebtedness, including a payment made after Lender's
exercise of any right of acceleration of the Indebtedness, as provided in the
Note.

        6.      EXCULPATION. Borrower's personal liability for payment of the
Indebtedness and for performance of the other obligations to be performed by it
under this Instrument is limited in the manner, and to the extent, provided in
the Note.

        7.      DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES.

        (a)     Borrower shall deposit with Lender on the day monthly
installments of principal or interest, or both, are due under the Note (or on
another day designated in writing by Lender), until the Indebtedness is paid in
full, an additional amount sufficient to accumulate with Lender the entire sum
required to pay, when due (1) any water and sewer charges which, if not paid,
may result in a lien on all or any part of the Mortgaged Property, (2) the
premiums for fire and other hazard insurance, rent loss insurance and such other
insurance as Lender may require under Section 19, (3) Taxes, and (4) amounts for
other charges and expenses which Lender at any time reasonably deems necessary
to protect the Mortgaged Property, to prevent the imposition of liens on the
Mortgaged Property, or otherwise to protect Lender's interests, all as
reasonably estimated from time to time by Lender. The amounts deposited under
the preceding sentence are collectively referred to in this Instrument as the
"Imposition Deposits". The obligations of Borrower for which the Imposition



                                       10

<PAGE>   24
Deposits are required are collectively referred to in this Instrument as
"IMPOSITIONS". The amount of the Imposition Deposits shall be sufficient to
enable Lender to pay each Imposition before the last date upon which such
payment may be made without any penalty or interest charge being added. Lender
shall maintain records indicating how much of the monthly Imposition Deposits
and how much of the aggregate Imposition Deposits held by Lender are held for
the purpose of paying Taxes, insurance premiums and each other obligation of
Borrower for which Imposition Deposits are required. Any waiver by Lender of the
requirement that Borrower remit Imposition Deposits to Lender may be revoked by
Lender, in Lender's discretion, at any time upon notice to Borrower.

        (b)     Imposition Deposits shall be held in an institution (which may
be Lender, if Lender is such an institution) whose deposits or accounts are
insured or guaranteed by a federal agency. Lender shall not be obligated to open
additional accounts or deposit Imposition Deposits in additional institutions
when the amount of the Imposition Deposits exceeds the maximum amount of the
federal deposit insurance or guaranty. Lender shall apply the Imposition
Deposits to pay Impositions so long as no Event of Default has occurred and is
continuing. Unless applicable law requires, Lender shall not be required to pay
Borrower any interest, earnings or profits on the Imposition Deposits. Borrower
hereby pledges and grants to Lender a security interest in the Imposition
Deposits as additional security for all of Borrower's obligations under this
Instrument and the other Loan Documents. Any amounts deposited with Lender under
this Section 7 shall not be trust funds, nor shall they operate to reduce the
Indebtedness, unless applied by Lender for that purpose under Section 7(e).

        (c)     If Lender receives a bill or invoice for an Imposition, Lender
shall pay the Imposition from the Imposition Deposits held by Lender. Lender
shall have no obligation to pay any Imposition to the extent it exceeds
Imposition Deposits then held by Lender. Lender may pay an Imposition according
to any bill, statement or estimate from the appropriate public office or
insurance company without inquiring into the accuracy of the bill, statement or
estimate or into the validity of the Imposition.

        (d)     If at any time the amount of the Imposition Deposits held by
Lender for payment of a specific Imposition exceeds the amount reasonably deemed
necessary by Lender, the excess shall be credited against future installments of
Imposition Deposits. If at any time the amount of the Imposition Deposits held
by Lender for payment of a specific Imposition is less than the amount
reasonably estimated by Lender to be necessary, Borrower shall pay to Lender the
amount of the deficiency within 15 days after notice from Lender.

        (e)     If an Event of Default has occurred and is continuing, Lender
may apply any Imposition Deposits, in any amounts and in any order as Lender
determines, in Lender's discretion, to pay any Impositions or as a credit
against the Indebtedness. Upon payment in full of the Indebtedness, Lender shall
refund to Borrower any Imposition Deposits held by Lender.

        8.      COLLATERAL AGREEMENTS. Borrower shall deposit with Lender such
amounts as may be required by any Collateral Agreement and shall perform all
other obligations of Borrower under each Collateral Agreement.



                                       11

<PAGE>   25
        9.      APPLICATION OF PAYMENTS. If at any time Lender receives, from
Borrower or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, then Lender may apply that
payment to amounts then due and payable in any manner and in any order
determined by Lender, in Lender's discretion. Neither Lender's acceptance of an
amount which is less than all amounts then due and payable nor Lender's
application of such payment in the manner authorized shall constitute or be
deemed to constitute either a waiver of the unpaid amounts or an accord and
satisfaction. Notwithstanding the application of any such amount to the
Indebtedness, Borrower's obligations under this Instrument and the Note shall
remain unchanged.

        10.     COMPLIANCE WITH LAWS. Borrower shall comply with all laws,
ordinances, regulations and requirements of any Governmental Authority and all
recorded lawful covenants and agreements relating to or affecting the Mortgaged
Property, including all laws, ordinances, regulations, requirements and
covenants pertaining to health and safety, construction of improvements on the
Mortgaged Property, fair housing, zoning and land use, and Leases. Borrower also
shall comply with all applicable laws that pertain to the maintenance and
disposition of tenant security deposits. Borrower shall at all times maintain
records sufficient to demonstrate compliance with the provisions of this Section
10. Borrower shall take appropriate measures to prevent, and shall not engage in
or knowingly permit, any illegal activities at the Mortgaged Property that could
endanger tenants or visitors, result in damage to the Mortgaged Property, result
in forfeiture of the Mortgaged Property, or otherwise materially impair the lien
created by this Instrument or Lender's interest in the Mortgaged Property.
Borrower represents and warrants to Lender that no portion of the Mortgaged
Property has been or will be purchased with the proceeds of any illegal
activity.

        11.     USE OF PROPERTY. Unless required by applicable law, Borrower
shall not (a) except for any change in use approved by Lender, allow changes in
the use for which all or any part of the Mortgaged Property is being used at the
time this Instrument was executed, (b) convert any individual dwelling units or
common areas to commercial use, (c) initiate or acquiesce in a change in the
zoning classification of the Mortgaged Property, or (d) establish any
condominium or cooperative regime with respect to the Mortgaged Property.

        12.     PROTECTION OF LENDER'S SECURITY.

        (a)     If Borrower fails to perform any of its obligations under this
Instrument or any other Loan Document, or if any action or proceeding is
commenced which purports to affect the Mortgaged Property, Lender's security or
Lender's rights under this Instrument, including eminent domain, insolvency,
code enforcement, civil or criminal forfeiture, enforcement of Hazardous
Materials Laws, fraudulent conveyance or reorganizations or proceedings
involving a bankrupt or decedent, then Lender at Lender's option may make such
appearances, disburse such sums and take such actions as Lender reasonably deems
necessary to perform such obligations of Borrower and to protect Lender's
interest, including (1) payment of fees and out-of-pocket expenses of attorneys,
accountants, inspectors and consultants, (2) entry upon the Mortgaged Property
to make repairs or secure the Mortgaged Property, (3) procurement of the
insurance required by Section 19, and (4) payment of amounts which Borrower has
failed to pay under Sections 15 and 17.



                                       12

<PAGE>   26
        (b)     Any amounts disbursed by Lender under this Section 12, or under
any other provision of this Instrument that treats such disbursement as being
made under this Section 12, shall be added to, and become part of, the principal
component of the Indebtedness, shall be immediately due and payable and shall
bear interest from the date of disbursement until paid at the "Default Rate", as
defined in the Note.

        (c)     Nothing in this Section 12 shall require Lender to incur any
expense or take any action.

        13.     INSPECTION. Lender, its agents, representatives, and designees
may make or cause to be made entries upon and inspections of the Mortgaged
Property (including environmental inspections and tests) during normal business
hours, or at any other reasonable time.

        14.     BOOKS AND RECORDS; FINANCIAL REPORTING.

        (a)     Borrower shall keep and maintain at all times at the Mortgaged
Property or the management agent's offices, and upon Lender's request shall make
available at the Mortgaged Property, complete and accurate books of account and
records (including copies of supporting bills and invoices) adequate to reflect
correctly the operation of the Mortgaged Property, and copies of all written
contracts, Leases, and other instruments which affect the Mortgaged Property.
The books, records, contracts, Leases and other instruments shall be subject to
examination and inspection at any reasonable time by Lender.

        (b)     Borrower shall furnish to Lender all of the following:

                (1)     within 20 days after the end of each calendar month, a
                        statement of income and expenses for Borrower's
                        operation of the Mortgaged Property for the immediately
                        preceding month and calendar year to date and, within 45
                        days after the end of each calendar quarter and at any
                        other time upon Lender's request, a balance sheet
                        showing all assets and liabilities of Borrower relating
                        to the Mortgaged Property as of the end of the
                        immediately preceding quarter and year to date;

                (2)     within 20 days after the end of each calendar month, and
                        at any other time upon Lender's request, a rent schedule
                        for the Mortgaged Property showing the name of each
                        tenant, and for each tenant, the space occupied, the
                        lease expiration date, the rent payable for the current
                        month, the date through which rent has been paid, and
                        any related information requested by Lender;

                (3)     within 120 days after the end of each fiscal year of
                        Borrower, and at any other time upon Lender's request,
                        annual financial statements in form and content
                        satisfactory to Lender, and an accounting of all
                        security deposits held pursuant to all Leases, including
                        the name of the institution (if any) and the names and
                        identification numbers of the accounts (if any) in which
                        such security deposits are held and the name of the
                        person to contact at such



                                       13

<PAGE>   27
                        financial institution, along with any authority or
                        release necessary for Lender to access information
                        regarding such accounts;

                (4)     within 120 days after the end of each fiscal year of
                        Borrower, and at any other time upon Lender's request, a
                        statement that identifies all owners of any interest in
                        Borrower and the interest held by each, if Borrower is a
                        corporation, all officers and directors of Borrower, and
                        if Borrower is a limited liability company, all managers
                        who are not members;

                (5)     upon Lender's request, a monthly property management
                        report for the Mortgaged Property, showing the number of
                        inquiries made and rental applications received from
                        tenants or prospective tenants and deposits received
                        from tenants and any other information requested by
                        Lender; and

                (6)     within 45 days after the end of each calendar quarter, a
                        consolidating balance sheet, a statement of income and
                        expenses for Borrower and a statement of changes in
                        financial position of Borrower for the immediately
                        preceding quarter; and

        (c)     Each of the statements, schedules and reports required by
Section 14(b) shall be certified to be complete and accurate by an individual
having authority to bind Borrower, and shall be in such form and contain such
detail as Lender may reasonably require. Lender also may require that any annual
statements, schedules or reports be audited at Borrower's expense by independent
certified public accountants acceptable to Lender.

        (d)     If Borrower fails to provide in a timely manner the statements,
schedules and reports required by Section 14(b), Lender shall have the right to
have Borrower's books and records audited, at Borrower's expense, by independent
certified public accountants selected by Lender in order to obtain such
statements, schedules and reports, and all related costs and expenses of Lender
shall become immediately due and payable and shall become an additional part of
the Indebtedness as provided in Section 12.

        (e)     If an Event of Default has occurred and is continuing, Borrower
shall deliver to Lender upon written demand copies of all books and records
relating to the Mortgaged Property or its operation.

        (f)     Borrower authorizes Lender to obtain a credit report on Borrower
at any time.

        (g)     If an Event of Default has occurred and Lender has not
previously required Borrower to furnish a quarterly statement of income and
expense for the Mortgaged Property, Lender may require Borrower to furnish such
a statement within 45 days after the end of each fiscal quarter of Borrower
following such Event of Default.



                                       14

<PAGE>   28
        15.    TAXES; OPERATING EXPENSES.

        (a)     Subject to the provisions of Section 15(c) and Section 15(d),
Borrower shall pay, or cause to be paid, all Taxes when due and before the
addition of any interest, fine, penalty or cost for nonpayment.

        (b)     Subject to the provisions of Section 15(c) and Section 15(d),
Borrower shall pay the expenses of operating, managing, maintaining and
repairing the Mortgaged Property (including insurance premiums, utilities,
repairs and replacements) before the last date upon which each such payment may
be made without any penalty or interest charge being added.

        (c)     As long as no Event of Default exists and Borrower has timely
delivered to Lender any bills or premium notices that it has received, Borrower
shall not be obligated to pay Taxes, insurance premiums or any other individual
Imposition to the extent that sufficient Imposition Deposits are held by Lender
for the purpose of paying that specific Imposition. If an Event of Default
exists, Lender may exercise any rights Lender may have with respect to
Imposition Deposits without regard to whether Impositions are then due and
payable. Lender shall have no liability to Borrower for failing to pay any
Impositions to the extent that any Event of Default has occurred and is
continuing, insufficient Imposition Deposits are held by Lender at the time an
Imposition becomes due and payable or Borrower has failed to provide Lender with
bills and premium notices as provided above.

        (d)     Borrower, at its own expense, may contest by appropriate legal
proceedings, conducted diligently and in good faith, the amount or validity of
any Imposition other than insurance premiums, if (1) Borrower notifies Lender of
the commencement or expected commencement of such proceedings, (2) the Mortgaged
Property is not in danger of being sold or forfeited, (3) Borrower deposits with
Lender reserves sufficient to pay the contested Imposition, if requested by
Lender, and (4) Borrower furnishes whatever additional security is required in
the proceedings or is reasonably requested by Lender, which may include the
delivery to Lender of the reserves established by Borrower to pay the contested
Imposition.

        (e)     Borrower shall promptly deliver to Lender a copy of all notices
of, and invoices for, Impositions, and if Borrower pays any Imposition directly,
Borrower shall promptly furnish to Lender receipts evidencing such payments.

        16.     LIENS; ENCUMBRANCES. Borrower acknowledges that, to the extent
provided in Section 21, the grant, creation or existence of any mortgage, deed
of trust, deed to secure debt, security interest or other lien or encumbrance (a
"Lien") on the Mortgaged Property (other than the lien of this Instrument) or on
any ownership interests in Borrower, whether voluntary, involuntary or by
operation of law, and whether or not such Lien has priority over the lien of
this Instrument, is a "Transfer" which constitutes an Event of Default.



                                       15

<PAGE>   29
        17.    PRESERVATION, MANAGEMENT AND MAINTENANCE OF
MORTGAGED PROPERTY.

        (a)     Borrower (1) shall not commit waste or permit impairment or
deterioration of the Mortgaged Property, (2) shall not abandon the Mortgaged
Property, (3) shall restore or repair promptly, in a good and workmanlike
manner, any damaged part of the Mortgaged Property to the equivalent of its
original condition, or such other condition as Lender may approve in writing,
whether or not insurance proceeds or condemnation awards are available to cover
any costs of such restoration or repair, (4) shall keep the Mortgaged Property
in good repair, including the replacement of Personalty and Fixtures with items
of equal or better function and quality, (5) shall provide for professional
management of the Mortgaged Property by a residential rental property manager
satisfactory to Lender under a contract approved by Lender in writing, and (6)
shall give notice to Lender of and, unless otherwise directed in writing by
Lender, shall appear in and defend any action or proceeding purporting to affect
the Mortgaged Property, Lender's security or Lender's rights under this
Instrument. Borrower shall not (and shall not permit any tenant or other person
to) remove, demolish or alter the Mortgaged Property or any part of the
Mortgaged Property except in connection with the replacement of tangible
Personalty.

        (b)     If, in connection with the making of the loan evidenced by the
Note or at any later date, Lender waives in writing the requirement of Section
17(a)(5) above that Borrower enter into a written contract for management of the
Mortgaged Property and if, after the date of this Instrument, Borrower intends
to change the management of the Mortgaged Property, Lender shall have the right
to approve such new property manager and the written contract for the management
of the Mortgaged Property and require that Borrower and such new property
manager enter into an Assignment of Management Agreement on a form approved by
Lender. If required by Lender (whether before or after an Event of Default),
Borrower will cause any Affiliate of Borrower to whom fees are payable for the
management of the Mortgaged Property to enter into an agreement with Lender, in
a form approved by Lender, providing for subordination of those fees and such
other provisions as Lender may require. "Affiliate of Borrower" means any
corporation, partnership, joint venture, limited liability company, limited
liability partnership, trust or individual controlled by, under common control
with, or which controls Borrower (the term "control" for these purposes shall
mean the ability, whether by the ownership of shares or other equity interests,
by contract or otherwise, to elect a majority of the directors of a corporation,
to make management decisions on behalf of, or independently to select the
managing partner of, a partnership, or otherwise to have the power independently
to remove and then select a majority of those individuals exercising managerial
authority over an entity, and control shall be conclusively presumed in the case
of the ownership of 50% or more of the equity interests).

        18.     ENVIRONMENTAL HAZARDS.

        (a)     Except for matters covered by a written program of operations
and maintenance approved in writing by Lender (an "O&M Program") or matters
described in Section 18(b), Borrower shall not cause or permit any of the
following:

                (1)     the presence, use, generation, release, treatment,
                        processing, storage (including storage in above ground
                        and underground storage tanks), handling,



                                       16

<PAGE>   30
                        or disposal of any Hazardous Materials on or under the
                        Mortgaged Property or any other property of Borrower
                        that is adjacent to the Mortgaged Property;

                (2)     the transportation of any Hazardous Materials to, from,
                        or across the Mortgaged Property;

                (3)     any occurrence or condition on the Mortgaged Property or
                        any other property of Borrower that is adjacent to the
                        Mortgaged Property, which occurrence or condition is or
                        may be in violation of Hazardous Materials Laws; or

                (4)     any violation of or noncompliance with the terms of any
                        Environmental Permit with respect to the Mortgaged
                        Property or any property of Borrower that is adjacent to
                        the Mortgaged Property.

The matters described in clauses (1) through (4) above are referred to
collectively in this Section 18 as "Prohibited Activities or Conditions".

        (b)     Prohibited Activities and Conditions shall not include the safe
and lawful use and storage of quantities of (1) pre-packaged supplies, cleaning
materials and petroleum products customarily used in the operation, maintenance,
repair or replacement of comparable multifamily properties, (2) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by tenants and occupants of residential
dwelling units in the Mortgaged Property; and (3) petroleum products used in the
operation and maintenance of motor vehicles from time to time located on the
Mortgaged Property's parking areas, so long as all of the foregoing are used,
stored, handled, transported and disposed of in compliance with Hazardous
Materials Laws.

        (c)     Borrower shall take all commercially reasonable actions
(including the inclusion of appropriate provisions in any Leases executed after
the date of this Instrument) to prevent its employees, agents, and contractors,
and all tenants and other occupants from causing or permitting any Prohibited
Activities or Conditions. Borrower shall not lease or allow the sublease or use
of all or any portion of the Mortgaged Property to any tenant or subtenant for
nonresidential use by any user that, in the ordinary course of its business,
would cause or permit any Prohibited Activity or Condition.

        (d)     If an O&M Program has been established with respect to Hazardous
Materials, Borrower shall comply in a timely manner with, and cause all
employees, agents, and contractors of Borrower and any other persons present on
the Mortgaged Property to comply with the O&M Program. All costs of performance
of Borrower's obligations under any O&M Program shall be paid by Borrower, and
Lender's out-of-pocket costs incurred in connection with the monitoring and
review of the O&M Program and Borrower's performance shall be paid by Borrower
upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower
fails to pay promptly shall become an additional part of the Indebtedness as
provided in Section 12.



                                       17

<PAGE>   31

        (e)     Borrower represents and warrants to Lender that, except as
previously disclosed by, or on behalf of, Borrower to Lender in writing:

                (1)     Borrower has not at any time engaged in, caused or
                        permitted any Prohibited Activities or Conditions;

                (2)     to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, no Prohibited Activities or Conditions
                        exist or have existed;

                (3)     except to the extent previously disclosed by Borrower to
                        Lender in writing, the Mortgaged Property does not now
                        contain any underground storage tanks, and, to the best
                        of Borrower's knowledge after reasonable and diligent
                        inquiry, the Mortgaged Property has not contained any
                        underground storage tanks in the past. If there is an
                        underground storage tank located on the Property which
                        has been previously disclosed by Borrower to Lender in
                        writing, that tank complies with all requirements of
                        Hazardous Materials Laws;

                (4)     to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, Borrower has complied with all
                        Hazardous Materials Laws, including all requirements for
                        notification regarding releases of Hazardous Materials.
                        Without limiting the generality of the foregoing,
                        Borrower has obtained all Environmental Permits required
                        for the operation of the Mortgaged Property in
                        accordance with Hazardous Materials Laws now in effect
                        and all such Environmental Permits are in full force and
                        effect;

                (5)     to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, no event has occurred with respect to
                        the Mortgaged Property that constitutes, or with the
                        passing of time or the giving of notice would
                        constitute, noncompliance with the terms of any
                        Environmental Permit;

                (6)     there are no actions, suits, claims or proceedings
                        pending or, to the best of Borrower's knowledge after
                        reasonable and diligent inquiry, threatened that involve
                        the Mortgaged Property and allege, arise out of, or
                        relate to any Prohibited Activity or Condition; and

                (7)     Borrower has not received any complaint, order, notice
                        of violation or other communication from any
                        Governmental Authority with regard to air emissions,
                        water discharges, noise emissions or Hazardous
                        Materials, or any other environmental, health or safety
                        matters affecting the Mortgaged Property or any other
                        property of Borrower that is adjacent to the Mortgaged
                        Property.

