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                               OPERATING AGREEMENT

                                       OF

                         ET SUB-HERITAGE ANDOVER, L.L.C.


                  THIS OPERATING AGREEMENT dated as of October 23, 1998 (the
"Agreement") is entered into by and between ET SUB-HERITAGE ANDOVER, L.L.C., a
Delaware limited liability company (the "LLC"), and ELDERTRUST OPERATING LIMITED
PARTNERSHIP, a Delaware limited Partnership (the "Member").

Recitals

         A. A Certificate of Formation dated July 16, 1998 (the "Certificate")
has been filed by the Member to form a limited liability company under the name
"ET Sub-Heritage Andover, L.L.C." pursuant to and in accordance with the
Delaware Limited Liability Company Act, as amended (6 Del. C. ss. 18-101, et
seq.) (the "Act").

         B. By executing this Agreement, the Member hereby (i) ratifies the
formation of the LLC and the filing of the Certificate and (ii) continues the
existence of the LLC.

         C. The Member and the LLC hereby adopt this Agreement to set forth the
terms governing the affairs of the LLC and the conduct of its business.

Terms of Agreement

         1. Name. The name of the LLC is ET Sub-Heritage Andover, L.L.C. The
Member may change the name of the LLC from time to time.

         2. Purpose and Powers. The LLC may carry on any lawful business purpose
or activity for which a limited liability company may be organized under the
Act. The LLC shall have all power necessary or convenient to the conduct,
promotion or attainment of its business, purposes and activities.

         3. Registered Office and Agent. The address of the LLC's registered
office in the State of Delaware is 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801. The name of the LLC's registered agent at such address
is The Corporation Trust Company.

         4. Member. ElderTrust Operating Limited Partnership is the sole member
of the LLC. The address of the Member is 101 East State Street, Suite 101,
Kennett Square, Pennsylvania 19348.

         5. Management by Member. Responsibility for the management of the
business and affairs of the LLC shall be vested in the Member, which shall have
all right, power and authority to manage, operate and control the business and
affairs of the LLC and to do or cause to be done any and all acts, at the
expense of the LLC, deemed by it to be necessary or convenient to the
furtherance of the purpose of the LLC described in this Agreement, and all
powers, statutory or otherwise, possessed by members of a limited liability
company under the Act. Without limiting the generality of the foregoing, the
Member may appoint, remove and replace officers of the LLC at any time and from
time to time, and the Member, in its sole discretion, may retain such persons or
entities (including any person or entity in which the Member shall have an
interest or of which the Member is an affiliate) as it shall determine to
provide services to or on behalf of the LLC for such compensation as the Member
deems appropriate. The Member is hereby designated as an authorized person,
within the meaning of the Act, to execute, deliver and file the Certificate and
any amendments or restatements thereof required by law.
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         6. Term. The life of the LLC shall be perpetual; provided, however,
that the LLC shall dissolve, and its affairs shall be wound up at the election
of the Member or upon the occurrence of an event of dissolution under the Act;
provided, further, however, that upon the occurrence of an event of dissolution
under the Act, the Member may elect to continue the LLC to the extent permitted
under the Act.

         7. Capital Contributions. As of the date of this Agreement, the Member
has made an initial contribution to the capital of the LLC as set forth on
Exhibit A. Except to the extent required under the Act, the Member shall not be
required to make any additional contributions to the capital of the LLC.

