<PAGE>

                                                                   EXHIBIT 10.11
                              MANAGEMENT AGREEMENT
                              --------------------


     This MANAGEMENT AGREEMENT (this "Agreement"), dated as of May 7, 1997, is
made and entered into by and between THE ISLAND ON LAKE TRAVIS, LTD., a Texas
limited partnership ("Owner"), and BROOKDALE LIVING COMMUNITIES OF TEXAS, INC.,
a Delaware corporation ("Manager").

                                    RECITALS
                                    --------

     WHEREAS, Owner owns the senior and assisted living facility identified on
Schedule A hereto (the "Facility");

     WHEREAS, Manager is experienced and qualified in the business of owning and
operating senior and assisted living facilities such as the Facility, and Owner
desires to engage Manager to operate the Facility; and

     WHEREAS, Manager is willing to operate the Facility on the terms and
subject to the conditions set forth in this Agreement.

                                   AGREEMENTS
                                   ----------

     NOW, THEREFORE, in consideration of the recitals and the mutual promises
and covenants herein contained and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

     1.  Responsibilities of Manager.

         (a) Owner hereby engages Manager to operate the Facility, and Manager
hereby accepts such engagement and, subject to the conditions set forth in this
Agreement, agrees to operate the Facility, at Owner's expense, so as to provide
all services required by applicable law and regulations and by the terms set
forth in this Agreement. During the term of this Agreement, Manager shall have
full authority to operate and manage the Facility as a senior and assisted
living facility in accordance with applicable law and regulations and the terms
and conditions hereof, and shall have full and complete control and reign over,
and use of, the entire Facility, including its common areas. Without limiting
the generality of the foregoing, Manager shall have full authority and
responsibility as follows:

             (i) Operational Policies and Forms. Subject to the applicable
Annual Budget (as defined in Section 1(a)(xii)), Manager shall establish and
implement such operational policies and procedures, and develop such new
policies and procedures, as Manager may deem necessary to cause or to ensure the
establishment
<PAGE>
 
and maintenance of operational standards appropriate for the nature of the
Facility.

             (ii)  Charges. Manager shall establish the schedules of charges for
residents of the Facility, including appropriate charges for any and all special
services rendered for residents at the Facility.

             (iii) Information. Manager shall develop any informational
material, mass media releases, and other related publicity materials, that it
deems necessary for the operation of the Facility.

             (iv)  Regulatory Compliance. Manager shall use its reasonable best
efforts to maintain all licenses, permits, qualifications and approvals from any
applicable governmental or regulatory authority required for the operation of
the Facility, to operate the Facility in compliance with all applicable laws and
regulations, and to comply with such laws and regulations in performing
Manager's obligations under this Agreement. In addition, Manager shall supervise
and coordinate the preparation and filing of (and, where required to do so under
applicable law or regulations, file) all reports or other information required
by all state or other governmental agencies having jurisdiction over the
Facility (including, but not limited to, the Capital Health Facilities
Development Corporation of Travis County, Texas (the "Issuer")) and shall
deliver copies of all such reports and information to Owner simultaneously with
such filings. Manager shall cooperate with governmental inspection and
enforcement activities.

             (v)   Equipment and Improvements. Subject to the applicable Annual
Budget, Manager shall, on behalf of Owner, acquire or effect the acquisition of
equipment and improvements which are needed to maintain or upgrade the quality
of the Facility or its services, to replace obsolete or run-down equipment, or
to correct any other deficiencies which may be identified by Manager during the
term of this Agreement, and shall make, or engage third parties to make, all
such repairs, replacements and maintenance and shall cause to be acquired all
necessary equipment, including replacement equipment.

             (vi)  Accounting. Manager shall supervise and coordinate accounting
support to, and prepare and maintain records for, the Facility, including the
following:

             A.    a monthly balance sheet and statement of operations for the
Facility, to be submitted to Owner within thirty (30) days after the end of each
calendar month;

             B.    resident billing records;

                                      -2-
<PAGE>
 
             C.    accounts receivable and collection records;

             D.    accounts payable records;

             E.    all payroll functions, including preparation of payroll
checks, establishment of depository accounts for with-holding taxes, payment of
such taxes (at Owner's sole expense), filing of payroll reports and the issuance
of W-2 forms to all employees;

             F.    a complete general ledger for the purposes of recording and
summarizing all transactions for the Facility; and

             G.    the preparation and filing of all necessary reports as
required by any and all governmental authorities having jurisdiction over the
Facility or the operation thereof (including, but not limited to, the Issuer)
and the simultaneous provision of copies thereof to Owner. Manager shall file,
on its own behalf or on behalf of Owner, all such reports as are required to be
filed by Manager or Owner.