Subject to subsection (f) below, the representations and warranties in this
Section 18 shall be continuing representations and warranties that shall be
deemed to be made by Borrower throughout the term of the loan evidenced by the
Note, until the Indebtedness has been paid in full.


                                       18

<PAGE>   32

        (f)     Borrower shall promptly notify Lender in writing upon the
occurrence of any of the following events:

                (1)     Borrower's discovery of any Prohibited Activity or
                        Condition;

                (2)     Borrower's receipt of or knowledge of any complaint,
                        order, notice of violation or other communication from
                        any Governmental Authority or other person with regard
                        to present or future alleged Prohibited Activities or
                        Conditions or any other environmental, health or safety
                        matters affecting the Mortgaged Property or any other
                        property of Borrower that is adjacent to the Mortgaged
                        Property; and

                (3)     any representation or warranty in this Section 18
                        becomes untrue after the date of this Agreement.

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

        (g)     Borrower shall pay promptly the costs of any environmental
inspections, tests or audits ("Environmental Inspections") required by Lender in
connection with any foreclosure or deed in lieu of foreclosure, or as a
condition of Lender's consent to any Transfer under Section 21, or required by
Lender following a reasonable determination by Lender that Prohibited Activities
or Conditions may exist. Any such costs incurred by Lender (including the fees
and out-of-pocket costs of attorneys and technical consultants whether incurred
in connection with any judicial or administrative process or otherwise) which
Borrower fails to pay promptly shall become an additional part of the
Indebtedness as provided in Section 12. The results of all Environmental
Inspections made by Lender shall at all times remain the property of Lender and
Lender shall have no obligation to disclose or otherwise make available to
Borrower or any other party such results or any other information obtained by
Lender in connection with its Environmental Inspections. Lender hereby reserves
the right, and Borrower hereby expressly authorizes Lender, to make available to
any party, including any prospective bidder at a foreclosure sale of the
Mortgaged Property, the results of any Environmental Inspections made by Lender
with respect to the Mortgaged Property. Borrower consents to Lender notifying
any party (either as part of a notice of sale or otherwise) of the results of
any of Lender's Environmental Inspections. Borrower acknowledges that Lender
cannot control or otherwise assure the truthfulness or accuracy of the results
of any of its Environmental Inspections and that the release of such results to
prospective bidders at a foreclosure sale of the Mortgaged Property may have a
material and adverse effect upon the amount which a party may bid at such sale.
Borrower agrees that Lender shall have no liability whatsoever as a result of
delivering the results of any of its Environmental Inspections to any third
party, and Borrower hereby releases and forever discharges Lender from any and
all claims, damages, or causes of action, arising out of, connected with or
incidental to the results of, the delivery of any of Lender's Environmental
Inspections.

        (h)     If any investigation, site monitoring, containment, clean-up,
restoration or other remedial work ("Remedial Work") is necessary to comply with
any Hazardous Materials Law or order of any Governmental Authority that has or
acquires jurisdiction over the Mortgaged Property


                                       19

<PAGE>   33

or the use, operation or improvement of the Mortgaged Property under any
Hazardous Materials Law, Borrower shall, by the earlier of (1) the applicable
deadline required by Hazardous Materials Law or (2) 30 days after notice from
Lender demanding such action, begin performing the Remedial Work, and thereafter
diligently prosecute it to completion, and shall in any event complete the work
by the time required by applicable Hazardous Materials Law. If Borrower fails to
begin on a timely basis or diligently prosecute any required Remedial Work,
Lender may, at its option, cause the Remedial Work to be completed, in which
case Borrower shall reimburse Lender on demand for the cost of doing so. Any
reimbursement due from Borrower to Lender shall become part of the Indebtedness
as provided in Section 12.

        (i)     Borrower shall cooperate with any inquiry by any Governmental
Authority and shall comply with any governmental or judicial order which arises
from any alleged Prohibited Activity or Condition.

        (j)     Borrower shall indemnify, hold harmless and defend (i) Lender,
(ii) any prior owner or holder of the Note, (iii) the Loan Servicer, (iv) any
prior Loan Servicer, (v) the officers, directors, shareholders, partners,
employees and trustees of any of the foregoing, and (vi) the heirs, legal
representatives, successors and assigns of each of the foregoing (collectively,
the "Indemnitees") from and against all proceedings, claims, damages, penalties
and costs (whether initiated or sought by Governmental Authorities or private
parties), including fees and out-of-pocket expenses of attorneys and expert
witnesses, investigatory fees, and remediation costs, whether incurred in
connection with any judicial or administrative process or otherwise, arising
directly or indirectly from any of the following:

                (1)     any breach of any representation or warranty of Borrower
                        in this Section 18;

                (2)     any failure by Borrower to perform any of its
                        obligations under this Section 18;

                (3)     the existence or alleged existence of any Prohibited
                        Activity or Condition;

                (4)     the presence or alleged presence of Hazardous Materials
                        on or under the Mortgaged Property or any property of
                        Borrower that is adjacent to the Mortgaged Property; and

                (5)     the actual or alleged violation of any Hazardous
                        Materials Law.

        (k)     Counsel selected by Borrower to defend Indemnitees shall be
subject to the approval of those Indemnitees. However, any Indemnitee may elect
to defend any claim or legal or administrative proceeding at the Borrower's
expense.

        (l)     Borrower shall not, without the prior written consent of those
Indemnitees who are named as parties to a claim or legal or administrative
proceeding (a "Claim"), settle or compromise the Claim if the settlement (1)
results in the entry of any judgment that does not include as an unconditional
term the delivery by the claimant or plaintiff to Lender of a written release of
those



                                       20
<PAGE>   34

Indemnitees, satisfactory in form and substance to Lender; or (2) may materially
and adversely affect Lender, as determined by Lender in its discretion.

        (m)     Lender agrees that the indemnity under this Section 18 shall be
limited to the assets of Borrower and Lender shall not seek to recover any
deficiency from any member of Borrower.

        (n)     Borrower shall, at its own cost and expense, do all of the
following:

                (1)     pay or satisfy any judgment or decree that may be
                        entered against any Indemnitee or Indemnitees in any
                        legal or administrative proceeding incident to any
                        matters against which Indemnitees are entitled to be
                        indemnified under this Section 18;

                (2)     reimburse Indemnitees for any expenses paid or incurred
                        in connection with any matters against which Indemnitees
                        are entitled to be indemnified under this Section 18;
                        and

                (3)     reimburse Indemnitees for any and all expenses,
                        including fees and out-of-pocket expenses of attorneys
                        and expert witnesses, paid or incurred in connection
                        with the enforcement by Indemnitees of their rights
                        under this Section 18, or in monitoring and
                        participating in any legal or administrative proceeding.

        (o)     In any circumstances in which the indemnity under this Section
18 applies, Lender may employ its own legal counsel and consultants to
prosecute, defend or negotiate any claim or legal or administrative proceeding
and Lender, with the prior written consent of Borrower (which shall not be
unreasonably withheld, delayed or conditioned), may settle or compromise any
action or legal or administrative proceeding. Borrower shall reimburse Lender
upon demand for all costs and expenses incurred by Lender, including all costs
of settlements entered into in good faith, and the fees and out-of-pocket
expenses of such attorneys and consultants.

        (p)     The provisions of this Section 18 shall be in addition to any
and all other obligations and liabilities that Borrower may have under
applicable law or under other Loan Documents, and each Indemnitee shall be
entitled to indemnification under this Section 18 without regard to whether
Lender or that Indemnitee has exercised any rights against the Mortgaged
Property or any other security, pursued any rights against any guarantor, or
pursued any other rights available under the Loan Documents or applicable law.
The obligation of Borrower to indemnify the Indemnitees under this Section 18
shall survive any repayment or discharge of the Indebtedness, any foreclosure
proceeding, any foreclosure sale, any delivery of any deed in lieu of
foreclosure, and any release of record of the lien of this Instrument.

        19.     PROPERTY AND LIABILITY INSURANCE.

        (a)     Borrower shall keep the Improvements insured at all times
against such hazards as Lender may from time to time require, which insurance
shall include but not be limited to coverage against loss by fire and allied
perils, general boiler and machinery coverage, and business income


                                       21

<PAGE>   35

coverage. Lender's insurance requirements may change from time to time
throughout the term of the Indebtedness. If Lender so requires, such insurance
shall also include sinkhole insurance, mine subsidence insurance, earthquake
insurance, and, if the Mortgaged Property does not conform to applicable zoning
or land use laws, building ordinance or law coverage. If any of the Improvements
is located in an area identified by the Fannie Mae (or any successor to that
agency) as an area having special flood hazards, and if flood insurance is
available in that area, Borrower shall insure such Improvements against loss by
flood.

        (b)     All premiums on insurance policies required under Section 19(a)
shall be paid in the manner provided in Section 7, unless Lender has designated
in writing another method of payment. All such policies shall also be in a form
approved by Lender. All policies of property damage insurance shall include a
non-contributing, non-reporting mortgage clause in favor of, and in a form
approved by, Lender. Lender shall have the right to hold the original policies
or duplicate original policies of all insurance required by Section 19(a).
Borrower shall promptly deliver to Lender a copy of all renewal and other
notices received by Borrower with respect to the policies and all receipts for
paid premiums. At least 30 days prior to the expiration date of a policy,
Borrower shall deliver to Lender the original (or a duplicate original) of a
renewal policy in form satisfactory to Lender.

        (c)     Borrower shall maintain at all times commercial general
liability insurance, workers' compensation insurance and such other liability,
errors and omissions and fidelity insurance coverages as Lender may from time to
time require.

        (d)     All insurance policies and renewals of insurance policies
required by this Section 19 shall be in such amounts and for such periods as
Lender may from time to time require, and shall be issued by insurance companies
satisfactory to Lender.

        (e)     Borrower shall comply with all insurance requirements and shall
not permit any condition to exist on the Mortgaged Property that would
invalidate any part of any insurance coverage that this Instrument requires
Borrower to maintain.

        (f)     In the event of loss, Borrower shall give immediate written
notice to the insurance carrier and to Lender. Borrower hereby authorizes and
appoints Lender as attorney-in-fact for Borrower to make proof of loss, to
adjust and compromise any claims under policies of property damage insurance, to
appear in and prosecute any action arising from such property damage insurance
policies, to collect and receive the proceeds of property damage insurance, and
to deduct from such proceeds Lender's expenses incurred in the collection of
such proceeds. This power of attorney is coupled with an interest and therefore
is irrevocable. However, nothing contained in this Section 19 shall require
Lender to incur any expense or take any action. Lender may, at Lender's option,
(1) hold the balance of such proceeds to be used to reimburse Borrower for the
cost of restoring and repairing the Mortgaged Property to the equivalent of its
original condition or to a condition approved by Lender (the "Restoration"), or
(2) apply the balance of such proceeds to the payment of the Indebtedness,
whether or not then due. To the extent Lender determines to apply insurance
proceeds to Restoration, Lender shall do so in accordance with Lender's
then-current policies relating to the restoration of casualty damage on similar
multifamily properties.


                                       22

<PAGE>   36

        (g)     Lender shall not exercise its option to apply insurance proceeds
to the payment of the Indebtedness if all of the following conditions are met:
(1) no Event of Default (or any event which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default) has occurred and
is continuing or Borrower otherwise deposits sufficient funds with Lender to
complete Restoration; (2) Lender determines, in its discretion, that there will
be sufficient funds to complete the Restoration; (3) Lender determines, in its
discretion, that the rental income from the Mortgaged Property after completion
of the Restoration will be sufficient to meet all operating costs and other
expenses, Imposition Deposits, deposits to reserves and loan repayment
obligations relating to the Mortgaged Property; (4) Lender determines, in its
discretion, that the Restoration will be completed before the earlier of (A) one
year before the maturity date of the Note or (B) one year after the date of the
loss or casualty; and (5) upon Lender's request, Borrower provides Lender
evidence of the availability during and after the Restoration of the insurance
required to be maintained by Borrower pursuant to this Section 19.

        (h)     If the Mortgaged Property is sold at a foreclosure sale or
Lender acquires title to the Mortgaged Property, Lender shall automatically
succeed to all rights of Borrower in and to any insurance policies and unearned
insurance premiums and in and to the proceeds resulting from any damage to the
Mortgaged Property prior to such sale or acquisition.

        20.     CONDEMNATION.

        (a)     Borrower shall promptly notify Lender of any action or
proceeding relating to any condemnation or other taking, or conveyance in lieu
thereof, of all or any part of the Mortgaged Property, whether direct or
indirect (a "Condemnation"). Borrower shall appear in and prosecute or defend
any action or proceeding relating to any Condemnation unless otherwise directed
by Lender in writing. Borrower authorizes and appoints Lender as
attorney-in-fact for Borrower to commence, appear in and prosecute, in Lender's
or Borrower's name, any action or proceeding relating to any Condemnation and to
settle or compromise any claim in connection with any Condemnation. This power
of attorney is coupled with an interest and therefore is irrevocable. However,
nothing contained in this Section 20 shall require Lender to incur any expense
or take any action. Borrower hereby transfers and assigns to Lender all right,
title and interest of Borrower in and to any award or payment with respect to
(i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any
damage to the Mortgaged Property caused by governmental action that does not
result in a Condemnation.

        (b)     Lender may apply such awards or proceeds, after the deduction of
Lender's expenses incurred in the collection of such amounts, at Lender's
option, to the restoration or repair of the Mortgaged Property or to the payment
of the Indebtedness, with the balance, if any, to Borrower. Unless Lender
otherwise agrees in writing, any application of any awards or proceeds to the
Indebtedness shall not extend or postpone the due date of any monthly
installments referred to in the Note, Section 7 of this Instrument or any
Collateral Agreement, or change the amount of such installments. Borrower agrees
to execute such further evidence of assignment of any awards or proceeds as
Lender may require.


                                       23

<PAGE>   37

        21.     TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER.

        (a)     The occurrence of any of the following events shall constitute
an Event of Default under this Instrument:

                (1)     a Transfer of all or any part of the Mortgaged Property
                        or any interest in the Mortgaged Property;

                (2)     a Transfer of a Controlling Interest in Borrower;

                (3)     a Transfer of a Controlling Interest in any entity which
                        owns, directly or indirectly through one or more
                        intermediate entities, a Controlling Interest in
                        Borrower;

                (4)     a Transfer of all or any part of Key Principal's
                        ownership interests (other than a Transfer of limited
                        partnership interests occurring at any time following
                        twenty-four (24) months from the date hereof) in
                        Borrower, or in any other entity which owns, directly or
                        indirectly through one or more intermediate entities, an
                        ownership interest in Borrower;

                (5)     a Transfer of a Controlling Interest in Key Principal,
                        if Key Principal becomes an entity other than a
                        Publicly-Held corporation;

                (6)     if Borrower or Key Principal is a trust, the termination
                        or revocation of such trust; and

                (7)     a conversion of Borrower from one type of legal entity
                        into another type of legal entity, whether or not there
                        is a Transfer.

Lender shall not be required to demonstrate any actual impairment of its
security or any increased risk of default in order to exercise any of its
remedies with respect to an Event of Default under this Section 21.

        (b)     The occurrence of any of the following events shall not
constitute an Event of Default under this Instrument, notwithstanding any
provision of Section 21(a) to the contrary:

                (1)     a Transfer to which Lender has consented;

                (2)     a Transfer that occurs by devise, descent, or by
                        operation of law upon the death of a natural person;

                (3)     the grant of a leasehold interest in an individual
                        dwelling unit for a term of two years or less not
                        containing an option to purchase;



                                       24

<PAGE>   38

                (4)     a Transfer of obsolete or worn out Personalty or
                        Fixtures that are contemporaneously replaced by items of
                        equal or better function and quality, which are free of
                        liens, encumbrances and security interests other than
                        those created by the Loan Documents or consented to by
                        Lender;

                (5)     the grant of an easement, if before the grant Lender
                        determines that the easement will not materially affect
                        the operation or value of the Mortgaged Property or
                        Lender's interest in the Mortgaged Property, and
                        Borrower pays to Lender, upon demand, all costs and
                        expenses incurred by Lender in connection with reviewing
                        Borrower's request; and

                (6)     the creation of a tax lien or a mechanic's,
                        materialman's or judgment lien against the Mortgaged
                        Property which is bonded off, released of record or
                        otherwise remedied to Lender's satisfaction within 30
                        days of the date of creation.

        (c)     Lender shall consent, without any adjustment to the rate at
which the Indebtedness secured by this Instrument bears interest or to any other
economic terms of the Indebtedness, to a Transfer that would otherwise violate
this Section 21 if, prior to the Transfer, Borrower has satisfied each of the
following requirements:

                (1)     the submission to Lender of all information required by
                        Lender to make the determination required by this
                        Section 21(c);

                (2)     the absence of any Event of Default;

                (3)     the transferee meets all of the eligibility, credit,
                        management and other standards (including any standards
                        with respect to previous relationships between Lender
                        and the transferee and the organization of the
                        transferee) customarily applied by Lender at the time of
                        the proposed Transfer to the approval of borrowers in
                        connection with the origination or purchase of similar
                        mortgages, deeds of trust or deeds to secure debt on
                        multifamily properties;

                (4)     the Mortgaged Property, at the time of the proposed
                        Transfer, meets all standards as to its physical
                        condition that are customarily applied by Lender at the
                        time of the proposed Transfer to the approval of
                        properties in connection with the origination or
                        purchase of similar mortgages on multifamily properties;

                (5)     in the case of a Transfer of all or any part of the
                        Mortgaged Property, or direct or indirect ownership
                        interests in Borrower or Key Principal (if an entity),
                        if transferor or any other person has obligations under
                        any Loan Document, the execution by the transferee or
                        one or more individuals or entities acceptable to Lender
                        of an assumption agreement (including, if applicable, an
                        Acknowledgment and Agreement of Key Principal to
                        Personal



                                       25

<PAGE>   39

                        Liability for Exceptions to Non-Recourse Liability) that
                        is acceptable to Lender and that, among other things,
                        requires the transferee to perform all obligations of
                        transferor or such person set forth in such Loan
                        Document, and may require that the transferee comply
                        with any provisions of this Instrument or any other Loan
                        Document which previously may have been waived by
                        Lender;

                (6)     if a guaranty has been executed and delivered in
                        connection with the Note, this Instrument or any of the
                        other Loan Documents, the Borrower causes one or more
                        individuals or entities acceptable to Lender to execute
                        and deliver to Lender a guaranty in a form acceptable to
                        Lender; and

                (7)     Lender's receipt of all of the following:

                        (A)     a non-refundable review fee in the amount of
                                $3,000 and a transfer fee equal to 1 percent of
                                the outstanding Indebtedness immediately prior
                                to the Transfer.

                        (B)     In addition, Borrower shall be required to
                                reimburse Lender for all of Lender's
                                out-of-pocket costs (including reasonable
                                attorneys' fees) incurred in reviewing the
                                Transfer request, to the extent such expenses
                                exceed $3,000.

        (d)     For purposes of this Section, the following terms shall have the
meanings set forth below:

                (1)     "INITIAL OWNERS" means, with respect to Borrower or any
                        other entity, the persons or entities who on the date of
                        the Note own the aggregate 100% of the ownership
                        interests in Borrower or that entity.

                (2)     A Transfer of a "CONTROLLING INTEREST" shall mean, with
                        respect to any entity, the following:

                        (i)     if such entity is a general partnership or a
                                joint venture, a Transfer of any general
                                partnership interest or joint venture interest
                                which would cause the Initial Owners to own less
                                than 51% of all general partnership or joint
                                venture interests in such entity;

                        (ii)    if such entity is a limited partnership, a
                                Transfer of any general partnership interest;

                        (iii)   if such entity is a limited liability company or
                                a limited liability partnership, a Transfer of
                                any membership or other ownership interest which
                                would cause the Initial Owners to own less than
                                51% of all membership or other ownership
                                interests in such entity;


                                       26

<PAGE>   40

                        (iv)    if such entity is a corporation (other than a
                                Publicly-Held Corporation) with only one class
                                of voting stock, a Transfer of any voting stock
                                which would cause the Initial Owners to own less
                                than 51% of voting stock in such corporation;

                        (v)     if such entity is a corporation (other than a
                                Publicly-Held Corporation) with more than one
                                class of voting stock, a Transfer of any voting
                                stock which would cause the Initial Owners to
                                own less than a sufficient number of shares of
                                voting stock having the power to elect the
                                majority of directors of such corporation; and

                        (vi)    if such entity is a trust, the removal,
                                appointment or substitution of a trustee of such
                                trust other than (A) in the case of a land
                                trust, or (B) if the trustee of such trust after
                                such removal, appointment or substitution is a
                                trustee identified in the trust agreement
                                approved by Lender.

                (3)     "PUBLICLY-HELD CORPORATION" shall mean a corporation the
                        outstanding voting stock of which is registered under
                        Section 12(b) or 12(g) of the Securities and Exchange
                        Act of 1934, as amended.

        22.     EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an Event of Default under this Instrument:

        (a)     any failure by Borrower to pay or deposit when due any amount
required by the Note, this Instrument or any other Loan Document;

        (b)     any failure by Borrower to maintain the insurance coverage
required by Section 19;

        (c)     any failure by Borrower to comply with the provisions of Section
33;

        (d)     fraud or material misrepresentation or material omission by
Borrower, or any of its officers, directors, trustees, general partners or
managers, Key Principal, or any guarantor in connection with (A) the application
for or creation of the Indebtedness, (B) any financial statement, rent roll, or
other report or information provided to Lender during the term of the
Indebtedness, or (C) any request for Lender's consent to any proposed action,
including a request for disbursement of funds under any Collateral Agreement;

        (e)     any Event of Default under Section 21;

        (f)     the commencement of a forfeiture action or proceeding, whether
civil or criminal, which, in Lender's reasonable judgment, could result in a
forfeiture of the Mortgaged Property or otherwise materially impair the lien
created by this Instrument or Lender's interest in the Mortgaged Property;



                                       27

<PAGE>   41

        (g)     any failure by Borrower to perform any of its obligations under
this Instrument (other than those specified in Sections 22(a) through (f)), as
and when required, which continues for a period of 30 days after notice of such
failure by Lender to Borrower, but no such notice or grace period shall apply in
the case of any such failure which could, in Lender's judgment, absent immediate
exercise by Lender of a right or remedy under this Instrument, result in harm to
Lender, impairment of the Note or this Instrument or any other security given
under any other Loan Document;

        (h)     any failure by Borrower to perform any of its obligations as and
when required under any Loan Document other than this Instrument which continues
for a period of 30 days or such shorter time period if provided under such Loan
Document, after notice of such failure by Lender to Borrower, but no such notice
or grace period shall apply in the case of any such failure which could, in
Lender's judgment, absent immediate exercise by Lender of a right or remedy
under the applicable Loan Document, result in harm to Lender, impairment of the
Note, such Loan Document or any other security given under any other Loan
Document; and

        (i)     a default under any mortgage, instruments, agreement or document
by which Borrower or any of its properties is bound: (i) which involves any Loan
Document, (ii) which involves the Mortgage Property and is not adequately
covered by insurance, (iii) which might materially and adversely affect the
ability of Borrower to perform its obligations under any of the Loan Documents
or any other material instrument, agreement or document to which it is a party,
or (iv) which might adversely affect the first priority of the liens and
security interests created by this Agreement or any of the Loan Documents.

        (j)     the occurrence of any event (including, without limitation, a
change in the financial condition, business, or operations of Borrower or Key
Principal for any reason whatsoever) that materially and adversely affects the
ability of Borrower to perform any of its obligations under the Loan Documents.

        23.     REMEDIES CUMULATIVE. Each right and remedy provided in this
Instrument is distinct from all other rights or remedies under this Instrument
or any other Loan Document or afforded by applicable law, and each shall be
cumulative and may be exercised concurrently, independently, or successively, in
any order.

        24.     FORBEARANCE.

        (a)     Lender may (but shall not be obligated to) agree with Borrower,
from time to time, and without giving notice to, or obtaining the consent of, or
having any effect upon the obligations of, any guarantor or other third party
obligor, to take any of the following actions: extend the time for payment of
all or any part of the Indebtedness; reduce the payments due under this
Instrument, the Note, or any other Loan Document; release anyone liable for the
payment of any amounts under this Instrument, the Note, or any other Loan
Document; accept a renewal of the Note; modify the terms and time of payment of
the Indebtedness; join in any extension or subordination agreement; release any
Mortgaged Property; take or release other or additional security; modify the
rate of interest or period of amortization of the Note or change the amount of
the monthly installments


                                       28

<PAGE>   42

payable under the Note; and otherwise modify this Instrument, the Note, or any
other Loan Document.

        (b)     Any forbearance by Lender in exercising any right or remedy
under the Note, this Instrument, or any other Loan Document or otherwise
afforded by applicable law, shall not be a waiver of or preclude the exercise of
any other right or remedy. The acceptance by Lender of payment of all or any
part of the Indebtedness after the due date of such payment, or in an amount
which is less than the required payment, shall not be a waiver of Lender's right
to require prompt payment when due of all other payments on account of the
Indebtedness or to exercise any remedies for any failure to make prompt payment.
Enforcement by Lender of any security for the Indebtedness shall not constitute
an election by Lender of remedies so as to preclude the exercise of any other
right available to Lender. Lender's receipt of any awards or proceeds under
Sections 19 and 20 shall not operate to cure or waive any Event of Default.

        25.     LOAN CHARGES. If any applicable law limiting the amount of
interest or other charges permitted to be collected from Borrower is interpreted
so that any charge provided for in any Loan Document, whether considered
separately or together with other charges levied in connection with any other
Loan Document, violates that law, and Borrower is entitled to the benefit of
that law, that charge is hereby reduced to the extent necessary to eliminate
that violation. The amounts, if any, previously paid to Lender in excess of the
permitted amounts shall be applied by Lender to reduce the principal of the
Indebtedness. For the purpose of determining whether any applicable law limiting
the amount of interest or other charges permitted to be collected from Borrower
has been violated, all Indebtedness which constitutes interest, as well as all
other charges levied in connection with the Indebtedness which constitute
interest, shall be deemed to be allocated and spread over the stated term of the
Note. Unless otherwise required by applicable law, such allocation and spreading
shall be effected in such a manner that the rate of interest so computed is
uniform throughout the stated term of the Note.

        26.     WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the
right to assert any statute of limitations as a bar to the enforcement of the
lien of this Instrument or to any action brought to enforce any Loan Document.

        27.     WAIVER OF MARSHALLING. Notwithstanding the existence of any
other security interests in the Mortgaged Property held by Lender or by any
other party, Lender shall have the right to determine the order in which any or
all of the Mortgaged Property shall be subjected to the remedies provided in
this Instrument, the Note, any other Loan Document or applicable law. Lender
shall have the right to determine the order in which any or all portions of the
Indebtedness are satisfied from the proceeds realized upon the exercise of such
remedies. Borrower and any party who now or in the future acquires a security
interest in the Mortgaged Property and who has actual or constructive notice of
this Instrument waives any and all right to require the marshalling of assets or
to require that any of the Mortgaged Property be sold in the inverse order of
alienation or that any of the Mortgaged Property be sold in parcels or as an
entirety in connection with the exercise of any of the remedies permitted by
applicable law or provided in this Instrument.



                                       29

<PAGE>   43

        28.     FURTHER ASSURANCES. Borrower shall execute, acknowledge, and
deliver, at its sole cost and expense, all further acts, deeds, conveyances,
assignments, estoppel certificates, financing statements, transfers and
assurances as Lender may require from time to time in order to better assure,
grant, and convey to Lender the rights intended to be granted, now or in the
future, to Lender under this Instrument and the Loan Documents.

        29.     ESTOPPEL CERTIFICATE. Within 10 days after a request from
Lender, Borrower shall deliver to Lender a written statement, signed and
acknowledged by Borrower, certifying to Lender or any person designated by
Lender, as of the date of such statement, (i) that the Loan Documents are
unmodified and in full force and effect (or, if there have been modifications,
that the Loan Documents are in full force and effect as modified and setting
forth such modifications); (ii) the unpaid principal balance of the Note; (iii)
the date to which interest under the Note has been paid; (iv) that Borrower is
not in default in paying the Indebtedness or in performing or observing any of
the covenants or agreements contained in this Instrument or any of the other
Loan Documents (or, if the Borrower is in default, describing such default in
reasonable detail); (v) whether or not there are then existing any setoffs or
defenses known to Borrower against the enforcement of any right or remedy of
Lender under the Loan Documents; and (vi) any additional facts requested by
Lender.

        30.     GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

        (a)     This Instrument, and any Loan Document which does not itself
expressly identify the law that is to apply to it, shall be governed by the laws
of the jurisdiction in which the Land is located (the "Property Jurisdiction").

        (b)     Borrower agrees that any controversy arising under or in
relation to the Note, this Instrument, or any other Loan Document shall be
litigated exclusively in the Property Jurisdiction. The state and federal courts
and authorities with jurisdiction in the Property Jurisdiction shall have
exclusive jurisdiction over all controversies which shall arise under or in
relation to the Note, any security for the Indebtedness, or any other Loan
Document. Borrower irrevocably consents to service, jurisdiction, and venue of
such courts for any such litigation and waives any other venue to which it might
be entitled by virtue of domicile, habitual residence or otherwise.

        31.     NOTICE.

        (a)     All notices, demands and other communications ("notice") under
or concerning this Instrument shall be in writing. Each notice shall be
addressed to the intended recipient at its address set forth in this Instrument,
and shall be deemed given on the earliest to occur of (1) the date when the
notice is received by the addressee; (2) the first Business Day after the notice
is delivered to a recognized overnight courier service, with arrangements made
for payment of charges for next Business Day delivery; or (3) the third Business
Day after the notice is deposited in the United States mail with postage
prepaid, certified mail, return receipt requested. As used in this Section 31,
the term "Business Day" means any day other than a Saturday, a Sunday or any
other day on which Lender is not open for business.


                                       30

<PAGE>   44

        (b)     Any party to this Instrument may change the address to which
notices intended for it are to be directed by means of notice given to the other
party in accordance with this Section 31. Each party agrees that it will not
refuse or reject delivery of any notice given in accordance with this Section
31, that it will acknowledge, in writing, the receipt of any notice upon request
by the other party and that any notice rejected or refused by it shall be deemed
for purposes of this Section 31 to have been received by the rejecting party on
the date so refused or rejected, as conclusively established by the records of
the U.S. Postal Service or the courier service.

        (c)     Any notice under the Note and any other Loan Document which does
not specify how notices are to be given shall be given in accordance with this
Section 31.

        32.     SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest
in the Note (together with this Instrument and the other Loan Documents) may be
sold one or more times without prior notice to Borrower. A sale may result in a
change of the Loan Servicer. There also may be one or more changes of the Loan
Servicer unrelated to a sale of the Note. If there is a change of the Loan
Servicer, Borrower will be given notice of the change.

        33.     SINGLE ASSET BORROWER. Until the Indebtedness is paid in full,
Borrower (a) shall not acquire any real or personal property other than the
Mortgaged Property and personal property related to the operation and
maintenance of the Mortgaged Property; (b) shall not operate any business other
than the management and operation of the Mortgaged Property; and (c) shall not
maintain its assets in a way difficult to segregate and identify.

        34.     SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and
the rights granted by this Instrument shall inure to, the respective successors
and assigns of Lender and Borrower. However, a Transfer not permitted by Section
21 shall be an Event of Default.

        35.     JOINT AND SEVERAL LIABILITY. If more than one person or entity
signs this Instrument as Borrower, the obligations of such persons and entities
shall be joint and several.

        36.     RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY.

        (a)     The relationship between Lender and Borrower shall be solely
that of creditor and debtor, respectively, and nothing contained in this
Instrument shall create any other relationship between Lender and Borrower.

        (b)     No creditor of any party to this Instrument and no other person
shall be a third party beneficiary of this Instrument or any other Loan
Document. Without limiting the generality of the preceding sentence, (1) any
arrangement (a "SERVICING ARRANGEMENT") between the Lender and any Loan Servicer
for loss sharing or interim advancement of funds shall constitute a contractual
obligation of such Loan Servicer that is independent of the obligation of
Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third
party beneficiary of any Servicing Arrangement, and (3) no payment by the Loan
Servicer under any Servicing Arrangement will reduce the amount of the
Indebtedness.



                                       31

<PAGE>   45

        37.     SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of
any provision of this Instrument shall not affect the validity or enforceability
of any other provision, and all other provisions shall remain in full force and
effect. This Instrument contains the entire agreement among the parties as to
the rights granted and the obligations assumed in this Instrument. This
Instrument may not be amended or modified except by a writing signed by the
party against whom enforcement is sought.

        38.     CONSTRUCTION. The captions and headings of the sections of this
Instrument are for convenience only and shall be disregarded in construing this
Instrument. Any reference in this Instrument to an "Exhibit" or a "Section"
shall, unless otherwise explicitly provided, be construed as referring,
respectively, to an Exhibit attached to this Instrument or to a Section of this
Instrument. All Exhibits attached to or referred to in this Instrument are
incorporated by reference into this Instrument. Any reference in this Instrument
to a statute or regulation shall be construed as referring to that statute or
regulation as amended from time to time. Use of the singular in this Agreement
includes the plural and use of the plural includes the singular. As used in this
Instrument, the term "including" means "including, but not limited to."

        39.     LOAN SERVICING. All actions regarding the servicing of the loan
evidenced by the Note, including the collection of payments, the giving and
receipt of notice, inspections of the Property, inspections of books and
records, and the granting of consents and approvals, may be taken by the Loan
Servicer unless Borrower receives notice to the contrary. If Borrower receives
conflicting notices regarding the identity of the Loan Servicer or any other
subject, any such notice from Lender shall govern.

        40.     DISCLOSURE OF INFORMATION. Lender may furnish information
regarding Borrower or the Mortgaged Property to third parties with an existing
or prospective interest in the servicing, enforcement, evaluation, performance,
purchase or securitization of the Indebtedness, including trustees, master
servicers, special servicers, rating agencies, and organizations maintaining
databases on the underwriting and performance of multifamily mortgage loans.
Borrower irrevocably waives any and all rights it may have under applicable law
to prohibit such disclosure, including any right of privacy.

        41.     NO CHANGE IN FACTS OR CIRCUMSTANCES. All information in the
application for the loan submitted to Lender (the "Loan Application") and in all
financial statements, rent rolls, reports, certificates and other documents
submitted in connection with the Loan Application are complete and accurate in
all material respects. There has been no material adverse change in any fact or
circumstance that would make any such information incomplete or inaccurate.

        42.     SUBROGATION. If, and to the extent that, the proceeds of the
loan evidenced by the Note are used to pay, satisfy or discharge any obligation
of Borrower for the payment of money that is secured by a pre-existing mortgage,
deed of trust or other lien encumbering the Mortgaged Property (a "PRIOR LIEN"),
such loan proceeds shall be deemed to have been advanced by Lender at Borrower's
request, and Lender shall automatically, and without further action on its part,
be subrogated to the rights, including lien priority, of the owner or holder of
the obligation secured by the Prior Lien, whether or not the Prior Lien is
released.



                                       32

<PAGE>   46

        43.     ACCELERATION; REMEDIES. At any time during the existence of an
Event of Default, Lender, at Lender's option, may declare the Indebtedness to be
immediately due and payable without further demand, and may invoke the power of
sale and any other remedies permitted by Arizona law or provided in this
Instrument or in any other Loan Document. Borrower acknowledges that the power
of sale granted in this Instrument may be exercised by Lender without prior
judicial hearing. Lender shall be entitled to collect all costs and expenses
incurred in pursuing such remedies, including attorneys' fees, costs of
documentary evidence, abstracts and title reports.

        If Lender invokes the power of sale, Lender shall give written notice to
Trustee of the occurrence of an Event of Default and of Lender's election to
cause the Mortgaged Property to be sold. Trustee shall record a notice of sale
in each county in which the Mortgaged Property or some part of the Mortgaged
Property is located and shall mail copies of the notices in the manner required
by Arizona law to Borrower and to all other persons entitled to receive such
notice under Arizona law. Trustee shall give public notice of the sale and shall
sell the Mortgaged Property according to Arizona law. Trustee may sell the
Mortgaged Property at the time and place and under the terms designated in the
notice of sale in one or more parcels and in such order as Trustee may
determine. Trustee may postpone the sale of all or any part of the Mortgaged
Property by public announcement at the time and place of any previously
scheduled sale. Lender or Lender's designee may purchase the Mortgaged Property
at any sale.

        Trustee shall deliver to the purchaser at the sale, within a reasonable
time after the sale, a deed conveying the Mortgaged Property so sold without any
expressed or implied covenant or warranty. The recitals in Trustee's deed shall
be prima facie evidence of the truth of the statements made in those recitals.
Trustee shall apply the proceeds of the sale in the following order: (a) to all
costs and expenses of the sale, including Trustee's fees and attorneys' fees and
costs of title evidence; (b) to the Indebtedness in such order as Lender, in
Lender's discretion, directs; and (c) the excess, if any, to the person or
persons legally entitled to the excess, or to the clerk of the superior court of
the county in which the sale took place.

        44.     RELEASE. Upon payment of the Indebtedness, Lender shall release
this Instrument. Borrower shall pay Lender's reasonable costs incurred in
releasing this Instrument.

        45.     SUBSTITUTE TRUSTEE. Lender, at Lender's option, may from time to
time remove Trustee and appoint a successor trustee. Without conveyance of the
Mortgaged Property, the successor trustee shall succeed to all the title, power
and duties conferred upon the Trustee in this Instrument and by applicable law.

        46.     TIME OF ESSENCE. Time is of the essence of each covenant of this
Instrument.

        47.     WAIVERS BY SURETY. Any party who has signed this Instrument as a
surety or accommodation party, or who has subjected his property to this
Instrument to secure the indebtedness of another, expressly waives the benefits
of the provision of Arizona Revised Statutes Section 12-1641 and 12-1642.

        48.     WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (A) COVENANTS
AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO



                                       33

<PAGE>   47

ANY ISSUE ARISING OUT OF THIS INSTRUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES
AS BORROWER AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY
RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH
RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS
SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF
COMPETENT LEGAL COUNSEL.


                                       34

<PAGE>   48

   ATTACHED EXHIBITS. The following Exhibits are attached to this Instrument:

        [X]     Exhibit A              Description of the Land (required).

        [X]     Exhibits B1, B2 and B3 Modifications to Instrument

        [X]     Exhibit C              Description of all Mortgaged Property

        IN WITNESS WHEREOF, Borrower has signed and delivered this Instrument or
has caused this Instrument to be signed and delivered by its duly authorized
representative.

                                        BORROWER:

                                        RETIREMENT INNS III, LLC,
                                        a Delaware limited liability company

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


                                       35

<PAGE>   49

                                  KEY PRINCIPAL

Key Principal

NAME:           ARV ASSISTED LIVING, INC.

ADDRESS:        245 Fischer Avenue, D-1

                Costa Mesa, California 92626


                                       36

<PAGE>   50


STATE OF CALIFORNIA, ________________ County ss:

        The foregoing instrument was acknowledged before me this
_________________, 1999 by Abdo H. Khoury, Manager of Retirement Inns III, LLC,
a Delaware limited liability company on behalf of the limited liability company.

My Commission Expires:


                                        ----------------------------------------
                                        Notary Public



This instrument was prepared by Patrick L. Gilmore, Esq.



<PAGE>   51

                                    EXHIBIT A

                            [DESCRIPTION OF THE LAND]



                                      A-1


<PAGE>   52


                                    EXHIBIT B

                           MODIFICATIONS TO INSTRUMENT

        The following modifications are made to the text of the Instrument that
precedes this Exhibit:


                                      B-1




<PAGE>   53

                          AGREEMENT TO AMEND OR COMPLY

        THIS AGREEMENT TO AMEND OR COMPLY ("Agreement") is made as of the
_________ day of June, 1999 by and between RETIREMENT INNS III, LLC, a Delaware
limited liability company ("Borrower") and BANC ONE CAPITAL FUNDING CORPORATION,
an Ohio corporation ("Lender").

                                    RECITALS:

        A.      Borrower has borrowed the sum of $5,172,300.00 (the "Loan") from
Lender, evidenced by Borrower's Multifamily Note of even date herewith
(including any addenda, the "Note") and secured by that certain Multifamily Deed
of Trust, Assignment of Rents and Security Agreement of even date herewith
(including any Riders, the "Security Instrument") executed by Borrower creating
a first lien on and encumbering the improved real property known as Chandler
Villa and located in Chandler, Maricopa County, Arizona, and more particularly
described in the Security Instrument.

        B.      The Note, the Security Instrument and the other documents,
certificates, instruments and agreements executed by Borrower in connection with
or to otherwise evidence or secure the Loan are hereinafter collectively
referred to as the "Loan Documents".

        C.      Pursuant to the terms of a commitment letter dated June 18,
1999, Lender notified Borrower that it intends to attempt to sell the Loan in
whole or in part (the "Loan Sale") in Lender's sole and absolute discretion to
Freddie Mac, Fannie Mae or other institutional investors or lenders (the
"Investor") in the secondary mortgage market, and Borrower agreed that it would
assist and fully cooperate with Lender's efforts to sell the Loan.