         8. Limitation on Liability; Indemnification.

                  a) Except as otherwise provided in the Act, the debts,
         obligations and liabilities of the LLC, whether arising in contract,
         tort or otherwise, shall be solely the debts, obligations and
         liabilities of the LLC. None of the Member, its partners or any
         officers, trustees, directors, employees or agents of any partner in
         the Member, or any officers, employees or agents of the LLC, shall be
         obligated personally for any debt, obligation or liability of the LLC
         solely by reason of the fact that he, she or it (i) is or was such
         Member, partner in the Member or officer, trustee, director, employee
         or agent of any partner in the Member, or officer, employee or agent of
         the LLC, or (ii) is or was serving at the request of the LLC as a
         director, partner, venturer, trustee, employee, agent or similar
         functionary of another foreign or domestic limited liability company,
         corporation, partnership, sole proprietorship, trust, employee benefit
         plan or other enterprise. The failure of the LLC to observe any
         formalities or requirements relating to the exercise of its powers or
         management of its business or affairs under the Act or this Agreement
         shall not be grounds for imposing personal liability on the Member, its
         partners or any officers, trustees, directors, employees or agents of
         any partner in the Member, or any officers, employees or agents of the
         LLC, for any liabilities of the LLC.
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                  b) The LLC shall indemnify and hold harmless the Member, its
         partners or any officers, trustees, directors, employees or agents of
         any partner in the Member, or any officers, employees or agents of the
         LLC (individually, in each case, an "Indemnitee"), to the fullest
         extent permitted by law from and against any and all losses, claims,
         demands, costs, damages, liabilities (joint or several), expenses of
         any nature (including attorneys' fees and disbursements), judgments,
         fines, settlements and other amounts arising from any and all claims,
         demands, actions, suits or proceedings, whether threatened, pending or
         completed and whether civil, criminal, administrative, arbitrative or
         investigative, including, without limitation, any appeal to any such
         claim, demand, action, suit or proceeding and any inquiry or
         investigation that could lead to such claim, demand, action, suit or
         proceeding, arising out of or incidental to the business or activities
         of or relating to the LLC and in which any such Indemnitee may be, or
         may have been, involved, or threatened to be involved, as a party or
         otherwise, by reason of the fact that he, she or it (i) is or was the
         Member, a partner in the Member or an officer, trustee, director,
         employee or agent of any partner in the Member, or an officer, employee
         or agent of the LLC, or (ii) is or was serving at the request of the
         LLC as a director, officer, partner, venturer, proprietor, trustee,
         employee, agent or similar functionary of another foreign or domestic
         limited liability company, corporation, partnership, joint venture,
         sole proprietorship, trust, employee benefit plan or other enterprise,
         to the fullest extent permitted under the Act, as the same exists or
         may hereafter be amended, regardless of whether the Indemnitee
         continues to be the Member, a partner in the Member or an officer,
         trustee, director, employee or agent of any partner in the Member, or
         an officer, employee or agent of the LLC, at the time any such
         liability or expense is paid or incurred; provided, however, that this
         provision shall not eliminate or limit the liability of an Indemnitee
         (i) for any breach of the Indemnitee's duty of loyalty to the LLC or
         its Member or (ii) for acts or omissions which involve intentional
         misconduct, gross negligence or a knowing violation of law. Any right
         of an Indemnitee under this Section 8 shall be a contract right and as
         such shall run to the benefit of such Indemnitee. Any repeal or
         amendment of this Section 8 shall be prospective only and shall not
         limit the rights of any such Indemnitee or the obligations of the LLC
         with respect to any claim arising from or related to the status or the
         services of such Indemnitee in any of the foregoing capacities prior to
         any such repeal or amendment to this Section 8. Such right shall
         include the right to be paid by the LLC expenses incurred in
         investigating or defending any such proceeding in advance of its final
         disposition to the maximum extent permitted under the Act, as the same
         exists or may hereafter be amended. If a claim for indemnification or
         advancement of expenses hereunder is not paid in full by the LLC within
         sixty (60) days after a written claim has been received by the LLC, the
         claimant may at any time thereafter bring suit against the LLC to
         recover the unpaid amount of the claim, and if successful in whole or
         in part, the claimant shall also be entitled to be paid the expenses of
         prosecuting such claim. It shall be a defense to any such action that
         such indemnification or advancement of costs of defense are not
         permitted under the Act, but the burden of proving such defense shall
         be on the LLC. Neither the failure of the LLC to have made its
         determination prior to the commencement of such action that
         indemnification of, or advancement of costs of defense to, the
         Indemnitee is permissible in the circumstances nor an actual
         determination by the LLC that such indemnification or advancement is
         not permissible shall be a defense to the action or create a
         presumption that such indemnification or advancement is not
         permissible. In the event of the death of any Indemnitee, such right
         shall inure to the benefit of his or her heirs, executors,
         administrators and personal representatives. The rights conferred above
         shall not be exclusive of any other right which any Indemnitee may have
         or hereafter acquire under any statute, resolution, agreement or
         otherwise. If authorized by the Member, the LLC may purchase and
         maintain insurance on behalf of any Indemnitee to the full extent
         permitted by the Act.
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         9. Distributions. The Member from time to time, in its sole discretion,
shall determine the amount of cash and other property of the LLC that is not
reasonably necessary for the operation of the LLC and is available for
distribution to the Member and shall cause the LLC to distribute such cash and
property to the Member, subject to the Act.

         10. Assignment of Interest. The Member from time to time may assign or
transfer all or any part of its interest in the LLC, including granting security
interests in such interest.

         11. Winding Up and Distribution Upon Dissolution. Upon dissolution of
the LLC, the Member shall wind up the business and affairs of the LLC and shall
cause all property and assets of the LLC to be distributed as follows:

                  a) first, all of the LLC's debts, liabilities and obligations,
         including any loans or advances from the Member, shall be paid in full
         or reserves therefor shall be set aside; and

                  b) any remaining assets shall be distributed to the Member.

         12. Amendments. The Member and the LLC may at any time and from time to
time amend this Agreement by executing a written amendment signed by authorized
representatives of both parties.

         13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (but not including the choice
of law rules thereof), including, without limitation, the Act.



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                  IN WITNESS WHEREOF, the LLC and the Member have executed this
Agreement as of the date first set forth above.

                     LLC:


                     ET SUB-HERITAGE ANDOVER, L.L.C.



                     By:   ElderTrust Operating Limited Partnership, Sole Member

                           By:  ElderTrust, General Partner


                                By:   /s/ Edward B. Romanov, Jr.
                                      ---------------------------------------
                                      Name:
                                      Title:



                     MEMBER:


                     ELDERTRUST OPERATING LIMITED PARTNERSHIP



                     By:   ElderTrust, General Partner


                           By:  /s/ Edward B, Romanov, Jr.
                                ---------------------------------------
                                Name:
                                Title:


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                               EXHIBIT A

                     MEMBER'S CAPITAL CONTRIBUTION


Cash in the Amount of:

Assignment of: