EX-10.1



 





Exhibit 10.1




LOAN AGREEMENT




     THIS LOAN AGREEMENT (this “Agreement”) is made effective as of the 7th day of
August, 2006, by and between DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company
(the “Afton Oaks Borrower”), DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited
liability company (the “NC I Borrower”), DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a
Delaware limited liability company, (the “NC II Borrower”), DIVERSICARE BRIARCLIFF, LLC, a Delaware
limited liability company (the “Briarcliff Borrower”), DIVERSICARE CHISOLM, LLC, a Delaware limited
liability company (the “Chisolm Borrower”), DIVERSICARE HARTFORD, LLC, a Delaware limited liability
company (the “Hartford Borrower”), DIVERSICARE HILLCREST, LLC, a Delaware limited liability company
(the “Hillcrest Borrower”), DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company (the
“Lampasas Borrower”), DIVERSICARE PINEDALE, LLC, a Delaware limited liability company (the “Newport
Borrower”), DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company (the “Windsor
Borrower”), and DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company (the “Yorktown
Borrower”; the Afton Oaks Borrower, the NC I Borrower, the NC II Borrower, the Briarcliff Borrower,
the Chisolm Borrower, the Hartford Borrower, the Hillcrest Borrower, the Lampasas Borrower, the
Newport Borrower, the Windsor Borrower and the Yorktown Borrower, together with their successors
and/or assigns, may be referred to collectively herein as the “Borrowers” or individually as a
“Borrower”), and CAPMARK FINANCE INC., a California corporation, formerly known as GMAC Commercial
Mortgage Corporation (together with its successors and assigns, “Lender”).



R E C I T A L S:




     A. Borrowers have requested that Lender make a loan to Borrower in the principal sum of
$30,625,000.00.



     B. Lender has agreed to make such loan on the terms and conditions hereinafter set forth.



AGREEMENT




     NOW, THEREFORE, it is hereby agreed as follows:



ARTICLE I

DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.




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



          “Accounts” has the meaning given to that term in the Mortgage.




 









 








          “Actual Cost of Professional and General Liability” means the total out of pocket expense
associated with professional and general liability related settlements, legal fees, or
administration for all facilities owned and/or operated by entities related to Guarantor for the
comparable period divided by the total number of licensed beds for all facilities owned and/or
operated by entities related to Guarantor then multiplied by the number of licensed beds for the
Facilities (excluding Carolina Beach Facility, Lampasas Facility and Yorktown Facility).




          “Actual Management Fees” means actual management fees paid or incurred in connection with
operation of the Facility.




          “Affiliate” means, with respect to any Person, (a) each Person that controls, is controlled by
or is under common control with such Person, (b) each Person that, directly or indirectly, owns or
controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of
such Person, and (c) each of such Person’s officers, directors, members, joint venturers and
partners.




          “Afton Oaks Facility” means the nursing home facility known as “Afton Oaks Nursing and
Rehabilitation Center” presently a 169-bed licensed skilled nursing facility located on the Land
located in Houston, Harris County, Texas, as it may now or hereafter exist, together with any other
general or specialized care facilities, if any (including any Alzheimer’s care unit, subacute
nursing and/or assisted living facility), now or hereafter operated on the Land.




          “Allocated Loan Amount” means that portion of the Loan allocated to an individual Borrower for
purposes of mortgage or deed recording tax. The Allocated Loan Amount for each Borrower is more
particularly described in Exhibit “G” herein.




          “A/R Lender” means (i) AmSouth Bank, an Alabama state banking corporation, its successors and
assigns (“AmSouth”) or (ii) any subsequent lender of an A/R Loan, its successors and assigns.




          “A/R Loan” means (i) that certain indebtedness and obligations of Guarantor, Borrowers and
their Affiliates, to AmSouth evidenced by and described in that certain Master Amendment to Loan
Documents and Agreement dated as of November 8, 2000, effective as of October 1, 2000, and the
documents and instruments executed in connection therewith, together with any amendments thereto,
and any modifications, renewals and extensions thereof, which indebtedness and obligations are
secured, in part, by a first priority lien in the Accounts of the Facilities or (ii) the
indebtedness and obligations of Guarantor, Borrowers and their Affiliates to any subsequent lender
of a credit facility for a working capital loan which is secured, in whole or in part, by a first
priority lien in the Accounts of the Facilities, subject to an Intercreditor Agreement acceptable
to Lender and subject to Lender’s review and approval of the loan documents evidencing the credit
facility, as approved by Lender in its reasonable discretion.




          “Assignment of Leases and Rents” means that certain Assignment of Leases and Rents of even
date herewith by and between Borrowers and Lender.




          “Assignment of Licenses” means that certain Assignment of Licenses, Permits and Contracts of
even date herewith by Borrowers to and for the benefit of Lender.




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          “Assumed Management Fees” means assumed management fees of five percent (5%) of net patient
revenues of the Facilities (after Medicaid and Medicare contractual adjustments).




          “Briarcliff Facility” means the nursing home facility known as “Briarcliff Health Care Center”
presently an 120-bed licensed skilled nursing facility located on the Land located in Oak Ridge,
Anderson County, Tennessee, as it may now or hereafter exist, together with any other general or
specialized care facilities, if any (including any Alzheimer’s care unit, subacute nursing and/or
assisted living facility), now or hereafter operated on the Land.




          “Business Day” means a day, other than Saturday or Sunday and legal holidays, when Lender is
open for business.




          “Capital Improvements Fund Escrow and Security Agreement” means that certain Capital
Improvements Fund Escrow and Security Agreement of even date herewith by and between the Newport
Borrower and Lender.




          “Carolina Beach Facility” means the assisted living facility known as “Diversicare Assisted
Living of Carolina Beach” (formerly Nielsens Rest Home) presently a 61-bed licensed assisted living
facility located on the Land located in Carolina Beach, New Hanover County, North Carolina, as it
may now or hereafter exist, together with any other general or specialized care facilities, if any
(including any Alzheimer’s care unit and/or subacute nursing facility), now or hereafter operated
on the Land.




          “Chisolm Facility” means the nursing home facility known as “Chisolm Trail Nursing and
Rehabilitation Center” presently a 100-bed licensed skilled nursing facility located on the Land
located in Lockhart, Caldwell County, Texas, as it may now or hereafter exist, together with any
other general or specialized care facilities, if any (including any Alzheimer’s care unit, subacute
nursing and/or assisted living facility), now or hereafter operated on the Land.




          “Closing Date” means the date on which all or any part of the Loan is disbursed by Lender to
or for the benefit of Borrowers.




          “Combined Debt Service Coverage Ratio” means the Debt Service Coverage Ratio for the
Facilities, when combined.




          “Commitment Letter” means the commitment letter issued by Lender to Borrower dated June 30,
2006.




          “Cross-Collateralization Agreement” means, the Cross-Collateralization, Cross-Default and
Mortgage Modification Agreement of even date herewith by and between Borrowers and Lender.




          “DCMS Note Receivable” means the note executed by DCMS Holdings, Inc.
 to the order of Diversicare Leasing Corp. associated with the sale of the Guarantor’s Canadian
subsidiary, which occurred May, 2004.




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          “Debt Service Coverage Ratio” means a ratio in which the first number is the sum of “net
pre-tax income” of a Borrower from usual operations of its Facility as set forth in the financial
statements provided to Lender (without deduction for Actual Management Fees or management expenses
paid or incurred in connection with the operation of the Facility), calculated based upon the
preceding twelve (12) months, plus Loan interest expense to the extent deducted in determining net
income and non-cash expenses or allowances for depreciation and amortization of the Facility for
such period, less Assumed Management Fees for such period and the second number is the sum
of the principal amounts due (even if not paid) on the Loan (but which shall not include that
portion associated with any balloon payment of the Loan) for the applicable period plus the
interest due on the Loan for the applicable period. In calculating “net pre-tax income”, any
Extraordinary Income, Extraordinary Expense, and non-cash Facility-related impairment charges
expensed in accordance with GAAP shall be excluded. Note: Commencing on (i) the ninth
(9th) day of the month immediately following the Closing Date if the Closing Date occurs
prior to the fifteenth (15th) day of a calendar month or (ii) the ninth (9th)
day of the second month following the Closing Date and continuing on the ninth (9th) day
of each successive month thereafter, principal and interest for the purposes of the denominator
above shall be annualized until such time as twelve (12) months of principal and interest has been
accrued (whether or not paid) under the Loan. Notwithstanding the foregoing, any expenses
associated with the deferred debt cost related to the Briarcliff Facility and/or the Hartford
Facility shall be treated as an Extraordinary Expense for the purpose of the Debt Service Coverage
Ratio.




          “Debt Service Reserve Fund Agreement” means that certain Debt Service Reserve Fund Escrow and
Security Agreement of even date herewith between Lender and Borrowers.




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




          “Default Rate” has the meaning given to that term in the Note.




          “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 Land and/or the Improvements.




          “Equipment” has the meaning given to that term in the Mortgage.




          “Event of Default” means any “Event of Default” as defined in Article VII hereof.




          “Extraordinary Income and Extraordinary Expenses” means material items of a character
significantly different from the typical or customary business activities of Borrowers which would
not be expected to recur frequently and which would not be considered as recurring factors in any
evaluation of the ordinary operating processes of Borrower’s business, and which would be treated
as extraordinary income or extraordinary expenses under GAAP.




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




          “Facilities” means, collectively, the Afton Oaks Facility, the Briarcliff Facility, the
Carolina Beach Facility, the Chisolm Facility, the Hartford Facility, the Hillcrest Facility, the
Lampasas Facility, the Newport Facility, the Windsor Facility and the Yorktown Facility. Any of
the Facilities may be referred to individually herein as a “Facility”.




          “GAAP” means, as in effect from time to time, generally accepted accounting principles
consistently applied as promulgated by the Financial Accounting Standards Board (“FASB”) and
enforced by the American Institute of Certified Public Accountants (“AICPA”).




          “Governmental Authority” means any nation or government, any state or other political
subdivision thereof, and any Person exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to such government.




          “Guarantor” means Advocat Inc., a Delaware corporation, which shall guarantee the Loan.




          “Guaranty Agreement” means that certain Guaranty of even date herewith from Guarantor to and
for the benefit of Lender, whereby Guarantor guarantees the Loan.




          “Hartford Facility” means the nursing home facility known as “Hartford Health Care” presently
an 86-bed licensed skilled nursing facility located on the Land located in Hartford, Geneva County,
Alabama, as it may now or hereafter exist, together with any other general or specialized care
facilities, if any (including any Alzheimer’s care unit, subacute nursing and/or assisted living
facility), now or hereafter operated on the Land.




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




          “Hazardous Materials Laws” means all federal, state, and local laws, ordinances and
regulations and standards, rules, policies and other governmental requirements, administrative
rulings and court judgments and decrees in effect now or in the future and including all
amendments, that relate to Hazardous Materials and apply to Borrower or to the Land and/or the
Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance
Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C.




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Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801,
and their state analogs.




          “Hillcrest Facility” means the nursing home facility known as “Hillcrest Manor Nursing and
Rehabilitation Center” presently a 60-bed licensed skilled nursing facility located on the Land
located in Luling, Caldwell County, Texas, as it may now or hereafter exist, together with any
other general or specialized care facilities, if any (including any Alzheimer’s care unit, subacute
nursing and/or assisted living facility), now or hereafter operated on the Land.




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




          “Indebtedness” means any (a) obligations for borrowed money, (b) obligations, payment for
which is being deferred by more than ninety (90) days, representing the deferred purchase price of
property other than accounts payable arising in connection with the purchase of inventory customary
in the trade and in the ordinary course of Borrowers’ business, (c) obligations, whether or not
assumed, secured by Liens or payable out of the proceeds or production from the Accounts and/or
property now or hereafter owned or acquired, and (d) the amount of any other obligation (including
obligations under financing leases) which would be shown as a liability on a balance sheet prepared
in accordance with GAAP.




          “Intercreditor Agreement” means (i) that certain Intercreditor Agreement dated August 6, 2006,
by and between AmSouth and Lender or (ii) any Intercreditor Agreement between Lender and any
subsequent A/R Lender.




          “Inventory” has the meaning given to that term in the Mortgage.




          “Lampasas Facility” means the nursing home facility known as “Lampasas Nursing and
Rehabilitation Center” presently a 68-bed licensed skilled nursing facility located on the Land
located in Lampasas, Lampasas County, Texas, as it may now or hereafter exist, together with any
other general or specialized care facilities, if any (including any Alzheimer’s care unit, subacute
nursing and/or assisted living facility), now or hereafter operated on the Land.




          “Land” means the land described in Exhibit “A” attached hereto and made a part hereof.




          “Leases” has the meaning given to that term in the Mortgage.




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




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          “Loan” means, collectively, the Note I Loan and the Note II Loan, in the combined principal
sum of $30,625,000.00 made by Lender to Borrowers as of the date hereof.