        NOW THEREFORE, in consideration of and as an inducement to Lender to
make the Loan, Borrower, intending to be legally bound, hereby covenants and
agrees as follows:

        1.      Further Documentation. In the event any further documentation or
information is required to correct patent mistakes in the Loan Documents,
materials relating to mortgagee's land title insurance or the funding of the
Loan, Borrower shall provide, or cause to be provided to Lender and/or Investor,
at Borrower's cost and expense, such documentation or information. Borrower
shall execute and deliver to Lender and/or Investor such documentation,
including but not limited to any amendments, corrections, deletions or additions
to the Note, the Security Instrument and the other Loan Documents as is required
by Lender or Investor; provided, however, that Borrower shall not be required to
do anything that has the effect of (a) changing the essential economic terms of
the Loan as set forth in the Commitment Letter, or (b) imposing greater personal
liability or materially greater obligations (other than reporting obligations)
under the Loan Documents than that set forth in the Commitment Letter.

        2.      Compliance with Investor Requirements. If Lender exercises the
Extension Option (as defined in the Note), then Borrower shall at its expense do
anything necessary to comply with


                                       1

<PAGE>   54

the reasonable requirements of Investor, in order to enable Lender to consummate
the Loan Sale; provided, however, that Borrower shall not be required to do
anything that has the effect of (a) changing the essential economic terms of the
Loan except as set forth in the Commitment Letter, or (b) imposing on Borrower
greater personal liability under the Loan Documents than that set forth in the
Commitment Letter. Without limiting the generality of Borrower's obligations
under this Section 2, Borrower agrees that if necessary to comply with the
requirements of Investor, or to permit the Loan to be sold in the secondary
mortgage market in a commercial mortgage securitization transaction rated
Standard & Poor's or other national rating agencies, Borrower will, among other
things, (i) restructure itself, to the extent necessary, into one or more
special purpose bankruptcy-remote entities; (ii) amend its organizational
documents; (iii) impose or cause to be imposed restrictions on encumbrance or
transfer of any ownership interests in Borrower; (iv) cause its insurance
relating to the real property described in the Security Instrument to comply
with minimum insurance requirements established by such national rating
agencies; (v) cause the general partner of its sole member to have at least one
independent director; (vi) consent to the consolidation of the Loan and all
other indebtedness of Borrower to Lender into one loan; and (vii) take such
action as may be necessary to obtain an opinion of counsel to the effect that if
an affiliate of Borrower became insolvent, the assets and liabilities of the
Borrower would not be "substantively consolidated" with those of the affiliate
(a "Non-Consolidation Opinion").

        3.      Event of Default. In the event Borrower is requested in writing
by Lender to: (a) furnish any documentation or information; (b) execute and
deliver any documentation; (c) correct or amend any documents previously
executed; or (d) perform any acts, as provided herein, and Borrower fails to do
so within fifteen (15) days following receipt of Lender's written request, such
that Investor refuses to purchase all or any portion of the Loan, or if
previously purchased, Investor requires that Lender repurchase the Loan, then
such failure by Borrower shall be, at the sole option of Lender, an event of
default under the Note, the Security Instrument and the other Loan Documents and
Lender shall have the right, in its sole and absolute option, to demand payment
in full of the Note, and pursue such remedies as are available to Lender under
the Security Instrument and the other Loan Documents.

        4.      Residual Participation. Lender hereby agrees with Borrower that
in the event Lender consummates Loan Sale, and as a result of the Loan Sale,
Lender receives any premium the proceeds thereof are in excess of the original
loan amount plus the costs associated with Loan Sale, or if any applicable
pass-through interest rate payable to Investor is less than the applicable
interest rate under the Note (collectively, the "RESIDUAL SAVINGS"), then the
Residual Savings shall be applied as follows: (i) first to pay all costs of
Lender associated with the Loan Sale, including compensation to Lender and its
affiliates, and any costs to be incurred by Lender as a result of any
subordinated participation, risk sharing positions, or Lender guarantees, as
determined by Lender in its sole and absolute discretion; (ii) once the costs of
Lender described in clause (i) are paid in full, any remaining Residual Savings
shall be applied to pay all costs of Borrower incurred in complying with its
obligations under Section 2, except for costs associated with any
Non-Consolidation Opinion to be provided by Borrower and any restructuring of
Borrower or its affiliates necessary in order to obtain such Non-Consolidation
Opinion; and (iii) any Residual Savings remaining after payment of Lender's
costs described in clause (i) and Borrower's costs described in clause (ii)
shall be applied one-half (1/2) to Lender and one-half (1/2) to Borrower. Lender
will so apply the Residual Savings and remit to Borrower any portions thereof
which Borrower is to receive in accordance with the


                                       2


<PAGE>   55

immediately preceding sentence, promptly upon receipt of the Residual Savings by
Lender.

        5.      Survival. This agreement shall survive closing of the Loan and
funding by Investor to Lender of Investor's purchase of all or any portion of
the Loan.

        6.      Notices. All notices given under this Agreement shall be in
writing to the other party at the address and in the manner set forth in the
Security Instrument.

        7.      Governing Law: Recourse. This Agreement shall be governed by and
construed in accordance with the laws of the jurisdiction in which the Mortgaged
Property (as such term is defined in the Security Instrument) is located and
applicable federal law, and shall be binding on Borrower and its successors and
assigns and shall inure to the benefit of Lender and its successors and assigns.
This Agreement is being executed in connection with the making of the Loan
pursuant to the terms of the Note. Borrower's liability hereunder shall be
limited to the same extent provided in the Note and the Security Instrument.


                                       3

<PAGE>   56

        IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the day and year first written above.


                                        RETIREMENT INNS III, LLC,
                                        a Delaware limited liability company

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



                                       4


<PAGE>   57

                             CERTIFICATE OF BORROWER

        In addition to all other representations, warranties and covenants made
by RETIREMENT INNS III, LLC, a Delaware limited liability company, ("Borrower")
in connection with a mortgage loan by BANC ONE CAPITAL FUNDING CORPORATION
("Lender") in the original principal amount of Five Million One Hundred Seventy
Two Thousand Three Hundred and 00/100ths Dollars ($5,172,300.00) (the "Loan"),
Borrower does hereby represent, warrant and covenant to Lender, its successors,
transferees and assigns, as of the _____ day of June, 1999, as follows:

        1.      Review of Documents. Borrower has reviewed (a) the Multifamily
Note (together with any addenda or schedules, the "Note"), dated the date
hereof, made by Borrower and evidencing the Loan, the Multifamily Deed of Trust,
Assignment of Rents and Security Agreement (together with any riders or
exhibits, the "Security Instrument"), dated the date hereof, granting to Lender
a first lien on an assisted living facility known as Chandler Villa and located
in Chandler, Maricopa County, Arizona (the "Property") and all other documents
executed by Borrower, Key Principal or guarantor, if any, in connection with the
Loan (the Note, the Acknowledgment and Agreement of Key Principal to Personal
Liability for Exceptions to Non-Recourse Liability (if any), the Security
Instrument, and other documents, including this Certificate, executed in
connection with the Loan are collectively referred to as the "Loan Documents");
and (b) the commitment letter dated June 18, 1999, from Lender to Borrower (as
accepted on June 22, 1999, and as it may have thereafter been modified, amended
or extended, the "Commitment Letter").

        2.      Purpose of Certificate. This Certificate is delivered to Lender
in order to induce Lender to make the Loan.

        3.      No Default. The execution, delivery and performance of the
obligations imposed on Borrower under the Loan Documents will not cause Borrower
to be in default under the provisions of any agreement, judgment or order to
which Borrower is a party or by which Borrower is bound.

        4.      Items Due and Payable. No defaults exist under the Loan, and all
of the following items regarding the Property which have become due and payable
have been paid: taxes; government assessments; insurance premiums; water, sewer
and municipal charges; leasehold payments; ground rents; and any other charges
affecting the Property.

        5.      Compliance with Applicable Laws and Regulations. To the best of
Borrower's knowledge after reasonable and diligent inquiry: (i) all improvements
to the Property and the use of the Property comply with all applicable statutes,
rules and regulations, including all applicable statutes, rules and regulations
pertaining to requirements for equal opportunity, anti-discrimination, fair
housing, environmental protection, zoning and land use; (ii) improvements on the
Property comply with applicable health, fire, and building codes; (iii) there is
no evidence of any illegal activities relating to controlled substances on the
Property; and (iv) all required permits, licenses and certificates for the
lawful use and operation of the Property, including, but limited to,
certificates of


                                       1


<PAGE>   58

occupancy, apartment licenses, or the equivalent, have been obtained and are
current and in full force and effect.

        6.      Condition of Property. The Property has not been damaged by
fire, water, wind or other cause of loss or any previous damage to the Property
has been fully restored.

        7.      Insurance Policies. Borrower has furnished to Lender all
insurance policies and certificates required pursuant to the Loan Documents.

        8.      No Insolvency or Judgment. Except as disclosed on Schedule A,
neither Borrower, nor any general partner of Borrower, nor any Key Principal is
currently (a) the subject of or a party to any completed or pending bankruptcy,
reorganization or insolvency proceeding; or (b) the subject of any judgment
unsatisfied of record or docketed in any court of the state in which the
Property is located or in any court located in the United States.

        9.      No Condemnation. No part of the Property has been taken in
condemnation or other like proceeding, nor is any proceeding pending, threatened
or known to be contemplated for the partial or total condemnation or taking of
the Property.

        10.     No Subordinate Financing. Except as otherwise expressly approved
by Lender in writing, no part of the Property is, or will become, subject to a
second mortgage, deed of trust or other type of subordinate lien.

        11.     No Labor or Materialmen Claims. All parties furnishing labor and
materials have been paid in full and, except for any work in progress for which
payment is not yet due or for such liens or claims insured against by the policy
of title insurance to be issued in connection with the Loan, there are no
mechanics', laborers' or materialmen's liens or claims outstanding for work,
labor or materials affecting the Property, whether prior to, equal with or
subordinate to the lien of the Security Instrument.

        12.     No Other Interests. No person, party, firm or corporation has
(a) any possessory interest in the Property or right to occupy the same except
under and pursuant to the provisions of existing leases by and between tenant
and Borrower, the material terms of all such leases having been previously
disclosed to Lender, or (b) an option to purchase the Property or an interest
therein.

        13.     Single Asset Status. Except as otherwise expressly approved by
Lender in writing, Borrower does not own any real property or assets other than
the Property and does not operate any business other than the management and
operation of the Property.

        14.     Taxes Paid. Borrower has filed all federal, state, county and
municipal tax returns required to have been filed by Borrower, and has paid all
taxes which have become due pursuant to such returns or to any notice of
assessment received by Borrower, and Borrower has no knowledge of any basis for
additional assessment with respect to such taxes. To the best of Borrower's


                                       2

<PAGE>   59

knowledge, there are not presently pending any special assessments against the
Property or any part thereof.

        15.     Property Characteristics. The Property contains not less than
359,720 square feet of land. There are not less than 113 parking spaces located
on the Property. No part of the Property is included or assessed under or as
part of another tax lot or parcel, and no part of any other property is included
or assessed under or as part of the tax lot or parcels for the Property.

        16.     Financial Condition. No material adverse change in the financial
condition of Borrower, any general partner of Borrower (if Borrower is a
partnership) or its controlling shareholder (if Borrower is a corporation), or
any Key Principal has occurred between the respective dates of the financial
statements which were furnished to Lender relating to such entities or persons
and the date hereof.

        17.     Financial Statements. The financial statements of Borrower and
any Key Principal furnished to Lender pursuant to the Commitment Letter, reflect
in each case a positive net worth as of the date thereof.

        18.     Insolvency. Borrower is not presently insolvent, and the
proposed Loan will not render Borrower insolvent. As used in this Certificate,
the term "insolvent" means that the sum total of all of an entity's liabilities
(whether secured or unsecured, contingent or fixed, or liquidated or
unliquidated) is in excess of the value of all such entity's non-exempt assets,
i.e., all of the assets of the entity that are available to satisfy claims of
creditors.

        19.     Working Capital. After the Loan is made, Borrower will have
sufficient working capital, including cash flow from the Property or other
assets, not only to adequately maintain the Property, but also to pay all of
Borrower's outstanding debts as they come due.

        20.     No Material Change. There has been no material change in the
occupancy of the Property or the business, financial condition or results of
operations of Borrower or the Property, from the date of the Commitment Letter.

        21.     Representations and Warranties True. Each and every
representation and warranty is true and correct as of the date hereof. In the
event that any representation or warranty contained herein becomes untrue, in
whole or in part, after the date hereof, Borrower will so advise Lender in
writing immediately.

        22.     Ratification. Borrower covenants that it shall, promptly upon
the request of Lender, ratify and affirm the accuracy of this Certificate of
Borrower and any factual changes relating to the content herein, in writing, as
of such date or dates as Lender shall specify.

        23.     Survival. The representations, warranties and covenants set
forth in this Certificate of Borrower, and in the Commitment Letter, shall
survive the closing of the Loan.


                                       3

<PAGE>   60

        24.     Capitalized Terms. Any capitalized terms used in this Agreement
and not specifically defined herein, shall have the meanings set forth in the
Security Instrument.

        IN WITNESS WHEREOF, Borrower has executed this Certificate of Borrower
as of the day and year first above written.


                                        BORROWER:

                                        RETIREMENT INNS III, LLC,
                                        a Delaware limited liability company

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



                                       4

<PAGE>   61

                   REPLACEMENT RESERVE AND SECURITY AGREEMENT

        This REPLACEMENT RESERVE AND SECURITY AGREEMENT (this "Agreement") is
made this _______ day of June, 1999, by RETIREMENT INNS III, LLC, a Delaware
limited liability company ("Borrower"), and BANC ONE CAPITAL FUNDING
CORPORATION, an Ohio corporation, its successors, transferees and assigns
("Lender").

                                    RECITALS:

A.      This Agreement is being executed in connection with Lender's making a
mortgage loan to Borrower in the original principal amount of $5,172,300.00 (the
"Loan"). The proceeds of the Loan will be used to finance a 164 unit multifamily
project known as CHANDLER VILLA, and located in Chandler, Maricopa County,
Arizona (the "Property").

B.      The Loan is evidenced by a Multifamily Note (including any addenda, the
"Note"), and is secured by a Multifamily Deed of Trust, Assignment of Rents and
Security Agreement (including any riders, the "Security Instrument") granting a
lien on the Property. The Note, Security Instrument, this Agreement and all
other documents executed in connection with the Loan are collectively referred
to as the "Loan Documents."

C.      Lender requires as a condition to the making of the Loan that Borrower
enter into this Agreement and make certain deposits with Lender as provided in
this Agreement as additional security for all of Borrower's obligations under
the Loan Documents.

                                   AGREEMENT:

        NOW, THEREFORE, in consideration of the above and the mutual promises
contained in this Agreement, the receipt and sufficiency of which are
acknowledged, Borrower and Lender agree as follows:

        1.      DEPOSITS TO THE REPLACEMENT RESERVE

                (a)     Concurrently with the execution of this Agreement,
Borrower shall deposit with Lender the sum of $15,000.00 (the "Initial
Deposit").

                (b)     Subject to the provisions of Sections 2, 10 and 16 of
this Agreement, on each date that a regularly scheduled payment of principal or
interest is due under the Note, Borrower shall deposit with Lender the
applicable Monthly Deposit (as defined in Section 1(c) of this Agreement).



                                       1


<PAGE>   62

                (c)     The "Monthly Deposit" required to be made each month
during the term of the Loan is set forth below:

<TABLE>
<CAPTION>
Amount of Monthly Deposit           Period
-------------------------           ------
<S>                                 <C>                   <C>
$3,758.33                           August 1, 1999        through July 1, 2011
</TABLE>

                (d)     Lender shall deposit any Initial Deposit and each
Monthly Deposit, as received, in an interest-bearing account (the "Replacement
Reserve") which meets the standards for custodial accounts as required by Lender
from time to time. (The Initial Deposit, if any, the Monthly Deposits and all
other funds in the Replacement Reserve are referred to collectively as the
"Replacement Reserve".) Lender or a designated representative of Lender shall
have the sole right to make withdrawals from such account. All interest earned
on funds in the Replacement Reserve shall be added to and become part of the
Replacement Reserve. Lender shall not be responsible for any losses resulting
from the investment of the Replacement Reserve or for obtaining any specific
level or percentage of earnings on such investment. If applicable law requires
and provided that no default or Event of Default exists under any of the Loan
Documents, Lender shall pay to Borrower the interest earned on the Replacement
Reserve.

        2.      [INTENTIONALLY DELETED]

        3.      REPLACEMENT RESERVE IS ADDITIONAL SECURITY.

                (a)     Borrower assigns to Lender the Replacement Reserve as
additional security for all of the Borrower's obligations under the Loan
Documents; provided, however, Lender shall make disbursements from the
Replacement Reserve in accordance with the terms of this Agreement.

                (b)     Except as otherwise provided in Sections 4(f) and 6.1 of
this Agreement, Lender shall make disbursements from the Replacement Reserve to
reimburse Borrower for the costs of those items listed on Exhibit A (the
"Replacements") in accordance with the provisions of Section 4. Lender shall not
be obligated to make disbursements from the Replacement Reserve to reimburse
Borrower for the costs of routine maintenance to the Property or for costs which
are to be reimbursed from funds deposited with Lender pursuant to a
Completion/Repair and Security Agreement or any similar agreement.

        4.      DISBURSEMENTS FROM REPLACEMENT RESERVE.

                (a)     Upon written request from Borrower and satisfaction of
the requirements set forth in Sections 4 and 5 of this Agreement, Lender shall
disburse to Borrower amounts from the Replacement Reserve necessary to reimburse
Borrower for the actual approved costs of the Replacements. Lender shall not be
obligated to make disbursements from the Replacement Reserve to reimburse
Borrower for the costs of routine maintenance to the Property or for costs which
are to be reimbursed from funds deposited with Lender pursuant to a
Completion/Repair and Security Agreement or any similar agreement. In no event
shall Lender be obligated to disburse funds from


                                       2


<PAGE>   63
 the Replacement Reserve if a default or Event of Default exists under this
Agreement or any of the other Loan Documents.

                (b)     Each request for disbursement from the Replacement
Reserve shall be in a form specified or approved by Lender and shall include (i)
the specific Replacements for which the disbursement is requested, (ii) the
quantity and price of each item purchased, if the Replacement includes the
purchase or replacement of specific items, (iii) the price of all materials
(grouped by type or category) used in any Replacement other than the purchase or
replacement of specific items, and (iv) the cost of all contracted labor or
other services applicable to each Replacement for which such request for
disbursement is made. With each request, Borrower shall certify that all
Replacements have been made in accordance with all applicable laws, ordinances,
and regulations of any governmental office or authority having jurisdiction over
the Property. Each request for disbursement shall include copies of invoices for
all items or materials purchased and all contracted labor or services provided
and, unless Lender has agreed to issue joint checks pursuant to Section 4(d) in
connection with a particular Replacement, each request shall include evidence
satisfactory to Lender of payment of all such amounts.

                (c)     Except as provided in Section 4(d) for periodic
payments, each request for disbursement from the Replacement Reserve shall be
made only after completion of the Replacement for which disbursement is
requested. Borrower shall provide Lender evidence satisfactory to Lender in its
reasonable judgment, of completion.

                (d)     If the cost of a Replacement exceeds $5,000.00 and the
contractor performing the Replacement requires periodic payments pursuant to the
terms of a written contract, Lender at its discretion may approve in writing
periodic payments for work performed under such contract. A request for
reimbursement from the Replacement Reserve may be made after completion of a
portion of the work under such contract, provided (i) such contract requires
payment upon completion of such portion of work, (ii) the materials for which
the request is made are on site at the Property and are properly secured or have
been installed in the Property, (iii) all other conditions in this Agreement for
disbursement have been satisfied, (iv) funds remaining in the Replacement
Reserve are, in Lender's judgment, sufficient to complete such Replacement and
the other Replacements when required and (v) if required by Lender, each
contractor or subcontractor receiving payments under such contract shall provide
a waiver of lien with respect to amounts which have been paid to that contractor
or subcontractor.

                (e)     Except as provided in Section 4(d) for periodic
payments, Borrower shall not make a request for disbursement from the
Replacement Reserve more frequently than once in any quarter and (except in
connection with the final disbursement) the total cost of all Replacements in
any request shall not be less than $5,000.00.

                (f)     In the event Borrower requests a disbursement from the
Replacement Reserve to reimburse Borrower for labor or materials for
replacements other than the Replacements specified on Exhibit A, Borrower shall
disclose in writing to Lender why funds in the Replacement Reserve should be
used to pay for such replacements. If Lender determines that such replacements
are of the type intended to be covered by this Agreement, the costs for such
replacements are reasonable, and



                                       3

<PAGE>   64

all other conditions for disbursement under this Agreement have been met, Lender
may at its discretion disburse funds from the Replacement Reserve.