All accounting procedures and systems utilized in providing said support shall
be in accordance with the operating capital and cash programs developed by
Manager and approved by Owner, which programs shall conform to generally
accepted accounting principles and shall not materially distort income or loss.
Subject to the applicable Annual Budget, nothing herein shall preclude Manager
from engaging a third party to assist it in the performance of the accounting
duties provided for herein.

             (vii) Reports. Manager shall supervise and coordinate the
preparation of any reasonable operational information which may from time to
time be specifically requested by Owner, including any information and reports
needed to assist Owner in completing its tax returns and in complying with any
reporting obligations imposed by any mortgagees or lessors of the Facility. In
addition, (i) within thirty (30) days after the end of each calendar month,
Manager shall supervise and coordinate the preparation and the delivery to Owner
of an unaudited balance sheet of the Facility, dated as of the last day of such
month, and unaudited statements of income and expenses and cash flow for such
month relating to the operation of the Facility and (ii) within ninety (90) days
after the end of the fiscal year of the Facility, Manager shall supervise and
coordinate the preparation and the delivery to Owner of audited financial
statements, including a balance sheet of the Facility dated as of the last day
of said fiscal year and statements of income and expense and changes in
financial position and an unaudited statement of cash flow for the fiscal year
then ended relating to the operation of the Facility. In addition, Manager shall
supervise and coordinate the preparation and the delivery to Owner of monthly
occupancy reports and related information with respect to the Facility. All
originals of the

                                      -3-
<PAGE>
 
books, forms and records generated by Manager in connection with the operation
of the Facility shall be Manager's property; provided, that Manager shall
provide Owner with copies of any of such books, forms and records reasonably
requested by Owner.

             (viii) Bank Accounts. Manager shall establish an account or
accounts and shall deposit therein all money received by Manager on Owner's
behalf from the operation of the Facility. Withdrawals and payments from this
account shall be made only on checks signed by one or more person or persons
designated by Manager. Manager shall give Owner written notice as to the
identity of such authorized signatories on such account. Subject to paragraph
(2) of Section 1(a)(xii), all expenses incurred in the operation of the Facility
in accordance with the terms of the Annual Budgets, including, but not limited
to, Facility mortgage or lease payments, payroll and employee benefits and
payment of Fees, shall be paid by check drawn on this account. Monthly payments
shall be made out of this account first to pay any debt service or rent due with
respect to the Facility, next to pay the operating expenses of the Facility in
such order of priority as Manager deems appropriate to the operation of the
Facility (other than the Fees), and, thereafter, to pay the Fees. Any Fees which
are not paid when due as a result of an insufficiency of revenues from the
Facility to cover the same shall accrue and shall be due and payable promptly by
Owner.

             (ix)  Personnel. Manager shall have full power and authority to
recruit, hire, train, promote, direct, discipline and fire all Facility
personnel, including the Executive Director of the Facility; establish salary
levels, personnel policies and employee benefits; and establish employee
performance standards, all as Manager determines to be necessary or desirable
during the term of this Agreement to ensure the efficient and satisfactory
operation of all departments within, and all services offered by, the Facility.
All of the foregoing obligations shall be undertaken in accordance with the
Annual Budgets and applicable law and regulations. All of the Facility personnel
shall be the employees of Manager, unless otherwise agreed by Owner and Manager,
and all salary, bonuses, fringe benefits, payroll taxes and related expenses
payable to or in respect of the Facility's on-site personnel holding the
position of Executive Director of the Facility and positions subordinate thereto
shall be expenses of the Facility. Manager agrees to employ as of the date of
this Agreement all individuals who are working at the Facility as of the date of
this Agreement and assume all liabilities and obligations to or with respect to
such individuals and indemnify, defend and hold harmless Owner and its
affiliates against any and all claims made by such individuals in respect of
their respective employment at the Facility.

             (x)   Supplies and Equipment. Manager shall purchase, on behalf of
Owner, supplies and non-capital equipment

                                      -4-
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needed to operate the Facility within the budgetary limits set forth in the
Annual Budgets.