          “Loan Documents” means, collectively, the Commitment Letter, this Agreement, the Note, the
Mortgage, the Assignment of Leases and Rents, the Assignment of Licenses, the Guaranty Agreement,
the Debt Service Reserve Fund Agreement, the Subordination Agreement, the Cross-Collateralization
Agreement, the Capital Improvements Fund Escrow and Security Agreement together with any and all
other documents executed by Borrowers or others, evidencing, securing or otherwise relating to the
Loan.




          “Loan Obligations” means the aggregate of all principal and interest owing from time to time
under the Note and all expenses, charges and other amounts from time to time owing under the Note,
this Agreement or the other Loan Documents and all covenants, agreements and other obligations from
time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents.




          “Managed Care Plans” means any health maintenance organization, preferred provider
organization, individual practice association, competitive medical plan, or similar arrangement,
entity, organization, or Person.




          “Management Agreement” means, collectively, those certain Management Agreements between
Manager and each Borrower, obligating Manager to operate and manage the Facilities.




          “Manager” means Diversicare Management Services, Co., a Tennessee corporation, and any
successor manager of a Facility approved by Lender in writing.




          “Maturity Date” means, for the portion of the Loan evidenced by Note I, August 9, 2011, and
for the portion of the Loan evidenced by Note II, August 9, 2010.




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




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




          “Mortgage” means those certain Deed of Trust and Security Agreements or Mortgage and Security
Agreements of even date herewith from Borrowers in favor of or for the benefit of Lender,
encumbering the real estate which is more particularly described in Exhibit “A” hereto, and
upon which each Facility is located, as modified by the Cross-Collateralization Agreement.




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          “Mortgaged Property” has the meaning given to that term in the Mortgage.




          “Newport Facility” means the nursing home facility known as “Newport Healthcare and
Rehabilitation Center” presently a 130-bed licensed skilled nursing facility located on the Land
located in Newport, Jackson County, Arkansas, as it may now or hereafter exist, together with any
other general or specialized care facilities, if any (including any Alzheimer’s care unit, subacute
nursing and/or assisted living facility), now or hereafter operated on the Land.




          “Note” means, collectively, Note I (hereinafter defined) and Note II (hereinafter defined).




          “Note I” means the Promissory Note of even date herewith in the principal amount of
$22,500,000.00, payable by Borrowers to the order of Lender.




          “Note I Loan” means the loan in the principal sum of $22,500,000.00 made by Lender to the
Borrowers, as evidenced by Note I.




          “Note I Security” means the collateral, security and property more specifically described in
Section 2.2(a) herein.




          “Note II” means the Promissory Note of even date herewith in the principal amount of
$8,125,000.00, payable by Borrowers to the order of Lender.




          “Note II Loan” means the loan in the principal amount of $8,125,000.00 made by Lender to
Borrowers, as evidenced by Note II.




          “Note II Security” means the collateral, security and property more particularly described in
Section 2.2(b) herein.




          “O&M Program” means a written program of operations and maintenance established or approved in
writing by Lender relating to any Hazardous Materials in, on or under the Land and/or the
Improvements.




          “OFAC List” means the list of specially designated nationals and blocked Persons subject to
financial sanctions that is maintained by the U.S. Treasury Department, Office of Foreign Assets
Control and any other similar list maintained by the U.S. Treasury Department, Office of Foreign
Assets Control pursuant to any Requirements of Law, including, without limitation, trade embargo,
economic sanctions, or other prohibitions imposed by Executive Order of the President of the United
States. The OFAC List currently is accessible through the internet website
www.treas.gov/ofac/t11sdn.pdf.




          “Patient Agreements” means collectively any and all contracts, authorizations, agreements or
consents made by or on behalf of any patient or resident of the Facilities, or any other person
seeking or obtaining services or Goods from a Borrower, pursuant to which a Borrower provides
skilled nursing care, intermediate care and/or assisted living facility, or any form of patient or
residential care, as well as related services at the Facilities (as such contracts, authorizations,
agreements or consents may be amended, supplemented, renewed, replaced,


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extended or modified from time to time). The Patient Agreements include consents to treatment
and assignments of payment of benefits.




          “Permits” means all licenses, permits and certificates used or necessary in connection with
the construction, ownership, operation, use or occupancy of the Mortgaged Property and/or the
Facilities, including, without limitation, business licenses, state health department licenses,
food service licenses, licenses to conduct business, certificates of need and all such other
permits, licenses and rights, obtained from any governmental, quasi-governmental or private person
or entity whatsoever concerning ownership, operation, use or occupancy including certifications and
eligibility for participation by any Borrower, with respect to its operation of the Facilities and
any related businesses or operations, in programs or arrangements with, or reimbursement from Third
Party Payors including Medicare and Medicaid.




          “Permitted Encumbrances” has the meaning given to that term in Section 5.2 hereof.




          “Person” means any individual, partnership, limited partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated association, joint
venture, governmental authority or other form of legal entity of whatever nature.




          “Proceeds” has the meaning given to that term in the Mortgage.




          “Reimbursement Contracts” means all third-party reimbursement contracts relating to the
Facilities which are now or hereafter in effect with respect to residents or patients qualifying
for coverage under the same, including Medicare and Medicaid, Managed Care Plans and private
insurance agreements, and any successor program or other similar reimbursement program and/or
private insurance agreements, now or hereafter existing.




          “Rents” has the meaning given to that term in the Mortgage.




          “Requirements of Law” means (a) the organizational documents of an entity, and (b) any law,
regulation, ordinance, code, decree, treaty, ruling or determination of an arbitrator, court or
other Governmental Authority, or any Executive Order issued by the President of the United States,
in each case applicable to or binding upon such Person or to which such Person, any of its property
or the conduct of its business is subject including, without limitation, laws, ordinances and
regulations pertaining to the zoning, occupancy and subdivision of real property.




          “Single Purpose Entity” means a Person which complies with the requirements of Section 5.4.




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




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          “Subordination Agreement” means that certain Subordination of Management Agreement of even
date herewith by and among Borrower, Manager, and Lender.




          “Windsor Facility” means the nursing home facility known as “Windsor House of Huntsville”
presently a 117-bed licensed skilled nursing facility and a 17-bed licensed assisted living
facility located on the Land located in Huntsville, Madison County, Alabama, as it may now or
hereafter exist, together with any other general or specialized care facilities, if any (including
any Alzheimer’s care unit, subacute nursing and/or assisted living facility), now or hereafter
operated on the Land.




          “Worker’s Comp Retro Premiums” means any and all current or future premium adjustments and/or
refunds and/or credits associated with Guarantor’s worker’s compensation policies.




          “Yorktown Facility” means the nursing home facility known as “Yorktown Nursing and
Rehabilitation Center” presently a 92-bed licensed skilled nursing facility located on the Land in
Yorktown, Dewitt County, Texas, as it may now or hereafter exist, together with any other general
or specialized care facilities, if any (including any Alzheimer’s care unit, subacute nursing
and/or assisted living facility), now or hereafter operated on the Land.




          The following terms shall have the same respective meanings as are given to those terms in the
Uniform Commercial Code of the State of Alabama, as amended: “Chattel Paper”, “Contracts”,
“Contract Rights”, “Documents”, “General Intangibles”, “Goods”, “Instruments.” Without limiting
the foregoing, the following kinds and types of property to the extent related to the Facilities
shall be included within the definition of “General Intangibles”:




               (a) Permits, Patient Agreements, provider agreements and all other agreements (whether now
existing or hereafter made) between any Borrower and any Third Party Payor relating to any rights
of any Borrower or to payment and/or reimbursement from, or claims of Borrower against, any Third
Party Payor;



               (b) All franchises, sub franchises, rights to distribute, sales agencies, licenses, permits,
leases, rights to indemnification, rights as insured, including the right to be provided a defense,
warranty rights, concessions and concession rights, customer lists, yellow page or trade journal
listing, telephone numbers, and any and all other property or rights necessary, convenient, or
proper with respect to the continued operation of the business of Borrower as now or hereafter
conducted by any of the Borrowers with respect to the operation or use of the Facilities;



               (c) All patents and patent applications, together with the right to sue for past, present, and
future infringements, all rights corresponding thereto throughout the world and all reissues,
divisions, continuations, renewals, extensions, and continuations-in-part thereof and all
improvements thereon;



               (d) All trademarks, trade names, and trade secrets, together with the right to sue for past,
present, and future violations corresponding thereto, and all good will associated therewith; and



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               (e) All copyrights, together with the right to sue for past, present, or future violations or
infringements of rights of the copyrights, and all renewals, extension and continuations thereof.



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



     1.3 Each term contained in this Agreement and defined in the Uniform Commercial Code (the
“UCC”) in effect from time to time in the state in which the Land is located shall have the meaning
given to such term in the UCC, unless the context otherwise indicates, and shall include, without
limitation, the meaning set forth in this Agreement.



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



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



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



ARTICLE II

TERMS OF THE LOAN




     2.1 The Loan. Borrowers have agreed to borrow the Loan from Lender, and Lender has
agreed to make the Loan to Borrowers, subject to Borrowers’ compliance with and observance of the
terms, conditions, covenants, and provisions of this Agreement and the other Loan Documents, and
Borrowers have made the covenants, representations, and warranties herein and therein as a material
inducement to Lender to make the Loan. The Loan shall be disbursed as follows:



               (a) On the Closing Date, $7,744,199.33 of the Loan shall be disbursed to Lender and applied to
the outstanding debts of the NC I Borrower and/or the NC II Borrower.



               (b) A portion of the Loan in the amount of $1,295,014.52 shall be used to pay off a term loan
made to the Borrowers and Guarantor by the A/R Lender. Such payoff shall not affect the A/R Loan;



               (c) A portion of the Loan in the amount of $1,107,620.00 for certain renovations at the
Newport Facility shall be disbursed in accordance with the Capital Improvements Fund Escrow and
Security Agreement; and



               (d) The remainder of the Loan shall refinance certain existing debt of the Borrowers to the
Lender.



     2.2 Security for the Loan.



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          (a) Note I Loan: The portion of the Loan evidenced by Note I will be evidenced, secured and
guaranteed by the Loan Documents and will include, but not be limited to the following
(collectively, the “Note I Security”):




               (i) a first lien deed of trust with respect to the Borrowers’ right, title, interest in and to
the Facilities (excluding the Carolina Beach Facility, the Lampasas Facility and the Yorktown
Facility);



               (ii) a second priority lien security interest in accounts receivable issuing from the
Facilities (excluding the Carolina Beach Facility, the Lampasas Facility and the Yorktown
Facility);



               (iii) the Cross-Collateralization Agreement; and



               (iv) any and all other collateral securing the Note I Loan.



          (b) Note II Loan: The portion of the Loan evidenced by Note II will be evidenced, secured and
guaranteed by the Loan Documents and will include, but not be limited to the following
(collectively, the “Note II Security”):




               (i) an assignment of the DCMS Note Receivable and the Workers’ Comp Retro Premiums;



               (ii) a first lien deed of trust with respect to the Borrowers’ right, title, interest in and
to the Carolina Beach Facility;



               (iii) a first lien deed of trust with respect to the Lampasas Borrower’s right, title, and
interest in and to the Lampasas Facility;



               (iv) a first lien deed of trust with respect to the Yorktown Borrower’s right, title, and
interest in and to the Yorktown Facility;



               (v) a second priority lien security interest in accounts receivable issuing from the Carolina
Beach Facility, the Lampasas Facility and the Yorktown Facility;



               (vi) a second lien deed of trust or mortgage with respect to the Borrowers’ right, title, and
interest in and to the Facilities (excluding the Carolina Beach Facility, the Lampasas Facility and
the Yorktown Facility), including the Land; and



               (vii) any and all other collateral securing the Note II Loan.



     2.3 Limitation on Interest. All agreements between Borrowers and Lender, whether now
existing or hereafter arising and whether written or oral, are hereby limited so that in no
contingency, whether by reason of acceleration of the maturity of any indebtedness governed hereby
or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum
amount permissible under applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to
Lender shall be reduced to the maximum amount permitted under applicable



12









 







law; and, if from any circumstance the Lender shall ever receive anything of value deemed
interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive
interest shall be applied to the reduction of the principal of the Loan and not to the payment of
interest, or, if such excessive interest exceeds the unpaid balance of principal of the Loan, such
excess shall be refunded to Borrowers. All interest paid or agreed to be paid to Lender shall, to
the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout
the full period until payment in full of the principal of the Loan (including the period of any
renewal or extension thereof) so that interest thereon for such full period shall not exceed the
maximum amount permitted by applicable law. This paragraph shall control all agreements between
the Borrowers and Lender.



ARTICLE III

BORROWERS’ REPRESENTATIONS AND WARRANTIES




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



     3.1 Existence, Power and Qualification. Borrower is a duly organized and validly
existing Delaware limited liability company, has the power to own its properties and to carry on
its business as is now being conducted, and is duly qualified to do business and is in good
standing in every jurisdiction in which the character of the properties owned by it or in which the
transaction of its business makes its qualification necessary.



     3.2 Power and Authority. Borrower has full power and authority to borrow the
indebtedness evidenced by the Note and to incur the Loan Obligations provided for herein, all of
which have been authorized by all proper and necessary limited liability company action on the part
of Borrower. All consents, approvals authorizations, orders or filings of or with any court or
governmental agency or body, if any, required for the execution, delivery and performance of the
Loan Documents by Borrower have been obtained or made.



     3.3 Single Purpose Entity. Borrower is a Single Purpose Entity.



     3.4 Pending Matters.



          (a) Operations; Financial Condition. Except as shown on Schedule 3.4, no action or
investigation is pending or, to the best of Borrower’s knowledge, threatened against Borrower
before or by any court or administrative agency which might result in any material adverse change
in the financial condition, operations or prospects of Borrower or any lower reimbursement rate
under the Reimbursement Contracts. Borrower is not in violation of any agreement, the violation of
which might reasonably be expected to have a material adverse effect on its business or assets, and
Borrower is not in violation of any order, judgment, or decree of any court, or any statute or
governmental regulation to which Borrower is subject.




          (b) Land and Improvements. There are no proceedings pending, or, to the best of
Borrower’s knowledge, threatened, to acquire through the exercise of any power of condemnation,
eminent domain or similar proceeding any part of the Land, the Improvements or any interest
therein, or to enjoin or similarly prevent or restrict the use of the Land or the

13









 








operation of the Facility in any manner. Except for unrepaired flood damage at the Afton Oaks
Facility, none of the Improvements is subject to any unrepaired casualty or other damage.




     3.5 Financial Statements Accurate. All financial statements heretofore or hereafter
provided by Borrower are and will be true and complete in all material respects as of their
respective dates and fairly present the financial condition of Borrower, and there are no material
liabilities, direct or indirect, fixed or contingent, as of the respective dates of such statements
which are not reflected therein or in the notes thereto or in a written certificate delivered with
such statements. The financial statements of Borrower have been prepared in accordance with GAAP.
There has been no material adverse change in the financial condition, operations, or prospects of
Borrower since the dates of such statements except as fully disclosed in writing with the delivery
of such statements. All financial statements of the operations of the Facility heretofore or
hereafter provided to Lender are and will be true and complete in all material respects as of their
respective dates.



     3.6 Compliance with Facility Laws. Its Facility is duly licensed as a skilled nursing
facility and/or an assisted living facility with the number of beds shown in the Facility’s
definition in Article I herein under the applicable laws of the state where the Land is located,
and except for the Carolina Beach Facility, is currently operated as a skilled nursing facility
and/or an assisted living facility. Borrower is the lawful owner of all Permits for the Facility,
including, without limitation, the Certificate of Need and/or the Nursing Home License issued by
the applicable State Department of Health, Health Care Facilities, if applicable, which (a) are in
full force and effect, (b) constitute all of the permits, licenses and certificates required for
the use, operation and occupancy thereof, (c) have not been pledged as collateral for any other
loan or Indebtedness, (d) are held free from any restriction or any encumbrance which would
materially adversely affect the use or operation of the Facility and (e) are not provisional,
probationary or restricted in any way. Borrower and Manager as well as the operation of the
Facility are in compliance in all material respects with the applicable provisions of all laws,
rules, regulations and published interpretations to which the Facility is subject. No waivers of
any laws, rules, regulations, or requirements (including, but not limited to, minimum foot
requirements per bed) are required for the Facility to operate at the foregoing licensed bed
capacity. All Reimbursement Contracts are in full force and effect with respect to the Facility,
and Borrower and Manager are in good standing with all the respective agencies governing such
applicable Facility licenses, program certification and Reimbursement Contracts. Borrower and
Manager are current in the payment of all so-called provider specific taxes or other assessments
with respect to such Reimbursement Contracts. Except for the Carolina Beach Facility, Borrower
will maintain the Certificate of Need, if applicable, and/or any required Permits in full force and
effect. In the event Lender acquires the Facility through foreclosure or otherwise, neither Lender
nor a subsequent manager, a subsequent lessee or any subsequent purchaser (through foreclosure or
otherwise) must obtain a Certificate of Need prior to applying for and receiving a license to
operate the Facility and certification to receive Medicare and Medicaid payments (and its successor
programs) for patients having coverage thereunder provided that no service or bed complement is
changed. Notwithstanding the foregoing, Lender acknowledges that the Carolina Beach Facility is
closed. NC I Borrower retains the associated license/Certificate of Need for the Carolina Beach
Facility; provided, however, Lender acknowledges that the license/Certificate of Need for the beds
at the Carolina Beach Facility is subject to a purchase and sale agreement with a third party
purchaser for the relocation of the beds to a facility of such purchaser (the “Carolina



14









 







Beach Transfer”). NCI Borrower will maintain the Certificate of Need, if applicable, and/or
any required Permits so long as necessary and NC I Borrower is able, until the Certificate of Need
application for the relocation of the beds by such purchaser is resolved; provided, however, that
NC I Borrower shall use its best efforts to extend the Permits and facilitate said sale. NC I
Borrower agrees that it shall provide Lender with the net sales proceeds from such sale.



     3.7 Maintain Bed Capacity. Except for the Carolina Beach Transfer, neither Borrower
nor Manager has granted to any third party the right to reduce the number of licensed beds in the
Facility or to apply for approval to transfer the right to any or all of the licensed Facility beds
to any other location.



     3.8 Medicare and Medicaid Compliance. The Facility is in compliance with all
requirements for participation in Medicare and Medicaid, including without limitation, the Medicare
and Medicaid Patient Protection Act of 1987. The Facility is in conformance in all material
respects with all insurance, reimbursement and cost reporting requirements and has a current
provider agreement which is in full force and effect under Medicare and Medicaid.



     3.9 Third Party Payors. There is no threatened or pending revocation, suspension,
termination, probation, restriction, limitation, or nonrenewal affecting Borrower, Manager or the
Facility or any participation or provider agreement with any third-party payor, including Medicare,
Medicaid, Blue Cross and/or Blue Shield, and any other private commercial insurance managed care
and employee assistance program (such programs, the “Third-Party Payors’ Programs”) to which
Borrower or Manager presently is subject. All Medicare (if any), Medicaid (if any) and private
insurance cost reports and financial reports submitted by Borrower or Manager with respect to the
Facility are and will be materially accurate and complete and have not been and will not be
misleading in any material respects. No cost reports which have been filed for the Facility remain
“open” or unsettled except as otherwise disclosed.



     3.10 Governmental Proceedings and Notices. Neither Borrower nor Guarantor nor Manager
nor the Facility is currently the subject of any proceeding by any governmental agency, and no
notice of any violation has been received from any federal, state or local government or
quasi-governmental body or agency or any administrative or investigative body that would, directly
or indirectly, or with the passage of time:



          (a) have a material adverse impact on Borrower’s or Manager’s ability to accept and/or retain
residents at the Facility or result in the imposition of a fine, a sanction, a lower rate
certification or a lower reimbursement rate for services rendered to eligible residents against or
in respect of the Facility;




          (b) modify, limit or annul or result in the transfer, suspension, revocation or imposition of
probationary use of any of the Permits; or




          (c) affect Borrower’s continued participation in the Medicare or Medicaid programs or any
other Third-Party Payors’ Programs, or any successor programs thereto, at current rate
certifications.




     3.11 Physical Plant Standards. To the best of Borrower’s knowledge, except for the
repairs indicated in the Property Condition Reports prepared for the benefit of Lender in



15









 







connection with the Loan as set forth on Exhibit A to the Commitment, the Facility and the use
thereof comply in all material respects with all applicable local, state and federal building
codes, fire codes, health care, nursing/assisted living/senior housing facility (as applicable) and
other similar regulatory requirements (the “Physical Plant Standards”), and except as set forth on
Schedule 3.11 attached hereto, no waivers of Physical Plant Standards exist at the Facility.



     3.12 Pledge of Receivables. With the exception of the A/R Loan, Borrower has not
pledged its Accounts as collateral security for any loan or Indebtedness other than, if applicable,
the Loan.



     3.13 Payment of Taxes and Property Impositions. Borrower has filed all federal,
state, and local tax returns which it is required to file and has paid, or made adequate provision
for the payment of, all taxes and assessments which are shown pursuant to such returns or are
required to be shown thereon, including, without limitation, provider taxes which are due and owing
as of the date hereof. All such returns are complete and accurate in all respects. Borrower has
paid or made adequate provision for the payment of all applicable water and sewer charges, ground
rents (if applicable) and Taxes (as defined in the Mortgage) with respect to the Land and/or the
Improvements which are due and owing as of the date hereof.



     3.14 Title to Mortgaged Property. Borrower has good and marketable title to all of
the Mortgaged Property, subject to no lien, mortgage, pledge, encroachment, zoning violation, or
encumbrance, except Permitted Encumbrances which do not materially interfere with the security
intended to be provided by the Mortgage or the current use or operation of the Land and the
Improvements or the current ability of the Facility to generate net operating income sufficient to
service the Loan. All Improvements situated on the Land are situated wholly within the boundaries
of the Land.



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



     3.16 Location of Chief Executive Offices. The location of Borrower’s chief executive
office(s) are set forth on Exhibit “B” hereto. Borrower has no place(s) of business other
than the locations of the Facility(ies) listed on Exhibit “B”.



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



     3.18 Trade Names. Except as shown on Schedule 3.18, neither Borrower nor the
Facility, which operates under the trade name stated in the Facility definition in Article I
herein, has changed its name, been known by any other name, or been a party to a merger,
reorganization or similar transaction within the last three (3) years.



16









 





     3.19 ERISA. As of the date hereof and throughout the term of this Agreement,



          (a) Borrower is not an “employee benefit plan,” as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), subject to Title I of ERISA, and none
of the assets of Borrower constitute “plan assets” (within the meaning of Department of Labor
Regulation Section 2510.3-101) of one or more such plans, and




          (b) Borrower is not a “governmental plan” within the meaning of Section 3(32) of ERISA, and
transactions by or with Borrower are not be subject to state statutes regulating investments of,
and fiduciary obligations with respect to, governmental plans.




          The execution and delivery of the Loan Documents and the borrowing of indebtedness hereunder
do not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of
the Internal Revenue Code of 1986, as amended (the “Code”).




     3.20 Ownership. The ownership interests of the Persons comprising Borrower and each
of the respective interests in Borrower are correctly and accurately set forth on Exhibit
“C” hereto.



     3.21 Compliance With Applicable Laws. Except for the repairs described in Section
3.11 above, the Facility and its operations and the Land and Improvements comply in all material
respects with, or are permitted non-conforming uses under all covenants and restrictions of record
and applicable laws, ordinances, rules and regulations, including, without limitation, the
Americans with Disabilities Act and the regulations thereunder, and all laws, ordinances, rules and
regulations relating to zoning, setback requirements and building codes and there are no waivers of
any building codes currently in existence for the Facility.



     3.22 Solvency. Borrower is solvent for purposes of 11 U.S.C. § 548, and the borrowing
of the Loan will not render Borrower insolvent for purposes of 11 U.S.C. § 548.



     3.23 Management Agreement. The Management Agreement is in full force and effect, and
there are no defaults (either monetarily or non-monetarily) by Manager or Borrower thereunder.



     3.24 Other Indebtedness. With the exception of the A/R Loan, which shall be subject
to the terms of the Intercreditor Agreement, Borrower has no outstanding Indebtedness, secured or
unsecured, direct or contingent (including any guaranties), other than indebtedness which
represents trade payables or accrued expenses incurred in the ordinary course of business of owning
and operating the Mortgaged Property; no other debt incurred by Borrower after the date hereof will
be secured (senior, subordinate or pari passu) by the Mortgaged Property.



     3.25 Other Obligations. Borrower has no material financial obligation under any
indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which
Borrower is a party or by which Borrower or the Mortgaged Property is otherwise bound, other than
obligations incurred in the ordinary course of the operation of the Mortgaged Property and other
than obligations under the Mortgage, the other Loan Documents and the A/R Loan.



17









 





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



     3.27 No Change in Facts or Circumstances. All information in any 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.



     3.28 No Illegal Activity as Source of Funds. No portion of the Mortgaged Property has
been or will be purchased, improved, equipped or furnished with proceeds of any illegal activity.



     3.29 Compliance with Anti-Terrorism, Embargo, Sanctions and Anti-Money Laundering
Laws. Borrower, and to the best of Borrower’s knowledge, after having made diligent inquiry,
(a) each Person owning an interest in Borrower, (b) each Guarantor, (c) Manager, and (d) each
tenant at the Property: (i) is not currently identified on OFAC List, and (ii) is not a Person
with whom a citizen of the United States is prohibited to engage in transactions by any trade
embargo, economic sanction, or other prohibition of United States law, regulation, or Executive
Order of the President of the United States. Borrower has implemented procedures, and will
consistently apply those procedures throughout the term of the Loan, to ensure the foregoing
representations and warranties remain true and correct during the term of the Loan.