        5.      PERFORMANCE OF REPLACEMENTS.

        5.1     WORKMANLIKE COMPLETION

                (a)     Borrower shall make each Replacement when required in
order to keep the Property in good order and repair and in a good marketable
condition and to keep the Property or any portion thereof from deteriorating.
Borrower shall complete all Replacements in a good and workmanlike manner as
soon as practicable following the commencement of making each such Replacement.

                (b)     Lender shall have the right to approve all contracts or
work orders with materialmen, mechanics, suppliers, subcontractors, contractors
or other parties providing labor or materials in connection with the
Replacements. Upon Lender's request, Borrower shall assign any contract or
subcontract to Lender as additional security for the Indebtedness.

                (c)     In the event Lender determines in its sole discretion
that any Replacement is not being performed or completed in a workmanlike or
timely manner, Lender shall have the option to withhold disbursement for such
unsatisfactory Replacement, and may proceed under existing contracts or contract
with third parties to complete such Replacement and to apply the Replacement
Reserve toward the labor and materials necessary to complete such Replacement,
without providing any prior notice to Borrower and to exercise any and all other
remedies available to Lender upon a default or Event of Default.

                (d)     If at any time during the term of the Loan, Lender
determines that replacements not listed on Exhibit A are advisable to keep the
Property in good order and repair and in a good marketable condition, or to
prevent deterioration of the Property (the "Additional Replacements") Lender may
send Borrower written notice of the need for making such Additional
Replacements. Borrower shall promptly commence making such Additional
Replacements in accordance with all the requirements of the Security Instrument.
Reimbursement from the Replacement Reserve for such Additional Replacements
shall not be made unless Lender has determined to do so pursuant to Section
4(f). Except for Section 4, all references in this Agreement to "Replacements"
shall include the "Additional Replacements."

                (e)     In order to facilitate Lender's completion or making the
Replacements pursuant to Sections 5(c) and (d) above, Lender is granted the
right to enter onto the Property and perform any and all work and labor
necessary to complete or make the Replacements and employ watchmen to protect
the Property from damage. All sums so expended by Lender shall be deemed to have
been advanced to Borrower and secured by the Security Instrument. For this
purpose Borrower constitutes and appoints Lender its true and lawful
attorney-in-fact with full power of substitution to complete or undertake the
Replacements in the name of Borrower. Borrower empowers said attorney-in-fact as
follows: (i) to use any funds in the Replacement Reserve for the purpose of
making or completing the Replacements; (ii) to make such additions, changes and
corrections to the


                                       4

<PAGE>   65

Replacements as shall be necessary or desirable to complete the Replacements;
(iii) to employ such contractors, subcontractors, agents, architects and
inspectors as shall be required for such purposes; (iv) to pay, settle or
compromise all existing bills and claims which are or may become liens against
the Property, or as may be necessary or desirable for the completion of the
Replacements, or for the clearance of title; (v) to execute all applications and
certificates in the name of Borrower which may be required by any of the
contract documents; (vi) to prosecute and defend all actions or proceedings in
connection with the Property or the rehabilitation and repair of the Property;
and (vii) to do any and every act which Borrower might do in its own behalf to
fulfill the terms of this Agreement. It is further understood and agreed that
this power of attorney, which shall be deemed to be a power coupled with an
interest, cannot be revoked. Borrower specifically agrees that all power granted
to Lender under this Agreement may be assigned by it to its successors or
assigns as holder of the Note.

                (f)     Nothing in this Section 5 shall make Lender responsible
for making or completing the Replacements, require Lender to expend funds in
addition to the Replacement Reserve to make or complete any Replacement,
obligate Lender to proceed with the Replacements, or obligate Lender to demand
from Borrower additional sums to make or complete any Replacement.

        5.2     ENTRY ONTO PROPERTY; INSPECTIONS.

                (a)     Borrower shall permit Lender or Lender's representatives
(including an independent person such as an engineer, architect, or inspector)
or third parties making Replacements pursuant to Section 5.1 of this Agreement,
to enter onto the Property during normal business hours (subject to the rights
of tenants under their leases) to inspect the progress of any Replacements and
all materials being used in connection therewith, to examine all plans and shop
drawings relating to such Replacements which are or may be kept at the Property,
and to complete any replacements made pursuant to Section 5.1. Borrower agrees
to cause all contractors and subcontractors reasonably to cooperate with Lender
or Lender's representatives or such other persons described above in connection
with inspections described in this Section 5.2 or the completion of Replacements
pursuant to Section 5.1.

                (b)     Lender may inspect the Property in connection with any
Replacement prior to disbursing funds from the Replacement Reserve. Lender, at
Borrower's expense, also may require an inspection by an appropriate independent
qualified professional selected by Lender and a copy of a certificate of
completion by an independent qualified professional acceptable to Lender prior
to the disbursement of any amounts from the Replacement Reserve. Borrower shall
pay Lender an inspection fee equal to the actual and reasonable cost for each
such inspection.

        5.3     LIEN-FREE COMPLETION.

                (a)     Borrower covenants and agrees that each of the
Replacements and all materials, equipment, fixtures, or any other item
comprising a part of any Replacement shall be constructed, installed or
completed, as applicable, free and clear of all mechanic's, materialman's or
other liens (except for those liens existing on the date of this Agreement which
have been approved in writing by Lender).


                                       5

<PAGE>   66

                (b)     Prior to each disbursement from the Replacement Reserve,
Lender may require Borrower to provide Lender with a search of title to the
Property effective to the date of the release, which search shows that no
mechanic's or materialmen's liens or other liens of any nature have been placed
against the Property since the date this Agreement (other than liens which
Borrower is diligently contesting in good faith and which have been bonded off
to the satisfaction of Lender) and that title to the Property is free and clear
of all liens (other than the lien of the Security Instrument and any other liens
previously approved in writing by the Lender, if any).

                (c)     In addition, as a condition to any disbursement, Lender
may require Borrower to obtain from each contractor, subcontractor, or
materialman an acknowledgment of payment and release of lien for work performed
and materials supplied. Any such acknowledgment and release shall conform to the
requirements of applicable law and shall cover all work performed and materials
supplied (including equipment and fixtures) for the Property by that contractor,
subcontractor or materialman through the date covered by the current
reimbursement request (or, in the event that payment to such contractor,
subcontractor or materialmen is to be made by a joint check, the release of lien
shall be effective through the date covered by the previous release of funds
request).

        5.4     COMPLIANCE WITH LAWS AND INSURANCE REQUIREMENTS.

                (a)     All Replacements shall comply with all applicable laws,
ordinances, rules and regulations of all governmental authorities having
jurisdiction over the Property and applicable insurance requirements including,
without limitation, applicable building codes, special use permits,
environmental regulations, and requirements of insurance underwriters.

                (b)     In addition to any insurance required under the Security
Instrument, Borrower shall provide or cause to be provided worker's compensation
insurance, builder's risk, and public liability insurance and other insurance to
the extent required under applicable law in connection with a particular
Replacement. All such policies shall be in form and amount satisfactory to
Lender. All such policies which can be endorsed with standard mortgagee clauses
making loss payable to Lender or its assigns shall be so endorsed. The originals
of such policies shall be delivered to Lender.

        6.      DEFAULT.

        6.1     DEFAULT UNDER THIS AGREEMENT. Borrower shall be in default under
this Agreement if it fails to comply with any provision of this Agreement and
such failure is not cured within 10 days after notice from Lender. Borrower
understands that a default under this Agreement shall be deemed to be an Event
of Default under the Security Instrument, and that in addition to the remedies
specified in this Agreement, Lender shall be able to exercise all of its rights
and remedies under the Security Instrument upon an Event of Default.

        6.2     APPLICATION OF REPLACEMENT RESERVE UPON DEFAULT.

                (a)     Upon the occurrence of a default under this Agreement or
an Event of Default under the Security Instrument and for so long as such
default or Event of Default is continuing, Borrower shall immediately lose all
of its rights to receive disbursements from the Replacement


                                       6

<PAGE>   67

Reserve unless and until any such default or Event of Default has been cured or
all amounts secured by the Security Instrument have been paid and the lien of
the Security Instrument has been released by Lender. Upon any such default or
Event of Default, Lender may in its sole and absolute discretion, use the
Replacement Reserve (or any portion thereof) for any purpose, including but not
limited to (i) repayment of any indebtedness secured by the Security Instrument,
including but not limited to principal prepayments and the prepayment premium
applicable to such full or partial prepayment (as applicable); provided,
however, that such application of funds shall not cure or be deemed to cure any
default or Event of Default; (ii) reimbursement of Lender for all losses and
expenses (including, without limitation, reasonable legal fees) suffered or
incurred by Lender as a result of such default or Event of Default; (iii)
completion of the Replacement as provided in Section 5.1, or for any other
repair or replacement to the Property; or (iv) payment of any amount expended in
exercising (and exercise) all rights and remedies available to Lender at law or
in equity or under this Agreement or under any of the other Loan Documents.

                (b)     Nothing in this Agreement shall obligate Lender to apply
all or any portion of the Replacement Reserve on account of any default or Event
of Default by Borrower or to repayment of the indebtedness secured by the
Security Instrument or in any specific order of priority.

        7.      BORROWER'S OTHER OBLIGATIONS. Nothing contained in this
Agreement shall alter, impair or affect the obligations of Borrower, or relieve
Borrower of any of its obligations to make payments and perform all of its other
obligations required under the Loan Documents.

        8.      REMEDIES CUMULATIVE. None of the rights and remedies conferred
upon or reserved to Lender under this Agreement is intended to be exclusive of
any other rights, and each and every right shall be cumulative and concurrent,
and may be enforced separately, successively or together, and may be exercised
from time to time as often as may be deemed necessary Lender.

        9.      ENFORCEMENT OF AGREEMENT. This Agreement is executed by Borrower
and Lender for the benefit of Lender. Borrower understands and agrees that in
connection with the anticipated sale or assignment and delivery of the Loan to
Fannie Mae, this Agreement may be assigned to Fannie Mae.

        10.     BALANCE IN THE REPLACEMENT RESERVE. The insufficiency of any
balance in the Replacement Reserve shall not abrogate the Borrower's agreement
to fulfill all preservation and maintenance covenants in the Loan Documents. In
the event that the balance of the Replacement Reserve is less than the current
estimated cost to make the Replacements required by the Lender, Borrower shall
deposit the shortage within 10 days of request by Lender. In the event Lender
determines from time to time based on Lender's inspections, that the amount of
the Monthly Deposit is insufficient to fund the cost of likely Replacements and
related contingencies that may arise during the remaining term of the Loan,
Lender may require an increase in the amount of the Monthly Deposits upon 30
days prior written notice to Borrower.

        11.     INDEMNIFICATION. Borrower agrees to indemnify Lender and to hold
Lender harmless from and against any and all actions, suits, claims, demands,
liabilities, losses, damages, obligations and costs and expenses (including
litigation costs and reasonable attorneys' fees and expenses)



                                       7

<PAGE>   68

arising from or in any way connected with the performance of the Replacements or
the holding or investment of the Replacement Reserve. Borrower assigns to Lender
all rights and claims Borrower may have against all persons or entities
supplying labor or materials in connection with the Replacements; provided,
however, that Lender may not pursue any such right or claim unless a default or
Event of Default exists under this Agreement or the Security Instrument.

        12.     DETERMINATIONS BY LENDER. In any instance in this Agreement
where the consent or approval of Lender may be given or is required, or where
any determination, judgment or decision is to be rendered by Lender under this
Agreement, the granting, withholding or denial of such consent or approval and
the rendering of such determination, judgment or decision shall be made or
exercised by Lender (or its designated representative) at its discretion.

        13.     BORROWER'S RECORDS. Borrower shall furnish such financial
statements, invoices, records, papers and documents relating to the Property as
Lender may reasonably require from time to time to make the determinations
permitted or required to be made by Lender under this Agreement.

        14.     FEES AND EXPENSES.

                (a)     In addition to any other fees payable by Borrower to
Lender in connection with the Loan, Borrower shall pay Lender an annual fee of
$250.00 for its services in administering the Replacement Reserve and investing
the Replacement Reserve. The annual fee shall be due and payable by Borrower on
the date specified in a statement to Borrower regarding such fee.

                (b)     Borrower shall pay within 10 days of request from Lender
(i) all reasonable costs and expenses incurred by Lender in connection with
collecting, holding and disbursing the Replacement Reserve pursuant to this
Agreement, and (ii) all reasonable fees, charges, costs and expenses incurred by
Lender in connection with inspections made by Lender or Lender's representatives
in carrying out Lender's responsibility to make certain determinations under
this Agreement.

        15.     COMPLETION OF REPLACEMENTS. Lender's approval of any plans for
any Replacement, release of funds from the Replacement Reserve, inspection of
the Property by Lender or Lender's agents, or other acknowledgment of completion
of any Replacement in a manner satisfactory to Lender shall not be deemed an
acknowledgment or warranty to any person that the Replacement has been completed
in accordance with applicable building, zoning or other codes, ordinances,
statutes, laws, regulations or requirements of any governmental agency.

        16.     TRANSFER OF PROPERTY/TRANSFER OF INTERESTS IN BORROWER. If a
Transfer shall occur or be contemplated, which Transfer requires the prior
written consent of Lender pursuant to the terms of the Security Instrument,
Lender may review the amount of the Replacement Reserve, the amount of the
Monthly Deposits and the likely repairs and replacements required by the
Property and the related contingencies which may arise during the remaining term
of the Loan. Based upon that review, Lender may require an additional deposit to
the Replacement Reserve, and/or an increase in the amount of the Monthly
Deposits as a condition to Lender's consent to such Transfer. In all


                                       8

<PAGE>   69

events, the transferee shall be required to assume Borrower's duties and
obligations under this Agreement.

        17.     TERMINATION OF REPLACEMENT RESERVE. After payment in full of all
sums secured by the Security Instrument and release by Lender of the lien of the
Security Instrument, Lender shall disburse to Borrower all amounts remaining in
the Replacement Reserve.

        18.     ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement contains
the complete and entire understanding of the parties with respect to the matters
covered and no change or amendment shall be valid unless it is made in writing
and executed by the parties to this Agreement. No specific waiver or forbearance
for any breach of any of the terms of this Agreement shall be considered as a
general waiver of that or any other term of this Agreement. If any provision of
this Agreement is in conflict with any provision of the Security Instrument
regarding the Replacement Reserve, the provision contained in this Agreement
shall control.

        19.     NOTICES. All notices under this Agreement shall be given in
writing to the other party at the address, and in the manner, provided in the
Security Instrument.

        20.     SEVERABILITY. The invalidity, illegality, or unenforceability of
any provision of this Agreement pursuant to judicial decree shall not affect the
validity or enforceability of any other provision of this Agreement, all of
which shall remain in full force and effect.

        21.     APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the jurisdiction in which the Property
is located.

        22.     NON-RECOURSE. This Agreement is being executed in connection
with the making of the Loan pursuant to the terms of the Note. Borrower's
liability hereunder shall be limited to the extent provided in the Note.

        23.     CAPITALIZED TERMS. Any capitalized terms used in this Agreement
and not specifically defined herein, shall have the meanings set forth in the
Security Instrument.



                                       9

<PAGE>   70

        Borrower and Lender have executed this Agreement on the date and year
first above written.


                                        BORROWER:

                                        RETIREMENT INNS III, LLC,
                                        a Delaware limited liability company

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


                                        LENDER:

                                        BANC ONE CAPITAL FUNDING
                                        CORPORATION, an Ohio corporation

                                        By:
                                           -------------------------------------
                                        Name: Michael S. Wood
                                        Title: Vice President



                                       10

<PAGE>   71

                                    EXHIBIT A

                                  REPLACEMENTS

        [Attach and label as Exhibit A a copy of the completed Evaluator's
Summary: Physical Needs Over the Term or a comparable listing prepared by
Lender]


                                      A-1



<PAGE>   72

                                   SCHEDULE B

                              MODIFICATIONS TO NOTE
                                (SENIOR HOUSING)

        The following modifications are made to the text of the Note that
precedes this Exhibit:

        1.      Section 9(b)(3) of the Note is hereby amended to read as
                follows:

                "Failure of Borrower to comply with Sections 14(d), 14 (e), or
                14 (f) of the Security Instrument relating to the delivery of
                books and records, statements, schedules and reports;"

        2.      Section 9(b) of the Note is hereby amended to add the following
                paragraph (8) at the end thereof:

                "Borrower's failure to renew, continue, extend, or maintain all
                permits, licenses or other certificates or other approvals
                required to legally operate the Mortgaged Property as a seniors
                housing facility, as defined in the Security Instrument;"

        3.      All capitalized terms used in this Schedule not specifically
                defined herein shall have the meanings set forth in the text of
                the Note that precedes this Schedule.



                                        BORROWER'S INITIALS:
                                                            --------------------



<PAGE>   73

                       ASSIGNMENT OF MANAGEMENT AGREEMENT

        THIS ASSIGNMENT OF MANAGEMENT AGREEMENT (this "Assignment") is made and
entered into as of ___________, ____ by and among (i) RETIREMENT INNS III, LLC
(the "Borrower"), a Delaware limited liability company, (ii) BANC ONE CAPITAL
FUNDING CORPORATION (the "Lender"), an Ohio corporation, and (iii) ARV ASSISTED
LIVING, INC. (the "Manager"), a Delaware corporation, its general partner.

                                    RECITALS

A.      Borrower is the owner of a multifamily residential apartment project
        located in Chandler, Maricopa County, Arizona (the "Mortgaged
        Property").

B.      Manager is the managing agent of the Mortgaged Property pursuant to a
        Management Agreement dated __________________, ______, between Borrower
        and Manager (the "Management Agreement").

C.      Lender is about to make a loan to Borrower in the amount of $6,075,000
        (the "Loan"). The Loan will be evidenced by a Multifamily Note and will
        be secured by a Multifamily Deed of Trust, Assignment of Rents and
        Security Agreement (the "Security Instrument") which encumbers the
        Mortgaged Property.

D.      Borrower is willing to assign its rights under the Management Agreement
        to Lender as additional security for the Loan.

E.      Manager is willing to consent to this Assignment and to attorn to Lender
        upon a default by Borrower under the documents evidencing and securing
        the Loan, and perform its obligations under the Management Agreement for
        Lender, or its successors in interest, or to permit Lender to terminate
        the Management Agreement without liability.

        NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
Borrower, Lender and Manager agree as follows:

        1.      Borrower hereby transfers, assigns and sets over to Lender, its
successors and assigns, all right, title and interest of Borrower in and to the
Management Agreement. Manager hereby consents to the foregoing assignment. The
foregoing assignment is being made by Borrower to Lender as collateral security
for the full payment and performance by Borrower of all of its obligations under
the loan documents evidencing and securing the Loan. However, until the
occurrence of an Event of Default (as such term is defined in the loan documents
evidencing and securing the Loan) Borrower may exercise all rights as owner of
the Mortgaged Property under the Management Agreement, except as otherwise
provided in this Assignment. The foregoing assignment shall remain in effect as
long as the Loan, or any part thereof, remains unpaid, but shall automatically
terminate upon the release of the Security Instrument as a lien on the Mortgaged
Property.


                                       1

<PAGE>   74

        2.      Borrower and Manager represent and warrant to Lender that (i)
the Management Agreement is unmodified and is in full force and effect, (ii) the
Management Agreement is a valid and binding agreement enforceable against the
parties in accordance with its terms, and (iii) neither party is in default in
performing any of its obligations under the Management Agreement.

        3.      Borrower hereby covenants with Lender that during the term of
this Assignment: (a) Borrower shall not transfer the responsibility for
management of the Mortgaged Property from Manager to any other person or entity
without the prior written consent of Lender; (b) Borrower shall not terminate or
amend any of the terms or provisions of the Management Agreement without the
prior written consent of Lender; and (c) Borrower shall, give Lender written
notice of any notice or information that Borrower receives which indicates that
Manager is terminating the Management Agreement or that Manager is otherwise
discontinuing its management of the Mortgaged Property.

        4.      Upon receipt by Manager of written notice from Lender that an
Event of Default (as that term is defined in the loan documents evidencing and
securing the Loan) has occurred and is continuing, Lender shall have the right
to exercise all rights as owner of the Mortgaged Property under the Management
Agreement.

        5.      After the occurrence of an Event of Default, Lender (or its
nominee) shall have the right any time thereafter to terminate the Management
Agreement, without cause and without liability, by giving written notice to
Manager of its election to do so. Lender's notice shall specify the date of
termination, which shall not be less than 30 days after the date of such notice.

        6.      On the effective date of termination of the Management
Agreement, Manager shall turn over to Lender all books and records relating to
the Mortgaged Property (copies of which may be retained by Manager, at Manager's
expense), together with such authorizations and letters of direction addressed
to tenants, suppliers, employees, banks and other parties as Lender may
reasonably require: Manager shall cooperate with Lender in the transfer of
management responsibilities to Lender or its designee. A final accounting of
unpaid fees ( if any) due to Manager under the Management Agreement shall be
made within 60 days after the effective date of termination, but Lender shall
not have any liability or obligation to Manager for unpaid fees or other amounts
payable under the Management Agreement which accrue before Lender (or its
nominee) acquires title to the Mortgaged Property, or Lender becomes a mortgagee
in possession.

        7.      Manager's address for notice is 245 Fisher Avenue, D-1, Costa
Mesa, California 92626. All notices to be given by Lender to Manager shall be
given in the same manner as notices to Borrower pursuant to the notice
provisions contained in the Security Instrument.

        8.      Modifications (if any) to this Assignment are attached on
Exhibit A to this Assignment.

        9.      This Assignment may be executed in any number of counterparts,
each of which shall be considered an original for all purposes; provided,
however, that all such counterparts shall constitute one and the same
instrument.

        IN WITNESS WHEREOF, Borrower, Lender and Manager have executed this
Assignment as of the day and year first above written.



                                       2
<PAGE>   75


                                        BORROWER:

                                        RETIREMENT INNS III, LLC,
                                        a Delaware limited liability company

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



                                       3
<PAGE>   76

                                        LENDER:

                                        BANC ONE CAPITAL FUNDING
                                        CORPORATION, an Ohio corporation

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

                                        Title:



                                       4
<PAGE>   77


                                        MANAGER:

                                        ARV ASSISTED LIVING, INC.,
                                        a Delaware corporation

                                        By:
                                           -------------------------------------
                                        Name:  Abdo H. Khoury
                                        Title: Senior Vice President




                                       5
<PAGE>   78

                                    EXHIBIT A

               MODIFICATIONS TO ASSIGNMENT OF MANAGEMENT AGREEMENT

The following modifications are made to the text of the Assignment that precedes
this Exhibit:

The Assignment is modified by adding a new Section 10 and a new Section 11 as
follows:

        "10.    Manager agrees that:

                        (a)     (i) any fees payable to Manager pursuant to the
                Management Agreement are and shall be subordinated in right of
                payment, to the extent and in the manner provided in this
                Assignment, to the prior payment in full of the Indebtedness (as
                defined in the Security Instrument), and (ii) the Management
                Agreement is and shall be subject and subordinate in all
                respects to the liens, terms, covenants and conditions of the
                Security Instrument and the other loan documents evidencing and
                securing the Loan and to all advances heretofore made or which
                may hereafter be made pursuant to the Security Instrument
                (including all sums advanced for the purposes of (x) protecting
                or further securing the lien of the Security Instrument, curing
                defaults by Borrower under the Security Instrument or for any
                other purposes expressly permitted by the Security Instrument,
                or (y) constructing, renovating, repairing, furnishing,
                fixturing or equipping the Mortgaged Property);

                        (b)     if, by reason of its exercise of any other right
                or remedy under the Management Agreement, Manager acquires by
                right of subrogation or otherwise a lien on the Mortgaged
                Property which (but for this subsection) would be senior to the
                lien of the Security Instrument, then, in that event, such lien
                shall be subject and subordinate to the lien of the Security
                Instrument;

                        (c)     until Manager receives notice (or otherwise
                acquires actual knowledge) of an Event of Default, Manager shall
                be entitled to retain for its own account all payments made
                under or pursuant to the Management Agreement;

                        (d)     after Manager receives notice (or otherwise
                acquires actual knowledge) of an Event of Default, it will not
                accept any payment of fees under or pursuant to the Management
                Agreement without Lender's prior written consent;

                        (e)     if, after Manager receives notice (or otherwise
                acquires actual knowledge) of an Event of Default, Manager
                receives any payment of fees under the Management Agreement, or
                if Manager receives any other payment or distribution of any
                kind from Borrower or from any other person or entity in
                connection with the Management Agreement which Manager is not
                permitted by this Assignment to retain for its own account, such
                payment or other distribution will be received and held in trust
                for Lender and unless Lender otherwise notifies Manager, will be



                                       6
<PAGE>   79

                promptly remitted, in cash or readily available funds, to
                Lender, properly endorsed to Lender, to be applied to the
                principal of, interest on and other amounts due under the loan
                documents evidencing and securing the Loan in such order and in
                such manner as Lender shall determine in its sole and absolute
                discretion. Manager hereby irrevocably designates, makes,
                constitutes and appoints Lender (and all persons or entities
                designated by Lender) as Manager's true and lawful attorney in
                fact with power to endorse the name of Manager upon any checks
                representing payments referred to in this subsection;

                        (f)     Manager shall notify (telephonically, followed
                by written notice) Lender of Manager's receipt from any person
                or entity other than Borrower of a payment with respect to
                Borrower's obligations under the loan documents evidencing and
                securing the Loan, promptly after Manager obtains knowledge of
                such payment; and

                        (g)     during the term of this Assignment Manager will
                not commence, or join with any other creditor in commencing any
                bankruptcy, reorganization, arrangement, insolvency or
                liquidation proceedings with respect to Borrower, without
                Lender's prior written consent.

                11.     Borrower agrees that after Borrower receives notice (or
        otherwise has actual knowledge) of an Event of Default, it will not make
        any payment of fees under or pursuant to the Management Agreement
        without Lender's prior written consent."


                                        ----------------------------------------
                                        Borrower Initials

                                        ----------------------------------------
                                        Lender Initials

                                        ----------------------------------------
                                        Manager Initials



                                       7
<PAGE>   80

                                   EXHIBIT B1
                                    (ARIZONA)

                           MODIFICATIONS TO INSTRUMENT
                   (CROSS-DEFAULT AND CROSS COLLATERALIZATION)

        The following modifications are made to the text of the Instrument that
precedes this Exhibit:

        1.      Section 33 of the Instrument is hereby amended to read as
follows:

                "Until the Indebtedness is paid in full, Borrower shall not (1)
        acquire any real or person property other than the Borrower's Projects
        (as defined in Section 49) and assets (such as accounts) related to the
        operation and maintenance of the Borrower's Projects, or (2) operate any
        business other than the management and operation of the Borrower's
        Projects."

        2.      The following new Sections are added to the Instrument after the
last numbered Section:

                "49.    CROSS-DEFAULT AND CROSS COLLATERALIZATION.

                        (a)     In addition to the Mortgaged Property described
                on Exhibit "A" attached hereto, the Borrower also owns each of
                the multifamily properties described on Exhibit C to this
                Instrument. All of the properties described on Exhibit C,
                together with the Mortgaged Property, are referred to herein
                collectively as the "Borrower's Projects". Contemporaneous with
                the closing and funding of the loan to the Borrower evidenced by
                the Note, the Lender has extended additional loans to the
                Borrower, each loan being secured by a Multifamily Mortgage or
                Deed of Trust, Assignment of Rents and Security Agreement (a
                "Security Instrument") against each of the other Borrower's
                Projects.

                        (b)     The Borrower acknowledges that the Lender is
                unwilling to extend the loan evidenced by the Note to the
                Borrower unless the Borrower agrees that all of the Borrower's
                Projects will be treated as a single project through the
                imposition of cross-collateralization, cross-default and release
                provisions. The Borrower further acknowledges that the Lender's
                agreement to amend the single asset borrower provisions of
                Section 33 of this Instrument, to permit the Borrower's
                ownership of all of the Borrower's Projects, is in partial
                consideration for the cross- collateralization, cross-default
                and release provisions set forth herein below.

                        (c)     The Borrower hereby agrees and consents that as
                additional security to the Lender, each of the Borrower's
                Projects shall be subject to the lien of the Lender's Security
                Instrument for each of the other of the Borrower's Projects, and
                that each of the respective Borrower's Projects shall
                collateralize the other Borrower's Projects as follows: all
                Mortgaged Property (as defined in the respective Security


                                      B-1

<PAGE>   81

                Instrument) for each of the Borrower's Projects shall be
                considered part of the "Mortgaged Property" under this
                Instrument, and shall be collateral under this Instrument and
                the Loan Documents.

                        (d)     The Borrower hereby agrees and consents that
                upon the occurrence of an Event of Default under the Security
                Instrument securing one of the Borrower's Projects, then an
                Event of Default shall exist under the Security Instrument with
                respect to the other Borrower's Projects. No notice shall be
                required to be given to the Borrower in connection with such
                Event of Default except as may be required under such Security
                Instrument. In the event of an Event of Default under the
                Security Instrument with respect to any one of the Borrower's
                Projects, the Lender shall have the right, in its sole and
                absolute discretion, to exercise and perfect any and all rights
                in and under the Loan Documents with regard to any or all of the
                other Borrower's Projects, including, but not limited to, an
                acceleration of one or all of the Notes and the sale of one or
                all of the Borrower's Projects in accordance with the terms of
                the respective Security Instrument. No notice, except as may be
                required by the respective Security Instrument, shall be
                required to be given to the Borrower in connection with the
                Lender's exercise of any and all of its rights after an Event of
                Default has occurred.

        50.     EXHIBIT C. Exhibit C is attached to this Instrument.


                                        BORROWER'S INITIALS:
                                                            --------------------


                                      B-2

<PAGE>   82

                                   EXHIBIT B2
                                    (ARIZONA)

                      MODIFICATIONS TO SECURITY INSTRUMENT
                                (SENIORS HOUSING)

The following modifications are made to the text of the Instrument that precedes
this Exhibit:

        1.      Section 1 of the Instrument is hereby amended to add the
        following paragraph (aa) at the end thereof:

                "(aa) "Seniors Housing Facility" means a residential housing
                facility which qualifies as "housing for older persons" under
                the Fair Housing Amendments Act of 1988 and includes congregate
                living units and assisted living units, but which does not
                include any nursing care units."

        2.      Section 1(o) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "The term "Leases" shall also include any occupancy and
                admission agreements pertaining to occupants of the Mortgaged
                Property, including both residential and commercial agreements."

        3.      Section 1(g) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "The term "Hazardous Materials" shall also include any medical
                products or devices, including, but not limited to, those
                materials defined as "medical waste" or "biological waste" under
                relevant statutes or regulations pertaining to hazardous
                materials law."

        4.      Section 1(x) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "together with and including all proceeds from any private
                insurance for tenants to cover rental charges and charges for
                services at or in connection with the Mortgaged Property, and
                the right to payments from Medicare or Medicaid programs, or
                similar federal, state or local programs, boards, bureaus or
                agencies and rights to payment from tenants, private insurers or
                others ("third party payments"), due for the rents of tenants or
                for services at the Mortgaged Property." Each of the foregoing
                shall be considered "Rents" for the purposes of the actions and
                rights set forth in Section 3 of the Instrument."



        5.      Section 1(s) of the Instrument is hereby amended to add the
        following paragraphs (16), (17), (18), and (19) at the end thereof:


                                       1

<PAGE>   83

                "(16) all payments due, or received, from occupants, second
                party charges added to base rental income, base and/or
                additional meal sales, commercial operations located on the
                Mortgaged Property or provided as a service to the occupants of
                the Mortgaged Property, rental from guest suites, seasonal lease
                charges, furniture leases, and laundry services, and any and all
                other services provided to third parties in connection with the
                Mortgaged Property, and any and all other personal property on
                the real property site, excluding personal property belonging to
                occupants of the real property (other than property belonging to
                Borrower);

                (17) subject to applicable law and regulations, all permits,
                licenses and contracts relating to the operation and authority
                to operate the Mortgaged Property as a Seniors Housing Facility;

                (18) all rights to payments from Medicare or Medicaid programs,
                or similar federal, state or local programs, boards, bureaus or
                agencies and rights to payment from residents or private
                insurers ("third party payments"), arising from the operation of
                the Mortgaged Property as a Seniors Housing Facility, utility
                deposits, unearned premiums, accrued, accruing or to accrue
                under insurance policies now or hereafter obtained by the
                Borrower and all proceeds of any conversion of the Mortgaged
                Property or any part thereof including, without limitation,
                proceeds of hazard and title insurance and all awards and
                compensation for the taking by eminent domain, condemnation or
                otherwise, of all or any part of the Mortgaged Property or any
                easement therein; and,

                (19) all of Borrower's inventory, accounts, accounts receivable,
                contract rights and general intangibles arising from the
                operation of the Mortgaged Property, and all proceeds thereof."

        6.      Section 1(v) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                        "The term "Personalty" shall also include all personal
                property currently owned or acquired by Borrower after the date
                hereof in connection with the ownership and operation of the
                Mortgaged Property as a Seniors Housing Facility, all kitchen or
                restaurant supplies, dining room facilities, medical facilities,
                or related furniture and equipment, and any other equipment,
                supplies or furniture owned by Borrower and leased to any third
                party service provider or facility operator under any use,
                occupancy, or lease agreements, as well as all licenses,
                permits, certificates, and approvals required for the operation
                of the Mortgaged Property as a Seniors Housing Facility, to the
                extent permitted by applicable law and regulations, including
                replacements and additions thereto."

        7.      Section 3(b) of the Instrument is hereby amended to add the
        following sentence at the end thereof:



                                       2

<PAGE>   84

                "After an Event of Default, Lender is further authorized to give
                notice to all third party providers, including insurers, any
                governmental provider, or Medicare or Medicaid or any similar
                program or provider, at Lender's option, instructing them to pay
                all Rents which would be otherwise paid to Borrower to Lender,
                to the extent permitted by law."

        8.      Section 3(c) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "Because of the special regulatory requirements applicable to
                the Mortgaged Property as a Seniors Housing Facility, including
                the requirement that operators be approved and licensed,
                Borrower (and any licensed operator or manager of the Mortgaged
                Property), in order to induce Lender to lend funds hereunder,
                hereby agrees, upon the occurrence of an Event of Default and at
                the option of Lender, that it shall continue to provide all
                necessary services required under any operating agreement or
                applicable licensing or regulatory requirements and shall fully
                cooperate with Lender and any receiver as may be appointed by a
                court, in performing these services and agree to arrange for an
                orderly transition to a replacement licensed operator, manager
                or provider of the necessary services."

        9.      Section 4(e) of the Instrument is hereby amended to provide that
        acceptable Leases may have a month-to-month term.

        10.     Section 11 of the Instrument is hereby amended to add the
        following sentences at the end thereof:

                "Borrower further covenants and agrees that it shall not permit
                more than 20% of its total units or more than 20% of its total
                income to be derived from units relying on Medicaid or Medicare
                payments. If by reason of applicable law or regulation more than
                20% of the total units or more than 20% of total income becomes
                derived from units relying on Medicaid or Medicare payments, the
                Borrower shall diligently and expeditiously take all reasonable
                steps necessary to bring the Mortgaged Property into compliance
                with the preceding sentence to the extent permissible by
                applicable law or regulation. Borrower further covenants and
                agrees that it shall limit the use and occupancy of the
                Mortgaged Property to tenants that meet the standards for
                congregate living or assisted living, and that it shall not
                accept tenants that require skilled nursing care or permit,
                except to the extent required by law, tenants requiring skilled
                nursing care to remain at the Mortgaged Property as a routine
                matter."

        11.     Section 12(a) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "and, (5) payments for any required licensing fees, permits, or
                other expenses related to the operation of the Mortgaged
                Property by or on behalf of the Lender as a Seniors Housing
                Facility, any fines or penalties that may be assessed against
                the Mortgaged


                                       3

<PAGE>   85

                Property, any costs incurred to bring the Mortgaged Property
                into full compliance with applicable codes and regulatory
                requirements, and any fees or costs related to Lender's
                employment of a licensed operator for the Mortgaged Property."

        12.     Section 14(b) of the Instrument is hereby amended to add the
        following sections (8) and (9) at the end thereof:

                (8) "Upon request by Lender, copies of all inspection reports,
                reviews, and certifications prepared by, for, or on behalf of
                any licensing or regulatory authority relating to the Mortgaged
                Property and any legal actions, orders, notices, or reports
                relating to the Mortgaged Property issued by the applicable
                regulatory or licensing authorities; and,

                (9) Upon the request of Lender, copies of all reports relating
                to the services and operations of the Mortgaged Property
                prepared by or on behalf of the Borrower, including, if
                applicable, Medicaid cost reports and records relating to
                account balances due to or from Medicaid or any private
                insurer."

        13.     Section 17(a) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "Borrower further covenants and agrees that it shall maintain
                and operate the Mortgaged Property as a Seniors Housing Facility
                at all times in accordance with the standards required by any
                applicable license or permit and as required by any regulatory
                authority, that it shall maintain in good standing all operating
                licenses and permits, and that it shall cause to renew and
                extend all such required operating licenses or permits, and
                shall not fail to take any action necessary to keep all such
                licenses and permits in good standing and full force and effect.
                Borrower will immediately provide Lender with any notice or
                order which may adversely impact the Mortgaged Property, its
                operations or its compliance with licensing and regulatory
                requirements."

        14.     Section 17(b) of the Instrument is hereby amended to replace the
        second sentence of Section 17(b) with the following sentence:

                "If required by Lender (whether before or after an Event of
                Default), Borrower will cause any Affiliate of Borrower to whom
                fees are payable for the management of the Mortgaged Property to
                enter into an agreement with Lender, in a form approved by
                Lender, providing for subordination of those fees and such other
                provisions as Lender may reasonably require."

        15.     The reference in Section 17(a)(5) to a residential rental
        property manager shall be deemed to mean and refer to an operator of a
        Seniors Housing Facility and any management company engaged thereby.


                                       4

<PAGE>   86

        16.     Section 18(b) of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "Prohibited Activities and Conditions also shall not include the
                safe and lawful use and storage of medical products and devices
                customarily used in the operation of a Seniors Housing
                Facility."

        17.     Section 21(a) of the Instrument is hereby amended to add the
        following section (8) at the end thereof:

                "and,

                (8) a Transfer to a separate entity, or change in the holder, of
                the operating license or permit allowing the Mortgaged Property
                to operate as a Seniors Housing Facility."

        18.     Section 22 of the Instrument is hereby amended to add the
        following sections (g), (h), and (i) at the end thereof:

                "(g) any failure by Borrower to comply with any non-material use
                and licensing requirements set forth in Sections 10 and 11 and
                such failure is not cured within ten (10) days following such
                failure, or any failure by Borrower to comply with any material
                use and licensing requirements set forth in Section 10 and 11,
                including but not limited to Borrower's loss of its license or
                other legal authority to operate the Mortgaged Property as a
                Seniors Housing Facility;

                (h) any failure by Borrower to correct, within the time
                deadlines set by any federal, state or local licensing agency,
                any deficiency that justifies any action by such agency with
                respect to the Mortgaged Property that may have a material
                adverse effect on the income and operation of the Mortgaged
                Property or Borrower's interest in the Mortgaged Property,
                including, without limitation, a termination, revocation or
                suspension of any applicable license, registration, permit,
                certificate, authorization or approval necessary for the
                operation of the Mortgaged Property as Seniors Housing Facility.

                (i) if, without the consent of Lender: (a) Borrower ceases to
                operate the Mortgaged Property as a Seniors Housing Facility;
                (b) Borrower ceases to provide such kitchens (except ovens)
                separate bathrooms, and areas for eating, sitting and sleeping
                in each unit as are provided in the units as of the date of this
                Instrument; (c) Borrower ceases to provide other facilities and
                services normally associated with congregate or assisted living
                units, including, without limitation, (i) central dining
                services providing one to three meals per day, (ii) periodic
                housekeeping, (iii) laundry services, and (iv) customary
                transportation services; (d) except as required by applicable
                law or regulation, Borrower provides or contracts for skilled
                nursing care for any of the units; (e) non-residential space
                leased or held available for lease to commercial tenants (i.e.,
                space other than the units, dining areas, activity rooms, lobby,
                parlors, kitchen, mailroom, marketing/management offices)
                exceeds ten

                                       5

<PAGE>   87

                percent (10%) of the net rental area; or, (f) the Mortgaged
                Property is no longer classified as housing for older persons
                pursuant to the Fair Housing Amendments Act of 1988, as it may
                be amended from time to time hereafter."

        19.     The former Sections 22 (g), (h), and (i) are hereby changed to
        be Sections 22 (j), (k), and (l), respectively.

        20.     Section 43 of the Instrument is hereby amended to add the
        following sentence at the end thereof:

                "In addition to the remedies set forth herein and elsewhere in
                this Instrument, Lender upon an Event of Default shall be
                entitled to mandate the use of a lockbox bank account, to be
                maintained under the control and supervision of Lender, for all
                income of the Mortgaged Property, including, but not limited to,
                Rents, service charges, insurance payments, third party provider
                payments including Medicare and Medicaid and any other
                governmental or private program by which the rents or occupancy
                charges are being paid. Lender may, upon an Event of Default,
                cause the removal of Borrower from any Mortgaged Property
                operations. Until such time as Lender has located a replacement
                licensed operator, Borrower or its related or affiliated entity
                acting as the licensed operator, shall continue to provide all
                required services to maintain the Mortgaged Property in full
                compliance with all licensing and regulatory requirements as a
                Seniors Housing Facility. Borrower acknowledges that its failure
                to perform this service shall constitute a form of waste of the
                Mortgaged Property, causing irreparable harm to Lender and the
                Mortgaged Property, and shall constitute sufficient cause for
                the appointment of a receiver."