             (xi)  Legal Proceedings. Manager shall, through legal counsel
designated by Manager and reasonably satisfactory to Owner, direct all legal
matters and proceedings that are within the scope of Manager's authority
pursuant to this Agreement, including without limitation, instituting any
necessary legal actions or proceedings to collect obligations owing to the
Facility, canceling or terminating any contract or agreement relating to the
Facility for breach thereof or default thereunder, and otherwise enforce the
obligations of the residents, sponsors, licensees, customers and any other users
of the Facility. Without limiting the generality of the foregoing, Manager is
authorized (without the prior written consent of Owner) to settle, in the name
and on behalf of Owner and on such terms and conditions as Manager may deem to
be in the best interests of the Facility, any and all claims or demands arising
out of, or in connection with, the operation of the Facility, whether or not
legal action has been instituted, provided that such settlement does not exceed
the amount for each such individual claim or demand as set forth in the most
recently approved Annual Budget. All such amounts paid in respect of any such
settlements shall be expenses of the Facility. Manager will give notice promptly
to Owner of all demands and claims and all settlements and legal actions, but
the failure to give such notice shall not affect the preceding provisions of
this paragraph.

             (xii) Annual Budgets.

             (A) Preparation and Submission. Owner and Manager acknowledge that
they have agreed upon the budget for the Facility through December 31, 1997. At
least ninety (90) days prior to January 1, 1998 and each subsequent calendar
year that commences during the term of this Agreement, Manager shall submit to
Owner a proposed annual budget for the Facility projecting the revenues
available and funds required during such fiscal year in order to operate the
Facility and to make capital improvements necessary or desirable in order to
keep the Facility's physical plant in good condition and repair. The proposed
annual budget shall be based upon data and information then available to Manager
and shall include, without limitation, estimated salaries and fringe benefits
for all personnel groups, projected staffing patterns for the Facility,
estimates of required capital expenditures and purchases of equipment, supplies,
inventory, food and similar items, and an estimate of the level of rates and
charges to residents of the Facility sufficient to generate revenue necessary to
operate the Facility and make the capital improvements projected in such budget.
The proposed annual budget shall be an estimate of revenues and costs, and Owner
and Manager acknowledge that (1) projected revenue may not be actually received
and (2) projected costs may be exceeded by actual expenses and capital
expenditures incurred in connection with the operation and maintenance of the

                                      -5-
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Facility. By submitting such a projected budget, Manager will not be deemed to
be providing a guarantee or warranty as to the projected revenue, expenses or
capital expenditures of the Facility.

             (B) Adoption. The Facility budget for the period ending December
31, 1997 referred to in the immediately preceding paragraph and each annual
budget as finally established in accordance with this subparagraph (B)
(including as it may thereafter be revised from time to time during a calendar
year pursuant to the written agreement of Owner and Manager), as the same may be
modified by Owner and Manager, shall constitute an "Annual Budget" for all
purposes under this Agreement. Owner shall, within fifteen (15) days following
receipt from Manager of a proposed annual budget proposal, notify Manager of
either (1) Owner's approval of such proposed annual budget or (2) those items of
which Owner approves and those items of which Owner disapproves. In the event
that Owner does not either approve or disapprove of, in total or in part, such
proposed annual budget in writing within such 15-day period, then such proposed
annual budget shall be deemed approved by Owner and shall be the Annual Budget
for such calendar year. If Owner disapproves of the proposed annual budget
either in total or in part within such 15-day period, then Owner and Manager
shall have thirty (30) days from the date of Owner's disapproval notice to
formulate a mutually agreeable Annual Budget. If the parties are unable to reach
an agreement within said thirty (30) day period, then the Annual Budget for the
immediately preceding calendar year, including any such prior Annual Budget
determined in accordance with this sentence, increased by the greater of 5% and
the percentage increase in the Consumer Price Index -- Urban Wage Earners (or,
if such index is no longer published, such other index as is determined by
Manager in good faith to be comparable) during the 12-month period ended on
November 30th of such preceding year, shall constitute the Annual Budget pending
the final adoption of an Annual Budget; provided, however, that the budgeted
items for the categories of heat, light, power, insurance and real estate taxes
shall be deemed increased as required to reflect actual expenses for the
succeeding calendar year).

             (C) Efforts to Operate within Annual Budget. Manager agrees to use
its reasonable best efforts to operate the Facility in accordance with the
Annual Budgets. Subject to the foregoing limitation, Owner shall be responsible
on a periodic basis, as and when needed, for all expenses and capital
expenditures incurred in connection with the operation and maintenance of the
Facility, including, without limitation, Fees and cost overruns which exceed the
projections in the then current Annual Budget; provided, however, that (except
as provided in the next sentence) Owner shall not be responsible for cost
overruns which exceed the relevant amount provided for in such Annual Budget by
more than 10%, if the incurrence of such overruns was subject to

                                      -6-
<PAGE>
 
or within the reasonable control of Manager. Notwithstanding anything in this
Agreement, if Manager determines in good faith that the incurrence of any
expenditure is required in order to comply with applicable law or regulations,
then, with Owner's prior approval, which shall not be unreasonably withheld,
Manager shall be entitled to make such expenditures, and all such expenditures
shall be deemed, for all purposes of this Agreement, to be in accordance with
the then current Annual Budget.