     3.30 Fraud and Abuse.



          (a) Anti-Kickback Law. After consultation with counsel concerning the federal
anti-kickback law (42 U.S.C.A. SEC. 1320a-7b(b)), neither Borrower nor its agent have offered or
given any remuneration or thing of value to any person to encourage referral to the facility nor
has Borrower or its agent solicited or received any remuneration or thing of value in exchange for
Borrower’s agreement to make referrals or to purchase goods or services for the Facility.




18









 








          (b) Relationships. No physician or other healthcare practitioner has an ownership
interest in, or financial relationship with (other than for rendering services to patient
residents), the Borrower, Manager or the Facility.




          (c) Required Adjustments. With the exception of those cost reports shown on Schedule
3.30, all cost report periods for all Facility payors have been closed and settled, and all
required adjustments have been fully paid and/or implemented.




     3.31 Compliance Program. Borrower has adopted and is adhering to a compliance program
meeting the guidelines published by the Office of the Inspector General on March 16, 2000, at 65
Fed. Reg. 14289. Borrower’s designated compliance officer is Bob Rice.



ARTICLE IV

AFFIRMATIVE COVENANTS OF BORROWER




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



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



     4.2 Maintenance of Existence. Maintain its existence as a Delaware limited liability
company in good standing under the laws of the jurisdiction of its organization or formation, and,
in each jurisdiction in which the character of the property owned by it or in which the transaction
of its business makes qualification necessary, maintain good standing and qualification to do
business.



     4.3 Maintenance of Single Purpose Status. Maintain its existence as a Single Purpose
Entity.



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



     4.5 Insurance. Maintain, at its expense, the following insurance coverages and
policies with respect to the Mortgaged Property and the Facility, which coverages and policies must
be acceptable to Lender’s insurance consultant in its reasonable discretion:



          (a) Comprehensive “all risk” insurance, including coverage for windstorms and hail, in an
amount equal to 100% of the full replacement cost of the Facility, which

19









 








replacement cost shall be determined by the “Insurable Value” or “Cost Approach to Value”
reflected in the most recent Lender approved appraisal for the Facility, without deduction for
depreciation. Such insurance shall also include (i) agreed insurance amount endorsement waiving
all co-insurance provisions, and (ii) an “Ordinance or Law Coverage” endorsement if the Facility or
the use thereof shall constitute a legal non-conforming structure or use.




          (b) Commercial general liability insurance against claims for sexual harassment abuse of
residents and/or patients, personal injury, bodily injury, death or property damage, in or about
the Facility to be on a so-called “occurrence” basis for at least $1,000,000.00 per occurrence and
$3,000,000.00 in the aggregate with a $5,000,000.00 umbrella coverage.




          (c) Professional liability insurance against claims for personal injury, bodily injury or
death, in or about the Facility to be on a so-called “occurrence” basis for at least $1,000,000.00
per occurrence and $3,000,000.00 in the aggregate.




          (d) Business interruption income insurance for the Facility in an amount equal to 100% of the
net income plus carrying costs and extraordinary expenses of the Facility for a period of twelve
(12) months as projected based on Borrower’s reasonable estimate thereof as approved by Lender,
containing a 90-day extended period of indemnity endorsement, provided that any covered loss
thereunder shall be payable to Lender.




          (e) Flood Hazard insurance if any portion of the Improvements is located in a “flood zone
area,” as identified in the Federal Register by the Federal Emergency Management Agency as a
100-year flood zone or “special flood hazard area” and in which flood insurance is available. In
lieu thereof, Lender will accept proof, satisfactory to it in its sole discretion, that the
Improvements are not within the boundaries of a designated area.




          (f) Workers’ compensation insurance, if applicable and required by state law, subject to
applicable state statutory limits, and employer’s liability insurance with a limit of $1,000,000.00
per accident and per disease per employee with respect to the Facility.




          (g) Comprehensive boiler and machinery insurance, including property damage coverage and time
element coverage in an amount equal to 100% of the full replacement cost, without deduction for
depreciation, of the Facility housing the machinery, if steam boilers, pipes, turbines, engines or
any other pressure vessels are in operation with respect to the Facility. Such insurance coverage
shall include a “joint loss” clause if such coverage is provided by an insurance carrier other than
that which provides the comprehensive “all risk” insurance described above.




          (h) During the period of any construction and/or renovation of capital improvements with
respect to the Facility or any new construction at the Facility, builder’s risk insurance for any
improvements under construction and/or renovation, including, without limitation, costs of
demolition and increased cost of construction or renovation, in an amount equal the amount of the
general contract plus the value of any existing purchase money financing for improvements and
materials stored on or off the Property, including “soft cost” coverage.




          (i) If the Facility is located in a seismically active area or an area prone to geologic
instability and mine subsidence, Lender may require an inspection by a qualified

20









 








structural or geological engineer satisfactory to Lender, and at Borrower’s expense. The
Facility must be structurally and geologically sound and capable of withstanding normal seismic
activity or geological movement. Lender reserves the right to require earthquake insurance or
Maximum Probable Loss insurance on a case by case basis in amounts determined by Lender.




          (j) Such other insurance coverages as may be deemed necessary at any time during the term of
the Loan and as shall be provided within such time periods as Lender may determine, in each case,
in its commercially reasonable discretion.




     All insurance policies shall have a term of not less than one year and shall be in the form
and amount and with deductibles as, from time to time, shall be acceptable to Lender in its
reasonable discretion. All such policies shall provide for loss payable solely to Lender and shall
contain a standard “non-contributory mortgagee” endorsement or its equivalent relating, among other
things, to recovery by Lender notwithstanding the negligent or willful acts or omissions of
Borrower and notwithstanding (i) occupancy or use of the Facility for purposes more hazardous than
those permitted by the terms of such policy, (ii) any foreclosure or other action taken by Lender
pursuant to the Mortgage upon the occurrence of an Event of Default thereunder, or (iii) any change
in title or ownership of the Facility.



     All insurance policies must be written by a licensed insurance carrier in the State in which
the Facility is located and such insurance carrier must have a long-term senior debt rating of at
least “A” by Standard and Poor’s Rating Service; provided, that if the initial principal balance of
the Loan is in excess of $25,000,000.00, such insurance carrier must have a long-term senior debt
rating of at least “AA” by Standard & Poor’s Rating Service.



     All liability insurance policies must name “Capmark Finance Inc., and its successors and/or
assigns as their interests may appear” as additional insureds, and all property insurance policies
must name “Capmark Finance Inc., and its successors and/or assigns” as the named mortgage holder
entitled to all insurance proceeds. Lender shall have the right, without Borrower’s consent, by
notice to the insurance company, to change the additional insured and named mortgagee endorsements
in connection with any sale of the Loan. Notwithstanding anything contained herein, Borrower shall
be entitled to all insurance proceeds covered by and disbursed under the above-referenced
comprehensive all risk insurance policy provided such proceeds do not exceed $25,000.00 per
occurrence.



     All insurance policies for the above-required insurance must provide for thirty (30) days
prior written notice of cancellation to Lender.



     Policies or binders, together with evidence of the above required insurance on ACORD Form 27
or its equivalent, must be submitted to Lender prior to setting the interest rate on the Loan.



     With respect to insurance policies which require payment of premiums annually, not less than
thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this
Agreement, Borrower shall pay such amount, except to the extent Lender is escrowing sums therefor
pursuant to the Loan Documents. Not less than thirty (30) days prior to the expiration dates of
the insurance policies obtained pursuant to this Agreement, originals or certified copies



21









 







of renewals of such policies (or certificates evidencing such renewals) bearing notations
evidencing the payment of premiums or accompanied by other evidence satisfactory to Lender of such
payment, which premiums shall not be paid by Borrower through or by any financing arrangement,
shall be delivered by Borrower to Lender at the address set forth in Section 8.7 hereof and in
Exhibit “B” hereto. Borrower shall not carry separate insurance, concurrent in kind or
form or contributing in the event of loss, with any insurance required under this Section 4.5. If
the limits of any policy required hereunder are reduced or eliminated due to a covered loss,
Borrower shall pay the additional premium, if any, in order to have the original limits of
insurance reinstated, or Borrower shall purchase new insurance in the same type and amount that
existed immediately prior to the loss.



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



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



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



     Borrower appoints Lender as Borrower’s attorney-in-fact to cause the issuance of an
endorsement of any insurance policy to bring Borrower into compliance herewith and, as limited
above, at Lender’s sole option, to make any claim for, receive payment for, and execute and endorse
any documents, checks or other instruments in payment for loss, theft, or damage



22









 







covered under any such insurance policy; provided, however, that in no event will Lender be
liable for failure to collect any amounts payable under any insurance policy.



     4.6 Proceeds of Insurance or Condemnation. If, after damage to or destruction of or
condemnation of any Mortgaged Property (or any part thereof), the net Proceeds of insurance or
condemnation (after payment of Lender’s reasonable costs and expenses in connection with the
administration thereof) are:



          (a) less than Seventy-Five Thousand Dollars ($75,000.00), Lender shall deliver such proceeds
to Borrower to be applied within thirty (30) days thereafter to the repair, restoration and
replacement by Borrower of the Improvements, Equipment and Inventory damaged, destroyed or taken,




     or



          (b) Seventy-Five Thousand Dollars ($75,000.00) or more and Lender agrees, at its option, to
make such net Proceeds available to Borrower, Lender shall make such net Proceeds available to
Borrower on the following terms:




               (i) The aggregate amount of all such Proceeds shall not exceed the aggregate amount of all
such Loan Obligations;



               (ii) At the time of such loss or damage and at all times thereafter while Lender is holding
any portion of such Proceeds, there shall exist no Default or Event of Default;



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



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



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



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



                    (B) if loss or damage exceeds One Hundred Thousand Dollars ($100,000), fixed-price or
guaranteed maximum cost bonded construction contracts for completion of the repair and restoration
work in accordance with such plans and specifications,



23









 





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



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



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



               (vi) Lender may, at Borrower’s expense, retain an independent inspector to review and approve
plans and specifications and completed construction and to approve all requests for disbursement,
which approvals shall be conditions precedent to release of Proceeds as work progresses;



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



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



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



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



     In the event and to the extent that such Proceeds are Seventy-Five Thousand Dollars
($75,000.00) or more and are not required to be used for the repair, restoration and replacement of
the Improvements, Equipment and Inventory to which a loss or damage has occurred, or, if the
conditions set forth herein for such application are otherwise not satisfied, then Lender shall be
entitled without notice to or consent from Borrower to apply such Proceeds, or the balance thereof,
at Lender’s option either (a) to the full or partial payment or prepayment of the Loan Obligations
(without premium) in the manner aforesaid or (b) to the repair, restoration and/or replacement of
all or any part of such Improvements, Equipment and Inventory to which a loss or damage has
occurred. Any excess Proceeds after such application by Lender shall be paid to Borrower.



24









 





     4.7 Financial and Other Information. Provide Lender, and cause Guarantor and Manager
to provide to Lender, at its address set forth in Section 8.7 and at Capmark Finance Inc., 2801
Highway 280 South, Suite 305, Birmingham, Alabama 35223, the following financial statements and
information on a continuing basis during the term of the Loan:



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




          (b) Within one hundred twenty (120) days after the end of each fiscal year of the Facility and
Borrower (if different from the Facility) unaudited financial statements of the operations of the
Facility, internally prepared in accordance with GAAP, and shall include a balance sheet and a
statement of income and expenses for the year then ended, and shall be certified as true and
correct in all material respects by a financial officer of Borrower. Lender reserves the right,
upon an Event of Default under the Loan Documents, to require that such statements be audited by a
nationally recognized accounting firm or independent certified public accounting firm acceptable to
Lender.




          (c) Within one hundred twenty (120) days after the end of each fiscal year of Manager,
unaudited financial statements of Manager, internally prepared in accordance with GAAP, acceptable
to Lender, which statements shall include a balance sheet and a statement of income and expenses
for the year then ended, and shall be certified as true and correct by a financial officer of
Manager. Lender reserves the right, upon an Event of Default under the Loan Documents to require
that such statements be audited by a nationally recognized accounting firm or independent certified
public accounting firm acceptable to Lender.




          (d) Within forty-five (45) days after the end of each fiscal quarter of the Facility,
unaudited interim financial statements of the operations of the Facility, certified as true and
correct in all material respects by a financial officer of the Borrower, prepared in accordance
with GAAP, which statements shall include a balance sheet and statement of income and expenses for
the quarter then ended.