        21.     The following new Section is added to the Instrument after the
        last numbered Section:

                51.     BORROWER'S REPRESENTATIONS AND WARRANTIES. In addition
to any other representations and warranties contained in this Instrument,
Borrower hereby represents and warrants to Lender as follows:

        (a)     The Mortgaged Property is duly licensed as Residential Care for
        the Elderly and is in all respects otherwise legally authorized to
        operate the Mortgaged Property as Seniors Housing Facility, under the
        applicable laws of the Mortgaged Property Jurisdiction;

        (b)     Borrower and the Mortgaged Property (and the operation thereof)
        are in compliance in all material respects with the applicable
        provisions of all laws, statutes, regulations, ordinances, orders,
        standards, restrictions and rules of any federal, state or local
        government or quasi-government body, agency, board or authority having
        jurisdiction over the operation of the Mortgaged Property, including,
        without limitation: (a) health care and fire safety codes; (b) laws
        regulating the handling and disposal of medical or biological waste; (c)
        the applicable provisions of Seniors Housing Facility laws, rules,
        regulations and published interpretations thereof to which the Borrower
        or the Mortgaged Property is subject; and (d)


                                       6

<PAGE>   88

        all criteria established to classify the Mortgaged Property as housing
        for older persons under the Fair Housing Amendments Act of 1988;

        (c)     If required, Borrower has a current provider agreement under any
        and all applicable federal, state and local laws for reimbursement: (a)
        to an Seniors Housing Facility; or (b) for other type of care provided
        at such facility. There is no decision not to renew any provider
        agreement related to the Mortgaged Property, nor is there any action
        pending or threatened to impose material intermediate or alternative
        sanctions with respect to the Mortgaged Property;

        (d)     To the best of Borrower's knowledge after reasonable and
        diligent inquiry, Borrower and the Mortgaged Property are not subject to
        any proceeding, suit or investigation by any federal, state or local
        government or quasi-government body, agency, board authority or any
        other administrative or investigative body which may result in the
        imposition of a fine, alternative, interim or final sanction, or which
        would have a material adverse effect on Borrower or the operation of the
        Mortgaged Property, or which would result in the appointment of a
        receiver or manager or would result in the revocation, transfer,
        surrender, suspension or other impairment of the operating certificate,
        license, permit, approval or authorization of the Mortgaged Property to
        operate as an Seniors Housing Facility;

        (e)     Upon Lender's request, but subject to applicable privacy laws
        protecting the privacy of residents of the Mortgaged Property, copies of
        resident care agreements shall be provided to Lender. All resident
        records at the Mortgaged Property are true and correct in all material
        respects;

        (f)     Neither the execution and delivery of the Note, the Instrument
        or the Loan Documents, Borrower's performance thereunder, nor the
        recordation of the Instrument will adversely affect the licenses,
        registrations, permits, certificates, authorizations and approvals
        necessary for the operation of the Mortgaged Property as a Seniors
        Housing Facility in the Mortgaged Property Jurisdiction;

        (g)     Borrower is not a participant in any federal program whereby any
        federal, state or local, government or quasi-governmental body, agency,
        board or other authority may have the right to recover funds by reason
        of the advance of federal funds. Borrower has received no notice, and is
        not aware of any violation of applicable antitrust laws of any federal,
        state or local, government or quasi-government body, agency, board or
        other authority; and,

        (h)     Except as otherwise specifically disclosed to the Lender in
        writing, in the event any existing management agreement is terminated or
        Lender acquires the Mortgaged Property through foreclosure or otherwise,
        neither Borrower, Lender, any subsequent manager, nor any subsequent
        purchaser (through foreclosure or otherwise) must obtain a certificate
        of need from any applicable state health care regulatory authority or
        agency (other than giving such notice required under the applicable
        state law or regulation) prior to applying for any applicable license,
        registration, permit, certificate, authorization or approval necessary
        for the operation of the Mortgaged Property as a Seniors Housing
        Facility, provided that no service or the unit complement is changed."


                                       7

<PAGE>   89

        22.     All capitalized terms used in this Exhibit not specifically
        defined herein shall have the meanings set forth in the text of the
        Instrument that precedes this Exhibit.


                                        BORROWER'S INITIALS:
                                                            --------------------



                                       8

<PAGE>   90

                                   EXHIBIT B3
                                    (ARIZONA)

                      MODIFICATIONS TO SECURITY INSTRUMENT
                          (DEBT SERVICE COVERAGE RATIO)

The following modifications are made to the text of the Instrument that precedes
this Exhibit:

        1.      Section 5 of the Instrument is hereby amended to add the
        following paragraph at the end thereof:

                The Borrower shall maintain on an annual basis for the term of
                the Loan, a minimum 1.30 debt service coverage ratio, based on
                the Net Operating Income of the Mortgaged Property for the
                immediately preceding twelve (12) month period. For purposes of
                this paragraph, "Net Operating Income" is defined as:

                                (i)     the lesser of the actual rents collected
                        for the 12 month period (net of any concession) or 95%
                        of the gross potential rental income for the 12 month
                        period; plus

                                (ii)    the actual laundry income (coin operated
                        machines), cable and alarm fees, application fees, late
                        fees and forfeited deposits for the 12 month period;
                        less

                                (iii)   the greater of the actual operating
                        expenses for the 12 month period (including the required
                        Replacement Reserves funding for the period) or the
                        operating expenses used by Lender in its final
                        underwriting (including Replacement Reserves), increased
                        at the rate of 3% per annum.

                On or before July 1 of each calendar year beginning in the year
2000, Borrower shall provide to Lender written evidence, in form and content
satisfactory to Lender, that Borrower has complied with its obligations in this
Exhibit B3.

                In the event Borrower fails to maintain the required debt
service coverage ratio, upon fifteen (15) days written notice to Borrower,
Borrower shall pay to Lender in immediately available funds, a curtailment
payment in an amount equal to the difference between the outstanding principal
Indebtedness and that principal amount which would be necessary in order for
Borrower to maintain a 1.30 debt service coverage ratio for the preceding twelve
(12) month period. Upon receipt of any such curtailment payment, Lender shall
apply such amount towards the payment of principal at par without premium.


                                        BORROWER'S INITIALS:
                                                            --------------------


                                       1

<PAGE>   91

                     ADDITIONAL INTEREST NOTE AND AGREEMENT

                                                                   June __, 1999

        FOR VALUE RECEIVED, the undersigned, ARV ASSISTED LIVING, INC.., a
Delaware corporation (the "COMPANY"), ACACIA VILLA, LLC, a Delaware limited
liability company ("BORROWER", and together with the Company, individually and
collectively, the "MAKER"), jointly and severally promise to pay to the order of
BANC ONE CAPITAL FUNDING CORPORATION, an Ohio corporation ("BOCFC"), the
Additional Interest, as hereinafter defined, without interest thereon, except as
hereinafter provided.

                              EXPLANATORY STATEMENT

        Borrower is a direct or indirect subsidiary or affiliate of the Company.
At the request of the Company and the Borrower, BOCFC has agreed to make one or
more loans to the Borrower in the aggregate amount of $2,116,100 (collectively
the "LOAN"). The Loan to Borrower will be evidenced by one or more promissory
notes of Borrower in favor of BOCFC (collectively the "BORROWER NOTES") and will
be secured by one or more first lien deeds of trust (collectively the "SECURITY
INSTRUMENTS") on certain parcels of real property and the improvements thereon
owned by Borrower. The Company will provide a limited guaranty of the Loan. As
an inducement to BOCFC to make the Loan to the Borrower, and without which BOCFC
would not make the to the Borrower, the Company and the Borrower have agreed to
pay the Additional Interest to the BOCFC with respect to the Loan in accordance
with the terms and conditions of this Note. The Additional Interest shall be in
an amount equal to the profit which BOCFC would have realized if the Company had
issued to BOCFC on the date hereof a Warrant to purchase the Warrant Shares
(both as hereinafter defined), and BOCFC had exercised such Warrant in whole or
in part, at such time or times as BOCFC determined and immediately sold the
Warrant Shares issued upon such exercise, subject however to a stated minimum
amount of $10.00.

        1.      DEFINED TERMS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings (the
definitions to be applicable to both the singular and the plural forms of the
terms defined where either such form is used in this Note):

        "ADDITIONAL INTEREST" means additional interest payable to the Lender
        with respect to the Loans, which is equal to the greater of (i) the
        aggregate amount of the Warrant Profit or (ii) Ten Dollars ($10.00).

        "ADDITIONAL SHARES" means all shares of Stock issued by the Company
        after the date hereof, other than Warrant Shares.

        "ADJUSTMENT EVENT" means any of the following: (i) the Company makes a
        distribution on its Outstanding Stock in shares of stock or Convertible
        Securities; or (ii) the Company subdivides or reclassifies any of its
        Outstanding Stock into a greater number of shares; or (iii) the Company
        combines or reclassifies any of its Outstanding Stock into a smaller
        number of shares.

        "COMPANY" means ARV Assisted Living, Inc., a Delaware corporation, and
        includes any Person which shall succeed to or assume the obligations of
        the Company, through a restructuring or otherwise.

        "CONVERTIBLE SECURITIES" means evidences of indebtedness, shares of
        stock or other securities that are convertible into or exchangeable for,
        with or without payment of additional consideration in cash



<PAGE>   92

        or property, or options, warrants or other rights that are exercisable
        for, stock, that, when issued upon such conversion, exchange or exercise
        would constitute Additional Shares, either immediately or upon the
        occurrence of a specified date or a specified event, but excluding the
        Warrant Shares.

        "EXERCISE PRICE" means the aggregate exercise price of all of the
        Warrant Shares issuable upon the exercise of the Warrants. The Exercise
        Price for the Warrant Shares shall be equal to 4,000 (the number of
        Warrant Shares, prior to any adjustment) multiplied by (ii) $__________
        per share (which is equal to the average of the per share closing prices
        of shares of Stock of the Company on the NASDAQ national market system
        for the ten (10) consecutive trading days prior to the date hereof).

        "INDEBTEDNESS" means the Additional Interest, interest thereon and any
        other amounts due at any time under this Note.

        "LENDER" means BOCFC and any subsequent holder of this Note.

        "MINIMUM ADDITIONAL INTEREST AMOUNT" shall mean the sum of Ten Dollars
        ($10.00).

        "OUTSTANDING SHARES" means as of any date, all shares of Stock then
        outstanding, plus the maximum number of shares of Stock issuable in
        respect of Convertible Securities and options and warrants to purchase
        Convertible Securities outstanding on such date (whether or not the
        right to convert, exchange or exercise thereunder are presently
        exercisable) including the maximum number of Warrant Shares then subject
        to issuance.

        "PERSON" means any individual, corporation, limited liability company,
        partnership, joint venture, trust, estate, unincorporated organization
        or other entity or any government or any agency or political subdivision
        thereof.

        "REORGANIZATION EVENT" means any of the following events: (i) any
        capital reorganization, reclassification or recapitalization of the
        Company (other than any Adjustment Event); (ii) any merger or
        consolidation of the Company with or into another person; (iii) the sale
        or transfer of the property of the Company as an entirety or
        substantially as an entirety; and (iv) any dividend or distribution
        (other than an Adjustment Event) paid by the Company with respect to
        Outstanding Shares other than regular quarterly, semi-annual or annual
        dividends out of net income of the Company.

        "STOCK" shall mean the Common Stock of the Company, par value ________,
        which is currently traded on the NASDAQ national market system.

        "WARRANT EXERCISE EXPIRATION DATE" means the fifth (5th) anniversary of
        the date hereof.

        "WARRANT SHARES" means 4,000 shares of Stock, as adjusted pursuant to
        the terms and conditions of the Warrant set forth on Exhibit A, issuable
        upon exercise of the Warrant. The term "Warrant Shares" shall include
        any other stock, securities or property which would have become issuable
        upon exercise of the Warrant by virtue of the occurrence of a
        Reorganization Event as set forth on Exhibit A.

        "WARRANT" means a warrant to purchase 4,000 shares of the Stock of the
        Company at a price per share of $__________ (which equal to the average
        of the closing prices per share of the outstanding stock of the Company
        on the NASDAQ national market system for the ten (10) consecutive
        trading days immediately prior to the date hereof) and having the other
        terms and conditions set forth on Exhibit A attached hereto.



                                       2

<PAGE>   93

        "WARRANT PROFIT" means the aggregate profit which would be realized upon
        the exercise of the Warrant, and the immediate sale of all of the
        Warrant Shares issued upon such exercise, which shall generally be equal
        to the difference between: (i) the total of the fair market value per
        share of the Warrant Shares on the day immediately preceding each date
        of exercise of the Warrant (which shall be equal to the closing price of
        the Stock (or other securities which would have been issuable upon
        exercise of the Warrant) on the NASDAQ national market system, or such
        other exchange on which the Stock or such other securities are traded,
        on the day immediately preceding such date of exercise or, if the Stock
        or such other securities are not then traded on a national securities
        exchange at the time of exercise, the fair market value per share of the
        Outstanding Stock or such other securities on the day immediately
        preceding such date of exercise) multiplied by the number of Warrant
        Shares issuable upon such exercise; and (ii) the Exercise Price. The
        portion of the Warrant Profit which would be realized upon any partial
        exercise of the Warrant, and the immediate sale of all the Warrant
        Shares issued upon such partial exercise, shall be reasonably determined
        by Lender, taking into account any adjustments to the number of Warrant
        Shares in accordance with the terms and conditions of the Warrant set
        forth on Exhibit A attached hereto.

        2.      ADDRESS FOR PAYMENT. All payments due under this Note shall be
payable at 150 E. Gay Street, 24th Floor, Columbus, Ohio 43215, or such other
place as may be designated by written notice to Borrower from or on behalf of
Lender.

        3.      DEEMED ISSUANCE OF WARRANT; DEEMED EXERCISE. For purposes of
computing the amount of Additional Interest due hereunder: (a) the Warrant shall
be deemed to have been issued by the Company to the Lender on the date hereof;
(b) the Lender shall be deemed to have the right to exercise the Warrant, in
whole or in part, at any time, and from time to time, between the date hereof
and the Warrant Exercise Expiration Date (the "Deemed Exercise") by providing to
the Maker a notice of deemed exercise (the "Notice of Deemed Exercise") which
shall set forth (i) the number of Warrant Shares covered by the Deemed Exercise;
and (ii) the computation of the portion of the Warrant Profit realized in
connection with such Deemed Exercise and the immediate sale of the Warrant
Shares deemed to be issued upon such Deemed Exercise; and (c) the Lender shall
be deemed to have all other rights of the holder of the Warrant, as provided in
the terms and conditions of the Warrant set forth on Exhibit A.

        4.      COMPUTATION AND PAYMENT OF INSTALLMENTS OF ADDITIONAL INTEREST.
The Additional Interest shall be payable in installments, the number of which
shall be equal to the number of Deemed Exercises of the Warrant. Each
installment of Additional Interest shall be due upon demand by Lender at the
time of a Deemed Exercise of the Warrant. Lender shall make demand hereunder for
each such installment of Additional Interest by written notice to the Maker (a
"Demand Notice") which shall be accompanied by a Notice of Deemed Exercise of
the Warrant. The installment of Additional Interest due upon such demand shall
be equal to the Warrant Profit, or portion thereof, resulting from the Deemed
Exercise described in the Notice of Deemed Exercise accompanying the Demand
Notice.

        5.      MATURITY; FINAL PAYMENT. If not sooner paid, all amounts payable
under this Note shall be due on the fifth anniversary of the date hereof (the
"Maturity Date"). Any part of the Warrant for which a Notice of Deemed Exercise
has not previously been provided to Maker shall be considered to have been
exercised on the Maturity Date (the "Maturity Date Deemed Exercise"), and
Additional Interest in an amount equal to the Warrant Profit realized in
connection with the Maturity Date Deemed Exercise shall be due and payable to
Lender on the Maturity Date, without any notice or demand from Lender. If the
total amount of Additional Interest paid or payable hereunder as of the Maturity
Date pursuant to Deemed Exercises of the Warrant (including any Maturity Date
Deemed Exercise) is less than the Minimum Additional Interest Amount, then Maker
shall pay to Lender on the Maturity Date an amount equal to the difference
between the Minimum Additional Interest Amount and the total amount of
Additional Interest paid or payable hereunder pursuant to Deemed Exercises of
the Warrant. Notwithstanding the foregoing, if Lender has not



                                       3
<PAGE>   94

notified Maker, on or before the Maturity Date, of the portion of the Warrant
Profit resulting from any Maturity Date Deemed Exercise, Maker may, on the
Maturity Date, request such a notification from Lender, and, if such request is
made, payment of any such portion of the Warrant Profit shall not be due until
such notification is given by Lender to Maker.

        6.      APPLICATION OF PAYMENTS. If at any time Lender receives, from
Maker or otherwise, any amount applicable to the Indebtedness which is less than
all amounts due and payable at such time, Lender may apply the payment to
amounts then due and payable in any manner and in any order determined by
Lender, in Lender's discretion. Maker agrees that neither Lender's acceptance of
a payment from Maker in an amount that is less than all amounts then due and
payable nor Lender's application of such payment shall constitute or be deemed
to constitute either a waiver of the unpaid amounts or an accord and
satisfaction.

        7.      LATE CHARGE. If any installment of Additional Interest or other
amounts due hereunder is not received by Lender within ten (10) days after
demand therefore, Maker shall pay to Lender, immediately and without further
demand by Lender, a late charge equal to five percent (5%) of any such amount.
Maker acknowledges that its failure to make timely payment will cause Lender to
incur additional expenses in servicing and processing the Loan and that it is
extremely difficult and impractical to determine those additional expenses.
Maker agrees that the late charge payable pursuant to this paragraph represents
a fair and reasonable estimate, taking into account all circumstances existing
on the date of this Note, of the additional expenses Lender will incur by reason
of such late payment. The late charge payable in addition to, and not in lieu
of, any interest payable pursuant to Paragraph 9.

        8.      INTEREST. Any installment of Additional Interest or any other
payment due under this Note which remains past due for ten (10) days shall bear
interest from the due date thereof until payment at the rate of twelve percent
(12%) per annum.

        9.      FINANCIAL STATEMENTS AND OTHER REPORTS. Each Maker shall
maintain at all times a system of accounting established and administered in
accordance with sound business practices, and delivered, or cause to be
delivered to the Lender (a) as soon as available, but in no event more than
forty-five (45) days after the end of each calendar quarter of each fiscal year
of such Maker, quarterly financial statements, in form and content reasonably
satisfactory to Lender; (b) as soon as available, but in no event more than
ninety (90) days after the close of each fiscal year of each Maker, audited
financial statements certified by an independent accounting firm acceptable to
Lender; (c) within thirty (30) days after the date of filing, all federal tax
returns of each Maker, together with all schedules and attachments, certified as
true, correct and complete by an authorized officer of such Maker; and (d)
promptly upon request of the Lender, such other information, reports or
documents respecting the business, properties, operation or financial condition
of each Maker as the Lender may, at any time and from time to time, reasonably
request.

        10.     COSTS AND EXPENSES. Maker shall pay on demand all expenses and
costs, including fees and out-of-pocket expenses of attorneys and expert
witnesses and costs of investigation, incurred by Lender as a result of any
default under this Note or in connection with efforts to collect any amount due
under this Note, including those incurred in post-judgment collection efforts
and in any bankruptcy proceeding (including any action for relief from the
automatic stay of any bankruptcy proceeding) or judicial or non-judicial
foreclosure proceeding.

        11.     FORBEARANCE. Any forbearance by Lender in exercising any right
or remedy under this Note or any Security Instrument or otherwise afforded by
applicable law, shall not be a waiver of or preclude the exercise of that or any
other right or remedy. The acceptance by Lender of any payment after the due
date of such payment, or in an amount which is less than the required payment,
shall not be a waiver of Lender's right to require prompt payment when due of
all other payments or to exercise any right or remedy with



                                       4
<PAGE>   95

respect to any failure to make prompt payment. Enforcement by Lender of any
security for any Borrower's obligations under this Note shall not constitute an
election by Lender of remedies so as to preclude the exercise of any other right
or remedy available to Lender.

        12.     WAIVERS. Presentment, demand, notice of dishonor, protest,
notice of acceleration, notice of intent to demand or accelerate payment or
maturity, presentment for payment, notice of nonpayment, grace, and diligence in
collecting the Indebtedness are waived by Maker, and all endorsers and
guarantors of this Note and all other third party obligors.