          (e) Within forty-five (45) days after the end of each fiscal quarter of Borrower, unaudited
interim financial statements of Borrower, certified as true and correct in all material respects by
a financial officer of Borrower, prepared in accordance with GAAP, which statements shall include a
balance sheet and statement income and expenses for the quarter then ended.




          (f) Within forty-five (45) days after the end of each fiscal quarter of Guarantor, unaudited
interim financial statements of Guarantor, certified as true and correct in all material respects
by a financial officer of Guarantor prepared in accordance with GAAP, which statements shall
include a balance sheet and a statement of income and expenses for the quarter then ended.




25









 








          (g) Within forty-five (45) days after the end of each fiscal quarter of Manager, unaudited
interim financial statements of Manager, certified as true and correct in all material respects by
a financial officer of Manager, prepared in accordance with GAAP, which statements shall include a
balance sheet and a statement of income and expenses for the quarter then ended.




          (h) Within forty-five (45) days after the end after each fiscal quarter of Borrower, a
statement of the number of bed days available and the actual patient days incurred for such
quarter, together with quarterly census information of the Facility as of the end of such quarter
in sufficient detail to show patient-mix (i.e., private, Medicare, Medicaid, and V.A.) on a
daily average basis for such year through the end of such quarter, certified by the chief financial
officer of Borrower or Manager to be true and correct. Such statements of the Facility shall be
accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit
“D”.




          (i) If requested by Lender, within thirty (30) days after the filing deadline, as may be
extended from time to time, copies of all federal, state and local tax returns of Borrower and
Guarantor, together with all supporting documentation and required schedules.




          (j) If and to the extent applicable, within twenty (20) days after filing or receipt, all
Medicaid cost reports and any amendments thereto filed with respect to the Facility and all
responses, audit reports, or other inquiries with respect to such cost reports.




          (k) If and to the extent applicable, within ten (10) days after receipt, copies of all
licensure and certification survey reports and statements of deficiencies (with plans of correction
attached thereto).




          (l) If and to the extent applicable, within ten (10) days after receipt, a copy of the
“Medicaid Rate Calculation Worksheet” (or the equivalent thereof) from the applicable agency.




          (m) If and to the extent applicable, within ten (10) days of receipt, a statement of the
number of resident days for which the Facility has received the Medicare default rate for any
applicable period. For purposes herein, “default rate” shall have the meaning ascribed to it in
that certain applicable Medicare rate notification letter prepared in connection with any review or
survey of the Facility.




          (n) Within three (3) days after receipt, any and all notices (regardless of form) from any and
all licensing and/or certifying agencies, including but not limited to, that the Facility’s license
is being downgraded to a substandard category, revoked or suspended, or that action is pending or
being considered to downgrade to a substandard category, revoke or suspend the Facility’s license
or certification.




          (o) If requested by Lender, evidence of payment by Borrower or Manager of any applicable
provider bed taxes or similar taxes, which taxes Borrower or Manager agrees to pay.




          (p) Within one hundred twenty (120) days after the end of each of Borrower’s fiscal years, and
more frequently, if requested by Lender, an aged accounts receivable report for

26









 








the Facility in sufficient detail to show amounts due from each class of patient-mix, if
applicable (i.e., private, Medicare, Medicaid and V.A.), by the account age classifications
of 30 days, 60 days, 90 days, 120 days, and over 120 days.




     Lender reserves the right to require that the annual and/or quarterly financial statements of
Borrower, Guarantor and Manager be audited and prepared by a nationally recognized accounting firm
or independent certified public accounting firm acceptable to Lender, at their respective sole cost
and expense, if (i) an Event of Default exists, (ii) if required by internal policy or by any
investor in any securities backed in whole or in part by the Loan or any rating agency rating such
securities, or (iii) if Lender has reasonable grounds to believe that the unaudited financial
statements do not accurately represent the financial condition of Borrower, Guarantor or Manager,
as the case may be.



     Lender further reserves the right to require such other financial information of Borrower,
Guarantor, Manager and/or the Facility, at such other times (including monthly or more frequently,
but not more frequently than reasonable) as it shall deem necessary. All financial statements must
be in the form and detail as Lender shall from time to time request.



     4.8 Compliance Certificate. At the time of furnishing the quarterly operating
statements required under Section 4.7 herein, furnish to Lender a compliance certificate in the
form attached hereto as Exhibit “E” executed by a financial officer of Borrower.



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



     4.10 Payment of Indebtedness. Duly and punctually pay or cause to be paid all other
Indebtedness now owing or hereafter incurred by Borrower in accordance with the terms of such
Indebtedness, except such Indebtedness owing to those other than Lender which is being contested in
good faith and with respect to which any execution against properties of Borrower has been
effectively stayed and for which reserves and collateral for the payment and security thereof have
been established in sufficient amounts as determined by Lender in its sole commercially reasonable
discretion.



     4.11 Records of Accounts. Maintain all records, including records pertaining to the
Accounts of Borrower, at the principal place of business of Borrower as set forth in this
Agreement.



27









 





     4.12 Conduct of Business. Conduct, or cause Manager to conduct, the operation of the
Facility at all times in a manner consistent with the level of operation of the Facility as of the
date hereof, including without limitation, the following:



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




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




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




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




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




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




     4.13 Periodic Surveys. Furnish or cause Manager to furnish to Lender, within three
(3) Business Days of receipt, a copy of any Medicare, Medicaid, or other licensing agency survey or
report and any statement of deficiencies and/or any other report or notices (regardless of form)
indicating that any action is pending or being considered to downgrade the Facility to a
substandard category, or revoke or suspend the Facility’s license or certification, and within the
time period required by the particular agency for furnishing a plan of correction also furnish or
cause to be furnished to Lender a copy of the plan of correction generated from such survey or
report for the Facility, and correct or cause to be corrected any deficiency, the curing of which
is a condition of continued licensure or for full participation in Medicaid, Medicare or other
reimbursement program pursuant to any Reimbursement Contract for existing residents or for new
residents to be admitted with Medicaid or Medicare coverage, by the date required for cure by such
agency (plus extensions granted by such agency).



     4.14 Debt Service Coverage Requirements.



          (a) Maintain (commencing with the closing of the Loan) and within forty-five (45) days after
the end of each fiscal quarter of Borrower, provide evidence to Lender of the achievement of, the
following debt service coverage ratios until the Loan is paid in full (collectively the “Debt
Service Coverage Requirements”):




28









 








               (i) Note I Loan: a Combined Debt Service Coverage for the Facilities (excluding the Carolina
Beach Facility, the Lampasas Facility and the Yorktown Facility), after deduction of Assumed
Management Fees and Actual Cost of Professional and General Liability and before the provision
(benefit) for self-insured professional and general liability to the extent deducted in determining
net income, based on a rolling twelve (12) month period, tested quarterly, of not less than 1.3 to
1.0; and



               (ii) Note I Loan and Note II Loan: a Combined Debt Service Coverage for the Facilities
(excluding the Carolina Beach Facility, the Lampasas Facility and the Yorktown Facility), after
deduction of Assumed Management Fees and Actual Cost of Professional and General Liability and
before the provision (benefit) for self-insured professional and general liability to the extent
deducted in determining net income, based on a rolling twelve (12) month period, tested quarterly
based upon an assumed twenty-five (25) year amortization period, of not less than 1.05 to 1.0.



          Upon the satisfaction of the Loan Obligations associated with the Note II Loan, the Combined
Debt Service Coverage Requirement described in this Section 4.14 (a) (ii) above shall no longer
apply.




     (b) If Borrower fails to achieve or provide evidence of achievement of the Debt Service
Coverage Requirements, Borrower may deposit with Lender, at Borrower’s option within fifteen (15)
days of such failure, additional cash or other liquid collateral in an amount which, when added to
the first number of the debt service coverage calculation, would have resulted in the noncomplying
debt service requirement having been satisfied. If after Borrower has deposited such additional
cash or liquid collateral, Borrower again fails to achieve or provide evidence of the achievement
of the Debt Service Coverage Requirements set forth above and such failure continues for two (2)
consecutive quarters, Borrower may deposit with Lender, at Borrower’s option within fifteen (15)
days after written notice to Borrower of such failure, additional cash or other liquid collateral
(with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an
amount which, if the same had been applied on the first (1st) day of the first quarter for which
such noncompliance of the debt service coverage requirement occurred to reduce the outstanding
principal indebtedness of the Loan, would have resulted in the noncomplying debt service coverage
requirement having been satisfied. Any additional cash or liquid collateral deposited by Borrower
hereunder in order to achieve the Debt Service Coverage Requirements and cure any existing default
with respect thereto will be held by Lender in a standard custodial account and shall constitute
additional collateral for the Loan Obligations and an “Account” as defined in this Agreement, and,
upon the occurrence of an Event of Default, may be applied by Lender, in such order and manner as
Lender may elect, to the reduction of the Loan Obligations. Borrower shall not be entitled to any
interest earned on such additional collateral. Provided that there is no outstanding Default or
Event of Default, such additional collateral which has not been applied to the Loan Obligations
will be released by Lender at such time as Borrower provides Lender with evidence that the Debt
Service Coverage Requirements outlined above have been achieved and maintained (without regard to
any cash deposited pursuant to this Section 4.14) for two (2) consecutive fiscal quarters.



     4.15 Occupancy. Maintain or cause to be maintained at all times, a daily average
annual combined occupancy for the Facilities (excluding the Carolina Beach Facility, the



29









 







Lampasas Facility and the Yorktown Facility), as tested quarterly (on the basis of a calendar
year), of seventy-five (75%) or more (based on the number of licensed beds at the Facilities
excluding the Carolina Beach Facility, the Lampasas Facility and the Yorktown Facility) through the
quarter ended September 30, 2008. Commencing with the quarter ended December 31, 2008 and
thereafter, maintain or cause to be maintained at all times, a daily average annual combined
occupancy for the Facilities (excluding the Carolina Beach Facility, the Lampasas Facility and the
Yorktown Facility), as tested quarterly (on the basis of a calendar year), of eighty (80%) or more
(based on the number of licensed beds at the Facilities excluding the Carolina Beach Facility, the
Lampasas Facility and the Yorktown Facility). For purposes of the occupancy covenant, the minimum
number of licensed beds at the Facilities must remain at or in excess of the number of beds set
forth in the definition of each Facility in Article I.



     4.16 Capital Expenditures. Maintain, and/or cause Manager to maintain, the Facility
in good condition and make minimum combined capital expenditures for the Facilities (excluding the
Carolina Beach Facility) in each fiscal year, in an amount equal to $314 per bed (or the
appropriate prorated amount for any partial fiscal year), (which capital expenditures may include
ordinary repairs and routine maintenance but shall exclude amounts funded by Lender to improve or
repair the Newport Facility) (the “Capital Expenditure Requirement”), commencing the first year of
the Loan term and continuing throughout the Loan term, and, within forty-five (45) days after the
end of each fiscal year, provide evidence thereof satisfactory to Lender. In the event that
Borrower shall fail to meet such requirement or to provide such evidence, Borrower shall, upon
Lender’s written request, immediately establish and maintain a capital expenditures reserve fund
with Lender equal to the difference between the required amount per bed and the amount per bed
actually spent by Borrower. Borrower grants to Lender a lien on and a right of setoff against all
moneys in the capital expenditures reserve fund, and Borrower shall not permit any other Lien to
exist upon such fund. Moneys on deposit in such capital expenditures reserve fund will be
disbursed to Borrower monthly upon Lender’s receipt of satisfactory evidence that Borrower has
caused to be made the required capital expenditures. Upon Borrower’s or Manager’s failure to
adequately maintain the Facility in good condition, Lender may, but shall not be obligated to, make
such capital expenditures and may apply the moneys in the capital expenditures reserve fund for
such purpose. To the extent there are insufficient moneys in such capital expenditures reserve
fund for such purposes, all funds advanced by Lender to make such capital expenditures shall
constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue
interest at the Default Rate until paid. Upon the occurrence of an Event of Default, Lender may
apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order
and manner as Lender may elect. For any partial fiscal year during which the Loan is outstanding,
the required expenditure amount shall be prorated by multiplying the required amount per bed amount
by a fraction, the numerator of which is the number of days during such year for which all or part
of the Loan is outstanding and the denominator of which is the number of days in such year. During
the term of the Loan, Lender may, from time to time, engage a professional building inspector,
engineer or its corporate representative to conduct an inspection of the Facility. Notwithstanding
the foregoing, upon payment in full of the Loan Obligations associated with the Note II Loan, the
Capital Expenditure Requirement shall be reduced to $313 per bed. For the purposes of testing the
Capital Expenditure Requirement for the first year of the Loan term only, the Newport Facility
shall be excluded from such calculation.



30









 





     4.17 Management Agreement. Maintain the Management Agreement in full force and effect
and timely perform all of Borrower’s obligations thereunder and enforce performance of all
obligations of Manager thereunder and not permit the termination, amendment or assignment of the
Management Agreement unless the prior written consent of Lender is first obtained, which consent
shall not be unreasonably withheld. Borrower will enter into and cause Manager to enter into the
Subordination Agreement. Borrower will not enter into any other management agreement without
Lender’s prior written consent, which consent may be in the sole and absolute discretion of Lender.



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



     4.19 Comply with Covenants and Laws. Comply, in all material respects, with all
applicable covenants and restrictions of record and all laws, ordinances, rules and regulations and
keep the Facility and the Land and Improvements in compliance with all applicable laws, ordinances,
rules and regulations, including, without limitation, the Americans with Disabilities Act and
regulations promulgated thereunder, and laws, ordinances, rules and regulations relating to zoning,
health, building codes, setback requirements, Medicaid and Medicare laws and keep the Permits for
the Facility in full force and effect.



     4.20 Taxes and Other Charges. Subject to Borrower’s right to contest the same as set
forth in Section 9(c) of the Mortgage, pay all taxes, assessments, charges, claims for labor,
supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against real or
personal property of the Borrower, except Liens to the extent permitted by this Agreement.



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



     4.22 Certificate. Upon Lender’s written request, furnish Lender with a certificate
stating that Borrower has complied with and is in compliance with all terms, covenants and
conditions of the Loan Documents to which Borrower is a party and that there exists no Default or
Event of Default or, if such is not the case, that one or more specified events have occurred, and
that the representations and warranties contained herein are true and correct with the same effect
as though made on the date of such certificate.



31









 





     4.23 Debt Service Reserve Fund. Pursuant to the Debt Service Reserve Fund Agreement,
establish and maintain a debt service reserve fund with Lender equal to approximately three (3)
months of debt service payments with respect to the Note as reasonably estimated by Lender, rounded
upward to the nearest One Thousand Dollars ($1,000).



     4.24 Intentionally Deleted.



     4.25 Intentionally Deleted.



     4.26 Notice of Fees or Penalties. Notify Lender in writing, within three (3) business
days of Borrower’s knowledge thereof, of the assessment by any state or, if applicable, any
Medicare, Medicaid, health or licensing agency of any fines or penalties against Borrower, Manager,
or the Facility.



     4.27 Loan Closing Certification. Immediately notify Lender in writing upon Borrower’s
knowledge thereof, in the event any representation or warranty contained in that certain Loan
Closing Certification of even date herewith, executed by Borrower for the benefit of Lender,
becomes untrue or there shall have been any material adverse change in any such representation or
warranty.



     4.28 Compliance with Anti-Terrorism, Embargo, Sanctions and Anti-Money Laundering
Laws. Borrower shall comply with all Requirements of Law relating to money laundering,
anti-terrorism, trade embargos and economic sanctions, now or hereafter in effect. Upon Lender’s
request from time to time during the term of the Loan, Borrower shall certify in writing to Lender
that Borrower’s representations, warranties and obligations under Sections 3.28 and 3.29 and this
Section 4.28 remain true and correct and have not been breached. Borrower shall immediately notify
Lender in writing if any of such representations, warranties or covenants are no longer true or
have been breached or if Borrower has a reasonable basis to believe that they may no longer be true
or have been breached. In connection with such an event, Borrower shall comply with all
Requirements of Law and directives of Governmental Authorities and, at Lender’s request, provide to
Lender copes of all notices, reports and other communications exchanged with, or received from,
Governmental Authorities relating to such an event. Borrower shall also reimburse Lender any
expense incurred by Lender in evaluating the effect of such an event on the Loan and Lender’s
interest in the collateral for the Loan, in obtaining any necessary license from Governmental
Authorities as may be necessary for Lender to enforce its rights under the Loan Documents, and in
complying with all Requirements of Law applicable to Lender as the result of the existence of such
an event and for any penalties or fines imposed upon Lender as a result thereof.



ARTICLE V

NEGATIVE COVENANTS OF BORROWER




     Until the Loan Obligations have been paid in full, no Borrower shall:



     5.1 Assignment of Licenses and Permits. Assign or transfer any of its interest in any
Permits or Reimbursement Contracts (including rights to payment thereunder) pertaining to the
Facility, or assign, transfer, or remove or permit any other Person to assign, transfer, or remove
any records pertaining to the Facility including, without limitation, resident records,



32









 







medical and clinical records (except for removal of such patient records as directed by the
residents owning such records), without Lender’s prior written consent, which consent may be
granted or refused in Lender’s sole discretion. Lender acknowledges that, with Lender’s consent,
NC I Borrower has agreed to assign and transfer it interest in the license/CON for the beds at the
Carolina Beach Facility as described in Section 3.6 above; provided, however, Lender’s consent is
conditioned upon the Lender’s receipt of all the net sale proceeds from the assignment and transfer
of such license/CON.



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



          (a) Liens at any time existing in favor of Lender;




          (b) Liens which are listed in Exhibit “F” attached hereto;




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




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




          (e) Liens for current year’s taxes, assessments or governmental charges or levies provided
payment thereof shall not be delinquent; and




          (f) Liens on Accounts (excluding the DCMS Note Receivable and the Worker’s Comp Retro
Premiums, which shall not be subject to the A/R Loan) related to the A/R Loan. Notwithstanding the
foregoing, the A/R Lender shall have no interest in any collateral securing the Loan or any
tangible or intangible property of any Borrower other than the Accounts. Until such time as Lender
has received payment in full of all Loan Obligations, Lender shall hold a first priority security
interest in and to all of the General Intangibles and Contract Rights of the Borrower, including,
but not limited to, all Patient Agreements, Permits and provider agreements, and the Proceeds and
products thereof; provided, however, that to the extent any such Proceeds or products, or any other
payments derived from such General Intangibles or Contract Rights are inextricably related to the
collection of Accounts, then the same shall be deemed to be subject to the lien of A/R Lender.
Notwithstanding anything herein to the contrary, Accounts subject to the A/R Loan shall not include
any Permits related to the operation of the Facilities, and A/R Lender shall have no right to
transfer, sell, convey or otherwise affect the Permits related to the operation of the Facilities;
and




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          (g) Liens securing purchase money loans not to exceed $150,000 per Facility in the aggregate
at any one time outstanding.




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



     5.4 Maintain Single Purpose Entity Status.



          (a) Engage in any business or activity other than the ownership, operation and maintenance of
the Mortgaged Property, and activities incidental thereto;




          (b) Acquire or own any material assets other than (i) the Mortgaged Property, and (ii) such
incidental machinery, equipment, fixtures and other personal property as may be necessary for the
operation of the Mortgaged Property;




          (c) Merge into or consolidate with any Person or dissolve, terminate or liquidate in whole or
in part, transfer or otherwise dispose of all or substantially all of its assets (except as
permitted in the Loan Documents) or change its legal structure, without in each case Lender’s
consent;




          (d) Without the prior written consent of Lender, amend, modify, terminate or fail to comply
with the provisions of its Partnership Agreement, Articles or Certificate of Incorporation,
Operating Agreement or similar organizational document, as same may be further amended or
supplemented, if such amendment, modification, termination or failure to comply would adversely
affect its status as a Single Purpose Entity or its ability to perform its obligations hereunder,
under the Note or any other document evidencing or securing the Loan;




          (e) Own any subsidiary or make any investment in, any Person without the consent of Lender;




          (f) Commingle its funds or assets with assets of, or pledge its assets with or for, any of its
general partners, members, shareholders, Affiliates, Lessee, principals or any other Person; except
for daily sweeps to a master concentration account with the A/R Lender from which necessary
operating funds will be disbursed to a control account for the benefit of Borrower;




          (g) Incur any debt, secured or unsecured, direct or contingent (including guaranteeing any
obligation), other than the trade payables or accrued expenses incurred in the ordinary course of
business, payable within ninety (90) days of the date incurred, based on historical amounts, and
the obligations to the A/R Lender;




          (h) Fail to maintain its records, books of account and bank accounts separate and apart from
those of its general partners, members, shareholders, principals and Affiliates, the Affiliates of
any of its general partners, members, shareholders, principals, and any other Person;




34









 








          (i) Enter into any contract or agreement with any of its general partners, members,
shareholders, principals or Affiliates (other than the Management Agreement), or the Affiliates of
any of its general partners, members, shareholders, principals, except upon terms and conditions
that are intrinsically fair and substantially similar to those that would be available on an
arms-length basis with third parties;




          (j) Seek its dissolution or winding up in whole, or in part;




          (k) Maintain its assets in such a manner that it will be costly or difficult to segregate,
ascertain or identify its individual assets from those of any of its general partners, members,
shareholders, principals and Affiliates, the Affiliates of any of its general partners, members,
shareholders, principals or any other Person;




          (l) Hold itself out to be responsible for the debts of another Person or pay another Person’s
liabilities out of its own funds other than the A/R Loan (to the extent permitted under the
Intercreditor Agreement);




          (m) Make any loans or advances to any third party, including any of its general partners,
members, shareholders, principals or Affiliates, or the Affiliates of any of its general partners,
members, shareholders, principals;




          (n) Fail to have prepared and filed its own tax returns, or tax returns consolidated with the
Guarantor;




          (o) Fail either to hold itself out to the public as a legal Person separate and distinct from
any other Person or to conduct its business solely in its own name, in order not (i) to mislead
others as to the identity with which such other party is transacting business, or (ii) to suggest
that it is responsible for the debts of any third party (including any of its members or
Affiliates, or any general partner, member, principal or Affiliate thereof); or




          (p) Fail to maintain adequate capital for the normal obligations reasonably foreseeable in a
business of its size and character and in light of its contemplated business operations.




     5.5 Change of Business. Make any material change in the nature of its business as it
is being conducted as of the date hereof.



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



     5.7 ERISA.



          (a) Agree to, enter into or consummate any transaction which would render it unable to confirm
that (i) it is not an “employee benefit plan” as defined in Section 3(32) of ERISA, which is
subject to Title I of ERISA, or a “governmental plan” within the meaning of Section 3(32) of ERISA;
(ii) it is not subject to state statutes regulating investments and fiduciary

35









 








obligations with respect to governmental plans; and (iii) less than twenty-five percent (25%)
of each of its outstanding class of equity interests are held by “benefit plan investors” within
the meaning of 29 C.F.R. § 2510.3-101(f)(2);




          (b) Engage in a non-exempt prohibited transaction described in Section 406 of ERISA or Section
4975 of the Code, as such sections relate to Borrower, or in any transaction that would cause any
obligation or action taken or to be taken hereunder (or the exercise by Lender of any of its rights
under the Loan Documents) to be a non-exempt prohibited transaction under ERISA.




     5.8 Transactions with Affiliates. Enter into any transaction (other than the
Management Agreement) with a Person which is an Affiliate of Borrower other than in the ordinary
course of its business and on fair and reasonable terms no less favorable to Borrower, than those
they could obtain in a comparable arms-length transaction with a Person not an Affiliate.



     5.9 Transfer of Ownership Interests. Except as otherwise allowable under the
Mortgage, pledge the ownership interest of the Borrower or permit a change in the percentage
ownership interest of the Persons owning the Borrower, unless the written consent of Lender is
first obtained, which consent may be granted or refused in Lender’s sole discretion.



     5.10 Change of Use. Alter or change the use of the Facility or enter into any
management agreement for the Facility other than the Management Agreement or enter into any
operating lease for the Facility, unless Borrower first notifies Lender and provides Lender a copy
of the proposed lease agreement or management agreement, obtains Lender’s written consent thereto,
which consent may be withheld in Lender’s sole discretion, and obtains and provides Lender with a
subordination agreement in form satisfactory to Lender, as determined by Lender in its sole
discretion, from such manager or lessee subordinating to all rights of Lender.



     5.11 Place of Business. Change its chief executive office or its principal place of
business without first giving Lender at least thirty (30) days prior written notice thereof and
promptly providing Lender such information and amendatory financing statements as Lender may
request in connection therewith.



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



     5.13 Dividends, Distributions and Redemptions. Except as hereinafter provided or as
otherwise consented to by Lender in writing, declare or pay any distributions to its shareholders,
members or partners, as applicable, or purchase, redeem, retire, or otherwise acquire for value,
any ownership interests in Borrower now or hereafter outstanding, return any capital to its
shareholders, members or partners, as applicable, or make any distribution of assets to its
shareholders, members, or partners, as applicable. Notwithstanding the foregoing, Lender
acknowledges and agrees that transfers of cash pursuant to the cash management program of Borrower
and its Affiliates shall not constitute or be deemed to be distributions for purposes of this
Section 5.13 prior to an Event of Default under the Loan.