        13.     LOAN CHARGES. If any applicable law limiting the amount of
interest or other charges permitted to be collected from the Company in
connection with this Note, or from any Borrower in connection with this Note and
any of the Loans, is interpreted so that any interest or other charge provided
for in this Note, whether considered separately or together with other charges
provided for in the Loan Documents for any Loan (as defined in the Security
Instrument pertaining to such Loan) violates that law, and Company or any
Borrower is entitled to the benefit of that law, that interest or charge is
hereby reduced for the Company or such Borrower, as applicable, to the extent
necessary to eliminate that violation. The amounts, if any, previously paid by
the Company or such Borrower, as applicable, to Lender in excess of the
permitted amounts shall be applied by Lender to reduce any unpaid amounts due
under this Note. For the purpose of determining whether any applicable law
limiting the amount of interest or other charges permitted to be collected from
the Company or any Borrower has been violated, all Indebtedness hereunder, and
all other indebtedness of such Borrower with respect to the Loans to such
Borrower that constitute interest, as well as all other charges made in
connection with the Loans to such Borrower that constitute interest, shall be
deemed to be allocated and spread ratably over the stated term of such Loans.
Neither this Note nor any of the Loan Documents shall be construed to create a
contract for the use, forbearance or detention of money requiring payment of
interest at a rate greater than the maximum interest rate permitted to be
charged under applicable law.

         14. COMMERCIAL PURPOSE. Maker represents that the Indebtedness is being
incurred by Maker solely for the purpose of carrying on a business or commercial
enterprise, and not for personal, family or household purposes.

        15.     COUNTING OF DAYS. Except where otherwise specifically provided,
any reference in this Note to a period of "days" means calendar days, not
Business Days.

        16.     GOVERNING LAW. This Note shall be governed by the law of the
state of California.

        17.     CAPTIONS. The captions of the paragraphs of this Note are for
convenience only and shall be disregarded in construing this Note.

        18.     NOTICES. All notices, requests and demand to or upon the parties
to be given pursuant to this Note shall be deemed to have been given or made
when delivered by hand, or when deposited in the mail, postage prepaid by
registered or certified mail, return receipt requested, or when deposited with a
nationally recognized courier service (e.g. Federal Express), or in the case of
notice by facsimile transmission, when properly transmitted addressed as follows
or to such other address as may be hereafter designated in writing by one party
to the other:

                If to Maker:            Acacia Villa, LLC
                                        ARV Assisted Living, Inc.
                                        245 Fisher Avenue, D-1
                                        Costa Mesa, California 92626
                                        Attn: Abdo H. Khoury
                                              Senior Vice President



                                       5
<PAGE>   96

                If to Lender:           Banc One Capital Funding Corporation
                                        150 E. Gay Street
                                        24th Floor
                                        Columbus, Ohio 43215
                                        Attn: John W. Adams
                                              Executive Vice President

        19.     NO RIGHT OR OBLIGATION TO ACQUIRE SECURITIES. This Note shall
not constitute a warrant, option or other right, or any agreement or obligation,
on the part of the Lender to purchase or otherwise acquire any Stock or other
securities of the Company, or to make any payments to the Company in respect
thereof. Rather, this Note evidences obligations on the part of Maker to make
monetary payments to Lender, the amount of which is measured by the profit which
Lender would have realized if the Company had issued to Lender on the date
hereof a warrant to purchase shares of Stock of the Company and Lender had
exercised such warrant, in whole or in part, at such time or times as Lender
determined, and immediately sold the shares of Stock issued upon such exercise.
The monetary payments which Maker is obligated to make hereunder shall be
payable, without setoff or counterclaim, in lawful money of the United States of
America.

        20.     SURVIVAL OF OBLIGATIONS. The liabilities and obligations of
Maker hereunder shall survive, and shall not be affected in any way, by
repayment of any or all of the Loans or the release of any or all of the
Security Instruments securing the Loans.

        21.     TIME OF THE ESSENCE. Maker agrees that time is strictly of the
essence to this Note.

        22.     JOINT AND SEVERAL LIABILITY. All liabilities and obligations
under this Note shall be joint and several with respect to the Maker.

        23.     WAIVER OF TRIAL BY JURY. MAKER AND LENDER EACH (A) AGREES NOT TO
ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS NOTE OR THE
RELATIONSHIP BETWEEN THE PARTIES AS LENDER AND MAKER THAT IS TRIABLE OF RIGHT BY
A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO
THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT
TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY
WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.

        IN WITNESS WHEREOF, Maker has signed and delivered this Note or has
caused this Note to be signed and delivered by its duly authorized
representative.


                                        MAKER:

                                        ACACIA VILLA, LLC,
                                        a Delaware limited liability company

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



                                       6
<PAGE>   97

                                        ARV ASSISTED LIVING, INC.

                                        By:
                                           -------------------------------------
                                           Abdo H. Khoury
                                           Senior Vice President



                                       7
<PAGE>   98

                           LIMITED GUARANTY AGREEMENT

        This Limited Guaranty Agreement ("GUARANTY") is entered into as of June
__, 1999, by the undersigned (the "KEY PRINCIPAL" whether one or more), for the
benefit of BANC ONE CAPITAL FUNDING CORPORATION, an Ohio corporation, and/or any
subsequent holder of the Note (the "LENDER").

                                    RECITALS

        A.      Retirement Inns III, LLC (the "BORROWER") has requested that
Lender make a loan to Borrower in the amount of $5,172,300.00 (the "LOAN"). The
Loan will be evidenced by a Multifamily Note from Borrower to Lender dated as of
the date of this Guaranty (the "MULTIFAMILY NOTE") and a Note and Agreement from
Borrower to Lender dated as of the date of this Guaranty (the "ADDITIONAL NOTE",
together with the Multifamily Note, are herein collectively, the "NOTE"). The
Multifamily Note will be secured by a Multifamily Deed of Trust, Assignment of
Rents and Security Agreement dated the same date as the Note (the "SECURITY
INSTRUMENT"), encumbering the real property described in the Security Instrument
(the "PROPERTY").

        B.      Key Principal has an economic interest in Borrower or will
otherwise obtain a material financial benefit from the Loan.

        C.      As a condition to making the Loan to Borrower, Lender requires
that the Key Principal execute this Guaranty.

        NOW, THEREFORE, in order to induce Lender to make the Loan to Borrower,
and in consideration thereof, Key Principal agrees as follows:

        1.      "Indebtedness" and other capitalized terms used but not defined
in this Guaranty shall have the meanings assigned to them in the Security
Instrument.

        2.      Key Principal hereby absolutely, unconditionally and irrevocably
guarantees to Lender the full and prompt payment and performance when due,
whether at maturity or earlier, by reason of acceleration or otherwise, and at
all times thereafter, of all amounts and/or obligations of Borrower under (i)
Paragraph 9 of the Multifamily Note for which Borrower is personally liable;
(ii) Exhibit B3 of the Security Instrument; (iii) the Agreement to Amend or
Comply, dated of even date herewith, by and between Lender and Borrower (the
"AGREEMENT TO AMEND OR COMPLY"); (iv) the Additional Note; and (v) that certain
letter agreement, dated of even date herewith, by and between Lender and
Borrower relating to the last right of first refusal for refinancing (the
"LETTER AGREEMENT").



<PAGE>   99

        3.      The obligations of Key Principal under this Guaranty shall
survive any foreclosure proceeding, any foreclosure sale, any delivery of any
deed in lieu of foreclosure, and any release of record of the Security
Instrument.

        4.      Key Principal's obligations under this Guaranty constitute an
unconditional guaranty of payment and not merely a guaranty of collection. If
Key Principal (or any Key Principal, if more than one) is a married person, Key
Principal (or each such married Key Principal, if more than one) agrees that
Lender may look to all of Key Principal's community property and separate
property to satisfy Key Principal's obligations under this Guaranty.

        5.      The obligations of Key Principal under this Guaranty shall be
performed without demand by Lender and shall be unconditional irrespective of
the genuineness, validity, regularity or enforceability of the Note, the
Security Instrument, or any other Loan Document, and without regard to any other
circumstance which might otherwise constitute a legal or equitable discharge of
a surety or a guarantor. Key Principal hereby waives any and all benefits and
defenses under California Civil Code SECTION 2810 and agrees that by doing so
Key Principal shall be liable even if Borrower had no liability at the time of
execution of the Note, the Security Instrument or any other Loan Document, or
thereafter ceases to be liable. Key Principal hereby waives any and all benefits
and defenses under California Civil Code SECTION 2809 and agrees that by doing
so Key Principal's liability may be larger in amount and more burdensome than
that of Borrower. Key Principal hereby waives the benefit of all principles or
provisions of law, statutory or otherwise, which are or might be in conflict
with the terms of this Guaranty and agrees that Key Principal's obligations
shall not be affected by any circumstances, whether or not referred to in this
Guaranty, which might otherwise constitute a legal or equitable discharge of a
surety or a guarantor. Key Principal hereby waives the benefits of any right of
discharge under any and all statutes or other laws relating to guarantors or
sureties and any other rights of sureties and guarantors thereunder. Without
limiting the generality of the foregoing, Key Principal hereby waives, to the
fullest extent permitted by law, diligence in collecting the Indebtedness,
presentment, demand for payment, protest, all notices with respect to the Note
and this Guaranty which may be required by statute, rule of law or otherwise to
preserve Lender's rights against Key Principal under this Guaranty, including
notice of acceptance, notice of any amendment of the Loan Documents, notice of
the occurrence of any default or Event of Default, notice of intent to
accelerate, notice of acceleration, notice of dishonor, notice of foreclosure,
notice of protest, and notice of the incurring by Borrower of any obligation or
indebtedness. Key Principal also waives, to the fullest extent permitted by law,
all rights to require Lender to (a) proceed against Borrower or any other
guarantor of Borrower's payment or performance with respect to the Indebtedness
(an "OTHER GUARANTOR"), (b) if Borrower or any guarantor is a partnership,
proceed against any general partner of Borrower or the guarantor, (c) proceed
against or exhaust any collateral held by Lender to secure the repayment of the
Indebtedness, or (d) pursue any other remedy it may now or hereafter have
against Borrower, or, if Borrower is a partnership, any general partner of
Borrower, including any and all benefits under California Civil Code Sections
2845, 2849 and 2850.

        6.      Key Principal understands that the exercise by Lender of certain
rights and remedies contained in the Security Instrument (such as a nonjudicial
foreclosure sale) may affect or eliminate Key Principal's right of subrogation
against Borrower and that Key Principal may therefore incur a partially or
totally nonreimbursable liability under this Guaranty. Nevertheless, Key
Principal hereby authorizes



                                       2
<PAGE>   100

and empowers Lender to exercise, in its sole and absolute discretion, any right
or remedy, or any combination thereof, which may then be available, since it is
the intent and purpose of Key Principal that the obligations under this Guaranty
shall be absolute, independent and unconditional under any and all
circumstances. Key Principal expressly waives any defense (which defense, if Key
Principal had not given this waiver, Key Principal might otherwise have) to a
judgment against Key Principal by reason of a nonjudicial foreclosure. Without
limiting the generality of the foregoing, Key Principal hereby expressly waives
any and all benefits under (i) California Code of Civil Procedure SECTION 580A
(which Section, if Key Principal had not given this waiver, would otherwise
limit Key Principal's liability after a nonjudicial foreclosure sale to the
difference between the obligations of Key Principal under this Guaranty and the
fair market value of the property or interests sold at such nonjudicial
foreclosure sale), (ii) California Code of Civil Procedure SECTIONS 580B and
580D (which Sections, if Key Principal had not given this waiver, would
otherwise limit Lender's right to recover a deficiency judgment with respect to
purchase money obligations and after a nonjudicial foreclosure sale,
respectively), and (iii) California Code of Civil Procedure SECTION 726 (which
Section, if Key Principal had not given this waiver, among other things, would
otherwise require Lender to exhaust all of its security before a personal
judgment could be obtained for a deficiency). Notwithstanding any foreclosure of
the lien of the Security Instrument, whether by the exercise of the power of
sale contained in the Security Instrument, by an action for judicial foreclosure
or by Lender's acceptance of a deed in lieu of foreclosure, Key Principal shall
remain bound under this Guaranty.

        7.      In accordance with SECTION 2856 of the California Civil Code,
Key Principal also waives any right or defense based upon an election of
remedies by Lender, even though such election (e.g., nonjudicial foreclosure
with respect to any collateral held by Lender to secure repayment of the
Indebtedness) destroys or otherwise impairs the subrogation rights of Key
Principal or the right of Key Principal (after payment of the obligations
guaranteed by Key Principal under this Guaranty) to proceed against Borrower for
reimbursement, or both, by operation of SECTION 580D of the Code of Civil
Procedure or otherwise.

        8.      In accordance with SECTION 2856 of the California Civil Code,
Key Principal waives any and all other rights and defenses available to Key
Principal by reason of SECTIONS 2787 through 2855, inclusive, of the California
Civil Code, including any and all rights or defenses Key Principal may have by
reason of protection afforded to Borrower with respect to any of the obligations
of Key Principal under this Guaranty pursuant to the antideficiency or other
laws of the State of California limiting or discharging Borrower's Indebtedness,
including SECTIONS 580A, 580B, 580D, and 726 of the California Code of Civil
Procedure.

        9.      In accordance with SECTION 2856 of the California Civil Code,
Key Principal agrees to withhold the exercise of any and all subrogation and
reimbursement rights against Borrower or Sole Member of Borrower, and against
any collateral or security for the Indebtedness, including any such rights
pursuant to SECTIONS 2847 and 2848 of the California Civil Code, until the
Indebtedness has been indefeasibly paid and satisfied in full, all obligations
owed to Lender under the Loan Documents have been fully performed, and Lender
has released, transferred or disposed of all of its right, title and interest in
such collateral or security.



                                       3
<PAGE>   101

        10.     At any time or from time to time and any number of times,
without notice to Key Principal and without affecting the liability of Key
Principal, (a) the time for payment of the principal of or interest on the
Indebtedness may be extended or the Indebtedness may be renewed in whole or in
part; (b) the time for Borrower's performance of or compliance with any covenant
or agreement contained in the Note, the Security Instrument or any other Loan
Document, whether presently existing or hereinafter entered into, may be
extended or such performance or compliance may be waived; (c) the maturity of
the Indebtedness may be accelerated as provided in the Note, the Security
Instrument, or any other Loan Document; (d) the Note, the Security Instrument,
or any other Loan Document may be modified or amended by Lender and Borrower in
any respect, including an increase in the principal amount; and (e) any security
for the Indebtedness may be modified, exchanged, surrendered or otherwise dealt
with or additional security may be pledged or mortgaged for the Indebtedness.

        11.     If more than one person executes this Guaranty, the obligations
of those persons under this Guaranty shall be joint and several. Lender, in its
discretion, may (a) bring suit against Key Principal, and any Other Guarantor,
jointly and severally, or against any one or more of them; (b) compromise or
settle with any one or more of the persons constituting Key Principal, or any
Other Guarantor, for such consideration as Lender may deem proper; (c) release
any Other Guarantor, from liability; and (d) otherwise deal with Key Principal
and any Other Guarantor, or any one or more of them, in any manner, and no such
action shall impair the rights of Lender to collect from Key Principal any
amount guaranteed by Key Principal under this Guaranty. Nothing contained in
this paragraph shall in any way affect or impair the rights or obligations of
Key Principal with respect to any Other Guarantor.

        12.     Any indebtedness of Borrower held by Key Principal now or in the
future is and shall be subordinated to the Indebtedness and any such
indebtedness of Borrower shall be collected, enforced and received by Key
Principal, as trustee for Lender, but without reducing or affecting in any
manner the liability of Key Principal under the other provisions of this
Guaranty.

        13.     Key Principal shall have no right of, and hereby waives any
claim for, subrogation or reimbursement against Borrower or any general partner
of Borrower by reason of any payment by Key Principal under this Guaranty,
whether such right or claim arises at law or in equity or under any contract or
statute, until the Indebtedness has been paid in full and there has expired the
maximum possible period thereafter during which any payment made by Borrower to
Lender with respect to the Indebtedness could be deemed a preference under the
United States Bankruptcy Code.

        14.     If any payment by Borrower is held to constitute a preference
under any applicable bankruptcy, insolvency, or similar laws, or if for any
other reason Lender is required to refund any sums to Borrower, such refund
shall not constitute a release of any liability of Key Principal under this
Guaranty. It is the intention of Lender and Key Principal that Key Principal's
obligations under this Guaranty shall not be discharged except by Key
Principal's performance of such obligations and then only to the extent of such
performance.



                                       4
<PAGE>   102

        15.     Key Principal shall from time to time, upon request by Lender,
deliver to Lender such financial statements as Lender may reasonably require
which may include, by way of example and not limitation, annual audited
financial statements.

        16.     Lender may assign its rights under this Guaranty in whole or in
part and, upon any such assignment, all the terms and provisions of this
Guaranty shall inure to the benefit of such assignee to the extent so assigned.
The terms used to designate any of the parties herein shall be deemed to include
the heirs, legal representatives, successors and assigns of such parties.

        17.     This Guaranty and the other Loan Documents represent the final
agreement between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements. There are no unwritten oral
agreements between the parties. All prior or contemporaneous agreements,
understandings, representations, and statements, oral or written, are merged
into this Guaranty and the other Loan Documents. Key Principal acknowledges that
it has received a copy of the Note, the Agreement to Amend or Comply, the Letter
Agreement and all other Loan Documents. Neither this Guaranty nor any of its
provisions may be waived, modified, amended, discharged, or terminated except by
an agreement in writing signed by the party against which the enforcement of the
waiver, modification, amendment, discharge, or termination is sought, and then
only to the extent set forth in that agreement.

        18.     Key Principal agrees that any controversy arising under or in
relation to this Guaranty shall be litigated exclusively in the jurisdiction
where the Key Principal's principal place of business is located (the "PROPERTY
JURISDICTION"). The state and federal courts and authorities with jurisdiction
where the Key Principal's principal place of business shall have exclusive
jurisdiction over all controversies which shall arise under or in relation to
this Guaranty. Key Principal irrevocably consents to service, jurisdiction, and
venue of such courts for any such litigation and waives any other venue to which
it might be entitled by virtue of domicile, habitual residence or otherwise.

        19.     Key Principal (or each Key Principal, if more than one) agrees
to notify Lender (in the manner for giving notices provided in Section 31 of the
Security Instrument) of any change in Key Principal's address within 10 Business
Days after such change of address occurs.

        20.     Key Principal will cause its chief financial officer and certain
other informed financial executives designated by Key Principal to meet with
representatives of Lender on a quarterly basis at mutually and reasonably
convenient times and places to discuss Key Principal progress in meeting its
corporate budget and business plan.

        21.     Key Principal will promptly notify Lender in writing if at any
time the liquidity of Key Principal, consisting of Key Principal's cash and cash
equivalents, falls below $5,000,000 (on a consolidated basis).

        22.     Key Principal shall maintain at all times a system of accounting
established and administered in accordance with sound business practices, and
delivered, or cause to be delivered to Lender (a) as soon as available, but in
no event more than forty-five (45) days after the end of each calendar quarter
of each fiscal year of Key Principal, quarterly financial statements, in form
and content



                                       5
<PAGE>   103

reasonably satisfactory to Lender; (b) as soon as available, but in no event
more than ninety (90) days after the close of each fiscal year of Key Principal,
audited financial statements certified by an independent accounting firm
acceptable to Lender; (c) within thirty (30) days after the date of filing, all
federal tax returns of Key Principal, together with all schedules and
attachments, certified as true, correct and complete by an authorized officer of
Key Principal; and (d) promptly upon request of Lender, such other information,
reports or documents respecting the business, properties, operation or financial
condition of Key Principal as Lender may, at any time and from time to time,
reasonably request.

        23.     Key Principal will not provide or obtain, or permit Borrower to
obtain, permanent financing to replace the Loan at or prior to the maturity
thereof without first providing Lender the opportunity to exercise its last
right of refusal to provide such financing, as provided in the Letter Agreement.

        24.     KEY PRINCIPAL AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY
JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS GUARANTY OR THE RELATIONSHIP
BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY
AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE
EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO
TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH
THE BENEFIT OF COMPETENT LEGAL COUNSEL.



                                       6
<PAGE>   104

        IN WITNESS WHEREOF, Key Principal has signed and delivered this Guaranty
or has caused this Guaranty to be signed and delivered by its duly authorized
representative.

                                        KEY PRINCIPAL

                                        ARV ASSISTED LIVING, INC.

                                        By:
                                           -------------------------------------
                                        Name: Abdo H. Khoury
                                        Title:    Senior Vice President



                                       7

<PAGE>   105

                                                                      SCHEDULE I

This schedule sets forth the material details in which the following loan
agreements (which are identified by reference to the common name of the subject
property) differ from the Loan Agreement dated June 28, 1999 between Banc One
Capital Funding Corporation and Retirement Inns III, LLC, filed as Exhibit 10.1
to this report ( the "Master Agreement"). The note was signed on June 28, 1999
by Retirement Inns III, LLC as the borrower under federal identification number
33-0842525.

<TABLE>
<CAPTION>
Property-Common Name    Amount of Loan     Monthly Payment     State of Jurisdiction     Miscellaneous
<S>                     <C>                <C>                 <C>                       <C>
Villa Las Posas          8,209,900.00         69,742.00        Camarillo, California          (1)
</TABLE>

None of these documents include Exhibit B1 to the Master Agreement. The
applicable law under each of these documents is California law.

----------
(1)     Pursuant to instruction number 2 of Item 601 of Regulation S-K, these
        documents have not been filed as an exhibit.