36









 





     5.14 Disposition of Assets/Release. Dispose of (except for the replacement of
obsolete, worn out or damaged Equipment which shall be replaced with Equipment of equal or greater
value), sell, transfer, alien or release any Collateral, Property, or Assets (as such terms are
defined in the Mortgage) owned by a Borrower unless Lender has agreed, in its sole discretion to
release a Facility. Lender agrees that it shall release all of the Note II Security, and will
release the Lampasas Borrower, the Yorktown Borrower, the NC I Borrower, and the NC II Borrower
(the “Released Borrowers”) upon the occurrence of the following:



          (a) No Event of Default or Default exists or is outstanding under the Loan;




          (b) No material changes in the financial condition of the Guarantor have occurred since the
Closing Date (including, but not limited to, the bankruptcy of Guarantor); and




          (c) The Note II Loan and the associated Loan Obligations are paid in full.




     The Released Borrowers acknowledge and agree that Released Borrowers’ obligations hereunder
shall apply to and continue with respect to any of the obligations of the Borrowers under the Loan
Documents which are subsequently recovered from the Lender relating to the Note II Loan and the
associated Loan Obligations for the reasons set forth below. In the event that any payment by or
on the behalf of a Borrower to Lender relating to the Note II Loan and the associated Loan
Obligations is held to constitute a preference, fraudulent transfer or other voidable payment under
any bankruptcy, insolvency or similar law, or if for any other reason the Lender is required to
refund such payment or pay the amount thereof to any other party, including, without limitation, as
a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar
officer for, any Borrower or of any substantial part of its property or otherwise, such payment by
the Borrower or any other party to the Lender shall not constitute a release of the Released
Borrower from any liability hereunder, and this Agreement and the Loan Documents shall continue to
be effective or shall be reinstated (notwithstanding any prior release, surrender or discharge by
the Lender of this Agreement or of the Released Borrowers), as the case may be, with respect to
this Agreement and the Loan Documents and shall apply to, any and all amounts so refunded by the
Lender or paid by the Lender to another party (which amounts shall constitute part of the Loan
Obligations), and any interest paid by the Lender and any attorneys’ fees, costs and expenses paid
or incurred by the Lender in connection with any such event.



ARTICLE VI

ENVIRONMENTAL HAZARDS




     6.1 Prohibited Activities and Conditions. Except for matters covered by a written
program of operations and maintenance approved in writing by Lender (an “O&M Program”) or matters
described in Section 6.2, Borrowers shall not cause or permit to exist any of the following:



          (a) The presence, use, generation, release, treatment, processing, storage (including storage
in above ground and underground storage tanks), handling, or disposal of any Hazardous Materials
in, on or under the Land, any Improvements, or any other property of Borrower that is adjacent to
the Land in violation of applicable Hazardous Materials Laws;




37









 








          (b) The transportation of any Hazardous Materials to, from, or across the Land in violation of
any applicable Hazardous Materials Laws;




          (c) Any occurrence or condition on the Land or in the Improvements or any other property of
Borrowers that is adjacent to the Land, which occurrence or condition is or may be in violation of
Hazardous Materials Laws;




          (d) Any violation of or noncompliance with the terms of any Environmental Permit with respect
to the Land, the Improvements or any property of Borrowers that is adjacent to the Land; or




          (e) Any Lien (whether or not such Lien has priority over the Lien created by the Mortgage)
upon the Land or any Improvements imposed pursuant to any Hazardous Materials Laws.



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




     6.2 Exclusions. Notwithstanding any other provision of Article VI to the contrary,
“Prohibited Activities and Conditions” shall not include the safe and lawful use and storage of
quantities of (a) pre-packaged supplies, medical waste, cleaning materials and petroleum products
customarily used in the operation and maintenance of comparable facilities, (b) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for consumer use and used
by occupants of the Facilities, and (c) petroleum products used in the operation and maintenance of
motor vehicles from time to time located on the Land’s parking areas, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous
Materials Laws.



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



     6.4 O & M Program Compliance. If an O&M Program has been established with respect to
Hazardous Materials, Borrowers shall comply in a timely manner with, and cause all employees,
agents and contractors of Borrowers and any other Persons (excluding trespassers) present on the
Land to comply with the O&M Program. All costs of performance of Borrowers’ obligations under any
O&M Program shall be paid by Borrowers, and Lender’s out-of-pocket costs incurred in connection
with the monitoring and review of the O&M Program and Borrowers’ performance shall be paid by
Borrowers upon demand by Lender. Any such out-of-pocket costs of Lender which Borrowers fail to
pay promptly shall become an additional part of the Loan Obligations.



     6.5 Borrowers’ Environmental Representations and Warranties. Borrowers represent and
warrant to Lender that, except as previously disclosed by Borrowers to Lender in writing or in the
Phase I Environmental Reports for the Facilities received by Lender in connection with the Loan
(the “Environmental Reports”):



38









 





          (a) Borrowers have not at any time caused or permitted any Prohibited Activities and
Conditions.




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




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




          (d) Borrowers have complied with all Hazardous Materials Laws, including all requirements for
notification regarding releases of Hazardous Materials, relating to the Land. Without limiting the
generality of the foregoing, Borrowers have obtained all Environmental Permits required for the
operation of the Land and the Improvements in accordance with Hazardous Materials Laws now in
effect and all such Environmental Permits are in full force and effect. During Borrowers’
ownership of the Land, and, to the best of Borrowers’ knowledge after reasonable and diligent
inquiry, no event has occurred with respect to the Land and/or Improvements that constitutes or,
with the passing of time or the giving of notice, would constitute, noncompliance with the terms of
any Environmental Permit.




          (e) There are no actions, suits, claims or proceedings pending or, to the best of Borrowers’
knowledge after reasonable and diligent inquiry, threatened that involves the Land and/or the
Improvements and allege, arise out of, or relate to any Prohibited Activity and Condition.




          (f) Borrowers have not received any written 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 Land, the Improvements or any other property of Borrowers that is adjacent to the Land. The
representations and warranties in this Article VI shall be continuing representations and
warranties that shall be deemed to be made by Borrower throughout the term of the Loan evidenced by
the Note and until all of the Loan Obligations have been paid in full.




     6.6 Notice of Certain Events. Borrowers shall promptly notify Lender in writing of
any and all of the following that may occur:



          (a) Borrowers’ discovery of any Prohibited Activity and Condition.




          (b) Borrowers’ receipt of or knowledge of any complaint, order, notice of violation or other
communication from any Governmental Authority or other Person with regard to present or future
alleged Prohibited Activities and Conditions or any other environmental, health or safety matters
affecting the Land, the Improvements or any other property of Borrowers that is adjacent to the
Land.




39









 








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




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




     6.7 Costs of Inspection. Borrowers 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, if required by Lender, as a condition of
Lender’s consent to any “Transfer” (as defined in the Mortgage), or required by Lender following a
commercially reasonable determination by Lender that Prohibited Activities and Conditions may
exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys
and technical consultants whether incurred in connection with any judicial or administrative
process or otherwise) which Borrowers fail to pay promptly shall become an additional part of the
Loan Obligations. 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 Borrowers 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 Borrowers
hereby expressly authorize 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. Borrowers consent 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. Borrowers acknowledge 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. Borrowers agree 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 Borrowers hereby release and forever discharge
Lender from any and all claims, damages, or causes of action, arising out of, connected with or
incidental to the results of, the such delivery of any of Lender’s Environmental Inspections.



     6.8 Remedial Work. If any investigation, site monitoring, containment, clean-up,
restoration or other remedial work (“Remedial Work”) is necessary to bring Borrowers into
compliance with any Hazardous Materials Law or order of any Governmental Authority that has or
acquires jurisdiction over the Land, the Improvements or the use, operation or improvement of the
Land under any Hazardous Materials Law, Borrowers shall, by the earlier of (a) the applicable
deadline required by Hazardous Materials Law or (b) thirty (30) days after notice from Lender
demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it
to completion, and shall in any event complete such work by the time required by applicable
Hazardous Materials Law. If Borrowers fail 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 Borrowers shall reimburse Lender on demand for the cost of doing so. Any reimbursement
due from Borrower to Lender shall become part of the Loan Obligations.



40









 





     6.9 Cooperation with Governmental Authorities. Borrowers shall cooperate with any
inquiry by any Governmental Authority and shall comply with any governmental or judicial order
which arises from any alleged Prohibited Activity and Condition.



     6.10 Indemnity.



          (a) Borrowers shall hold harmless, defend and indemnify (i) Lender, (ii) any prior owner or
holder of the Note, (iii) any Person who is or will have been involved in the servicing of the
Note, (iv) the officers, directors, partners, agents, shareholders, employees and trustees of any
of the foregoing, and (v) the heirs, legal representatives, successors and assigns of each of the
foregoing (together, the “Indemnitees”) from and against all proceedings, claims, damages, losses,
expenses, penalties and costs (whether initiated or sought by any Governmental Authority or private
parties), including fees and out of pocket expenses of attorneys and expert witnesses,
investigatory fees, and remediation costs, whether incurred in connection with any judicial or
administrative process or otherwise, arising directly or indirectly from any of the following
except to the extent the same relate solely to Hazardous Materials first introduced to the Property
or any part thereof by anyone other than Borrowers or an Affiliate of Borrowers following
foreclosure of the Mortgage (or the delivery and acceptance of a deed in lieu of foreclosure).




               (i) Any breach of any representation or warranty of Borrowers in this Article VI;



               (ii) Any failure by Borrowers to perform any of its obligations under this Article VI;



               (iii) The existence or alleged existence of any Prohibited Activity and Condition;



               (iv) The presence or alleged presence of Hazardous Materials in, on, around or under the Land,
the Improvements or any property of Borrowers that is adjacent to the Land; or



               (v) The actual or alleged violation of any Hazardous Materials Law.



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




          (c) Borrowers 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 (i) results in the entry of any judgment that does not include as an
unconditional term the delivery by the claimant or plaintiff to Lender

41









 








of a written release of those Indemnitees, satisfactory in form and substance to Lender; or
(ii) may materially and adversely affect any Indemnitee, as determined by such Indemnitee in its
sole discretion.




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




               (i) Any amendment or modification of any Loan Document;



               (ii) Any extensions of time for performance required by any of the Loan Documents;



               (iii) The accuracy or inaccuracy of any representations and warranties made by Borrowers under
this Agreement or any other Loan Document;



               (iv) The release of Borrowers or any other Person, by Lender or by operation of law, from
performance of any obligation under any of the Loan Documents;



               (v) The release or substitution in whole or in part of any security for the Loan Obligations;
or



               (vi) Lender’s failure to properly perfect any lien or security interest given as security for
the Loan Obligations; or



               (vii) Any provision in any of the Loan Documents limiting Lender’s recourse to property
securing the Loan or limiting the personal liability of Borrowers or any party for payment of all
or any part of the Loan.



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




               (i) 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 Article VI;



               (ii) Reimburse Indemnitees for any expenses paid or incurred in connection with any matters
against which Indemnitees are entitled to be indemnified under this Article VI; and



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



          (f) In any circumstances in which the indemnity under this Article VI applies, Lender may
employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal
or administrative proceeding and Lender, with the prior written consent of Borrowers (which shall
not be unreasonably withheld, delayed or conditioned) may settle or

42









 








compromise any action or legal or administrative proceeding. Borrowers 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.




          (g) The provisions of this Article VI shall be in addition to any and all other obligations
and liabilities that Borrowers may have under the applicable law or under the other Loan Documents,
and each Indemnitee shall be entitled to indemnification under this Article VI without regard to
whether Lender or that Indemnitee has exercised any rights against the Land and/or the Improvements
or any other security, pursued any rights against any guarantor, or pursued any other rights
available under the Loan Documents or applicable law. If Borrowers consist of more than one Person
or entity, the obligation of those Persons or entities to indemnify the Indemnitees under this
Article VI shall be joint and several. The obligations of Borrowers to indemnify the Indemnitees
under this Article VI shall survive any repayment or discharge of the Loan Obligations, any
foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and
any release of record of the lien of the Mortgage.




ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES




     7.1 Events of Default. The occurrence of any one or more of the following shall
constitute an “Event of Default” hereunder:



          (a) The failure by Borrowers to pay any installment of principal, interest, or other payments
required under the Note, this Agreement, the Mortgage or any other Loan Document after the same
becomes due;




          (b) Any failure by Borrowers to provide and maintain in full force and effect the insurance
coverage required by Section 4.5(a) – (j), inclusive, of this Agreement;




          (c) The violation by Borrowers of any covenant set forth in Article V hereof;




          (d) The failure by Borrowers to deliver or cause to be delivered the financial statements and
information set forth in Section 4.7 of this Agreement within the times required, and such failure
is not cured within thirty (30) days following Lender’s written notice to Borrowers thereof;




          (e) The failure by Borrowers or Guarantor to establish and maintain the capital expenditures
reserve fund in accordance with Section 4.16 of this Agreement;




          (f) The failure of Borrowers or Guarantor to properly and timely to perform or observe any
covenant or condition set forth in this Agreement (other than those specified in this Section 7.1)
or any of the other Loan Documents which failure is not cured within any applicable cure period as
set forth herein or in such other Loan Document, or, if no cure period is specified therefor, is
not cured within thirty (30) days after notice to Borrowers of such Default; provided, however,
that if such Default cannot be cured within such thirty (30) day period, such cure period shall be
extended for an additional sixty (60) days, as long as Borrowers are diligently and in good faith
prosecuting said cure to completion;




43









 








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




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




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




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




          (k) The failure by Guarantor to comply with the Guarantor Covenants as set forth in the
Guaranty Agreement;




          (l) The failure of any Borrower to correct or to cause Manager to correct, within the time
deadlines set by any applicable Medicare, Medicaid or licensing agency, any

44









 








deficiency which would result or has resulted in the following actions by such agency with
respect to such Borrower’s Facility;




               (i) a termination of any Reimbursement Contract or any Permit; or



               (ii) a ban on new admissions generally or, if applicable, on admission of patients otherwise
qualifying for Medicare or Medicaid coverage;


unless, with respect to Section 7.1(l)(ii), Borrower or Manager, as the case may be, has provided
Lender with a plan of correction for such deficiency acceptable to Lender in its sole discretion
(only for the purposes of this Section 7.1(l)) and Borrower and/or Manager is diligently pursing
such plan of correction to completion; provided, however, such ban on new admissions or on the
admission of patients otherwise qualifying for Medicare or Medicaid coverage must be lifted within
thirty (30) days from the occurrence of such ban unless such thirty (30) day period is extended by
Lender in writing in its sole discretion. Failure to comply with the preceding shall result in an
Event of Default. Notwithstanding the foregoing, if more than one (1) Facility at any one time is
subject to a ban on the new admissions or on admission of patients otherwise qualifying for
Medicare or Medicaid coverage, then any second or more ban on a Facility’s new admissions or on
admission of patients otherwise qualifying for Medicare or Medicaid coverage shall be an Event of
Default hereunder unless such second or more ban on a Facility’s new admissions or on admission of
patients otherwise qualifying for Medicare or Medicaid coverage has been waived by Lender in
writing in its sole discretion;




          (m) The final assessment against any Borrower, its Facility, or Manager (as to such Facility)
of any fines or penalties by any state or any Medicare, Medicaid, health or licensing agency having
jurisdiction over such Persons or the Facility in excess of $50,000.00 which remains unpaid for a
period of thirty (30) days, unless such assessment is being contested or appealed by appropriate
proceedings and Borrower or Manager, as the case may be, has established reserves adequate for
payment in the event such contest or appeal is ultimately unsuccessful. Provided further that in
the event such contest or appeal is ultimately unsuccessful, the Borrower shall pay the assessment
within ten (10) days of the final ruling associated with such contest or appeal, but in no event
later than the deadline as set forth by the applicable agency;




          (n) A final judgment is rendered by a court of law or equity against any Borrower in excess of
$25,000.00, or Manager or Guarantor in excess of $100,000.00, and the same remains undischarged for
a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible
insurance and such insurer has within such period acknowledged such coverage in writing, or (ii)
although not fully covered by insurance, enforcement of such judgment has been effectively stayed,
such judgment is being contested or appealed by appropriate proceedings and Borrowers, Guarantor or
Manager as the case may be, has established reserves adequate for payment in the event such Person
is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Lender;




          (o) The occurrence of any material adverse change in the financial condition or prospects of
any Borrower, Guarantor or Manager, or the existence of any other condition which, in Lender’s
reasonable determination, constitutes a material impairment of any such

45









 








Person’s ability to operate the Facility or of such Person’s ability to perform their
respective obligations under the Loan Documents, which is not remedied within thirty (30) days
after written notice;




          (p) The occurrence of an Event of Default under the A/R Loan or failure by A/R Lender to fund
a request for an advance under the A/R Loan, which is not funded within five (5) Business Days from
the funding date requested by Borrowers, Guarantor, Manager and/or any affiliate and/or subsidiary
of Borrowers, Guarantor or Manager (a “Ceased Funding”) unless such Ceased Funding is waived by
Lender in its sole discretion. Failure of Borrowers to promptly notify Lender of a Ceased Funding
shall be an immediate Event of Default hereunder; or




          (q) The occurrence of Omega Default as defined in Section 7(d) of the Guaranty Agreement.




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



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



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




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




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




          (d) Exercise the rights and remedies of setoff and/or banker’s lien against the interest of
Borrowers in and to every account and other property of Borrowers which is in the possession of
Lender or any Person who then owns a participating interest in the Loan, to the extent of the full
amount of the Loan; and/or




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




ARTICLE VIII

MISCELLANEOUS




46









 





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



     8.2 Costs and Expenses. Borrowers will bear all taxes, fees and expenses (including
actual attorneys’ fees and expenses of counsel for Lender) in connection with the Loan, the Note,
the preparation of this Agreement and the other Loan Documents (including any amendments hereafter
made), and in connection with any modifications thereto and the recording of any of the Loan
Documents. If, at any time, a Default occurs or Lender becomes a party to any suit or proceeding
in order to protect its interests or priority in any collateral for any of the Loan Obligations or
its rights under this Agreement or any of the Loan Documents, or if Lender is made a party to any
suit or proceeding by virtue of the Loan, this Agreement or any Mortgaged Property and as a result
of any of the foregoing, Lender employs counsel to advise or provide other representation with
respect to this Agreement, or to collect the balance of the Loan Obligations, or to take any action
in or with respect to any suit or proceeding relating to this Agreement, any of the other Loan
Documents, any Mortgaged Property, Borrowers, Guarantor or Manager, or to protect, collect, or
liquidate any of the security for the Loan Obligations, or attempt to enforce any security interest
or lien granted to Lender by any of the Loan Documents, then in any such events, all of the actual
attorney’s fees arising from such services, including attorneys’ fees for preparation of litigation
and in any appellate or bankruptcy proceedings, and any expenses, costs and charges relating
thereto shall constitute additional obligations of Borrower to Lender payable on demand of Lender.
Without limiting the foregoing, Borrowers have undertaken the obligation for payment of, and shall
pay, all recording and filing fees, revenue or documentary stamps or taxes, intangibles taxes, and
other taxes, expenses and charges payable in connection with this Agreement, any of the Loan
Documents, the Loan Obligations, or the filing of any financing statements or other instruments
required to effectuate the purposes of this Agreement, and should Borrowers fail to do so,
Borrowers agree to reimburse Lender for the amounts paid by Lender, together with penalties or
interest, if any, incurred by Lender as a result of underpayment or nonpayment. Such amounts shall
constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall bear
interest at the Default Rate (as defined in the Note) from the date advanced until repaid.



     8.3 Performance of Lender. At its option, upon Borrowers’ failure to do so, Lender
may make any payment or do any act on Borrowers’ behalf that Borrowers or others are required to do
to remain in compliance with this Agreement or any of the other Loan Documents, and Borrowers agree
to reimburse Lender, on demand, for any payment made or expense incurred by Lender pursuant to the
foregoing authorization, including, without limitation, attorneys’ fees, and until so repaid any
sums advanced by Lender shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall bear interest at the Default Rate (as defined in the Note) from the date
advanced until repaid.



47









 





     8.4 Indemnification. Except to the extent caused solely by the gross negligence of
willful misconduct or illegal activity of the Indemnified Parties, Borrowers shall, at its sole
cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties from and
against any and all claims, suits, liabilities (including, without limitation, strict liabilities),
actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value,
fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive
damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including
but not limited to reasonable attorneys’ fees and other costs of defense) imposed upon or incurred
by or asserted against Lender by reason of (a) ownership of the Note, the Mortgage, the Mortgaged
Property or any interest therein or receipt of any Rents, (b) any amendment to, or restructuring
of, the Loan Obligations and/or any of the Loan Documents, (c) any and all lawful action that may
be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note
or any of the other Loan Documents, whether or not suit is filed in connection with same, or in
connection with Borrowers, Guarantor, Manager and/or any partner, joint venturer, member or
shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy,
insolvency or similar proceeding, (d) any accident, injury to or death of persons or loss of or
damage to property occurring in, on or about the Land, the Improvements or any part thereof or on
the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways, (e)
any use, nonuse or condition in, on or about the Land, the Improvements or any part thereof or on
the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways, (f)
any failure on the part of Borrowers, Guarantor or Manager to perform or comply with any of the
terms of this Agreement or any of the other Loan Documents, (g) any claims by any broker, Person or
entity claiming to have participated in arranging the making of the Loan evidenced by the Note, (h)
any failure of the Land and/or Improvements to be in compliance with any applicable laws, (i)
performance of any labor or services or the furnishing of any materials or other property with
respect to the Land, the Improvements or any part thereof, (j) the failure of any Person to file
timely with the Internal Revenue Service an accurate Form 1099-b, statement for recipients of
proceeds from real estate, broker and barter exchange transactions, which may be required in
connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of
the proceeds of the transaction in connection with which the Loan is made, (k) any
misrepresentation made to Lender in this Agreement or in any of the other Loan Documents, (l) any
tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents;
(m) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as
amended, (n) any fines or penalties assessed or any corrective costs incurred by Lender if the
Facility or any part of the Land and/or Improvements is determined to be in violation of any
covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations, or (o)
the enforcement by any of the Indemnified Parties of the provisions of this Section 8.4. Any
amounts payable to Lender by reason of the application of this Section 8.4, shall become
immediately due and payable, and shall constitute a portion of the Loan Obligations, shall be
secured by the Mortgage and shall accrue interest at the Default Rate (as defined in the Note).
The obligations and liabilities of Borrowers under this Section 8.4 shall survive any termination,
satisfaction, assignment, entry of a judgment of foreclosure or exercise of a power of sale or
delivery of a deed in lieu of foreclosure of the Mortgage. For purposes of this Section 8.4, the
term “Indemnified Parties” means Lender and any Person who is or will have been involved in the
origination of the Loan, any Person who is or will have been involved in the servicing of the



48









 







Loan, any Person in whose name the encumbrance created by the Mortgage is or will have been
recorded, any Person who may hold or acquire or will have held a full or partial interest in the
Loan (including, without limitation, any investor in any securities backed in whole or in part by
the Loan) as well as the respective directors, officers, shareholder, partners, members, employees,
agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries,
participants, successors and assigns of any and all of the foregoing (including, without
limitation, any other Person who holds or acquires or will have held a participation or other full
or partial interest in the Loan or the Mortgaged Property, whether during the term of the Mortgage
or as a part of or following a foreclosure of the Loan and including, without limitation, any
successors by merger, consolidation or acquisition of all or a substantial portion of Lender’s
assets and business).



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



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



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


If to Borrower:



c/o Advocat Inc

1621 Galleria Boulevard

Brentwood, Tennessee 37027-2926

Attn: Glynn Riddle



with a copy to:



Harwell Howard Hyne Gabbert & Manner P.C.

Suite 1800

315 Deaderick Street

Nashville, Tennessee 37238-1800

Attn: John N. Popham, Esq.



If to Lender:




49









 







Capmark Finance Inc.

200 Witmer Road

Horsham, Pennsylvania 19044-0809

Attn: Servicing Department



and



Capmark Finance Inc.

2801 Highway 280 South, Suite 305

Birmingham, Alabama 35223

Attn: Laura York McDonald



with a copy to:



Shannon B. Lisenby, Esq.

Bradley Arant Rose & White llp

One Federal Place

1819 Fifth Avenue North

Birmingham, Alabama 35203-2119



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




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



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



50









 







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



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



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



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



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



51









 







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



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



	 	 	 	 	 	 	 
	 	 	BORROWER:
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee
corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a

Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By: Diversicare Assisted Living Services NC, LLC 
Its: Sole Member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,

its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a

Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By: Diversicare Assisted Living Services NC, LLC

 Its: Sole Member






52









 






	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,

its Chief Financial Officer






53









 






	 	 	 	 	 	 	 
	 	 	DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE CHISOLM, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE HARTFORD, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE HILLCREST, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer






54









 






	 	 	 	 	 	 	 
	 	 	DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE PINEDALE, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer
	 
	 	 	 	 	 	 
	 	 	DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company
	 
	 	 	 	 	 	 
	 	 	By:	 	Diversicare Leasing Corp., a Tennessee corporation, its sole member
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Glynn Riddle
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	L. Glynn Riddle,
	 

	 	 	 	 	 	its Chief Financial Officer






55









 






	 	 	 	 	 
	 	 	LENDER:
	 
	 	 	 	 
	 	 	CAPMARK FINANCE INC., a California corporation,
formerly known as GMAC Commercial Mortgage
Corporation
	 
	 	 	 	 
	 	 	/s/ Laura Y. McDonald
	 	 	 
	 

	 	By:
	 	/s/ Laura Y. McDonald
	 

	 	 	 	 
	 

	 	Its:
	 	Senior Vice President






[Exhibits omitted]





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