             (xiii) Collection of Accounts. Manager shall issue bills and
collect accounts and monies owed for goods and services furnished by the
Facility, including, but not limited to, enforcing the rights of Owner and the
Facility as creditor under any contract or in connection with the rendering of
any services. Any actions taken by Manager to collect said accounts receivable
shall be in accordance with the applicable laws, rules and regulations governing
the collection of accounts receivable and in accordance with the applicable
Annual Budget.

             (xiv)  Contracts. Subject to Owner's prior approval, Manager shall
negotiate, enter into, secure, cancel and/or terminate such agreements and
contracts which Manager may deem necessary or advisable for the operation of the
Facility, including, without limitation, the furnishing of concessions,
supplies, utilities, extermination, refuse removal and other services. Where
lawful and provided Owner has approved, said agreements and contracts will be
entered into in the name of and on behalf of Owner.

         (b)    Exclusive Representative. It is understood and agreed that
Manager shall be the exclusive representative of Owner for purposes of
communicating and dealing directly with the regulatory authorities, governmental
agencies, employees, independent contractors, suppliers, residents, sponsors,
licensees, customers and guests of the Facility. Any communications from Owner
to such persons or entities or authorities shall be directed through Manager
unless Owner determines that direct communications between Owner and one or more
such persons or entities is appropriate. Owner currently maintains and will
continue to maintain contact relationships with certain of the above-mentioned
persons and entities.

     2.   Insurance. Manager shall arrange for and maintain all necessary and
proper hazard insurance covering the Facility, including the furniture, fixtures
and equipment situated thereon, all necessary and proper malpractice and public
liability insurance for Manager's and Owner's protection and for the protection
of Manager's and Owner's directors, officers, partners, agents and the
Facility's personnel. Manager shall also arrange for and maintain all employee
health and worker's compensation insurance for the Facility's personnel. Any
insurance provided pursuant to this paragraph shall comply with the requirements
of any applicable

                                      -7-
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Facility mortgage or lease and, with the exception of the insurance maintained
by Manager for its own protection, shall be an expense of the Facility.

     3.   Proprietary Interest. The systems, methods, procedures and controls
employed by Manager and any written materials or brochures developed by Manager
to document the same are to remain the property of Manager provided, Manager
shall provide Owner with a copy or copies of such materials and brochures.

     4.   Term of Agreement; Effect of Termination. Unless this Agreement is
sooner terminated as hereinafter provided in Section 5 or in this Section 4 or
as otherwise agreed in writing, the initial term of this Agreement shall
commence on the date hereof and shall end on April 30, 1999, with successive
automatic renewal periods of one (1) year each thereafter, unless either party
notifies the other in writing, within sixty (60) days prior to the expiration of
the then current term, of such party's intention not to exercise the then
upcoming automatic renewal period. This Agreement may be terminated (i) by Owner
(a) upon sixty (60) days' prior written notice to Manager given at any time
after the last day of the 24th month of the term of this Agreement or (b) at any
time after the date hereof for Cause (as hereinafter defined), or (ii) by
Manager upon sixty (60) days' prior written notice to Owner given at any time
after the date hereof; provided, however, that in the event of a termination by
Manager pursuant to clause (ii) above, Manager shall cooperate with and assist
Owner in engaging a qualified replacement manager for the Facility. Upon any
termination of this Agreement pursuant to the immediately preceding sentence,
the parties hereto shall have no further obligations or liabilities other than
the right of Manager to receive Fees through the date of termination and
Manager's obligation to cooperate with Owner to facilitate a smooth transition
to a qualified replacement manager for the Facility, except that, upon the
expiration or earlier termination of this Agreement for any reason, the parties
shall cooperate (at Owner's expense) to minimize the impact of the change on the
residents of the Facility, and during any such period for which Manager provides
services or assists in the operation of the Facility in connection therewith it
shall be entitled to receive an appropriate fee therefor.

     For purposes of this Agreement, "Cause" shall mean (i) fraud,
misappropriation or embezzlement by Manager involving Owner's property or other
wrongful acts by Manager that materially impair the goodwill or business of
Owner or the Facility or that cause material damage to Owner's property,
goodwill or business or (ii) continued failure by Manager to substantially
perform its duties and obligations owing to Owner under this Agreement, after a
written demand for performance by Manager is delivered to Manager by Owner that
specifically identifies the manner in which Owner believes Manager has not
substantially performed its duties and

                                      -8-
<PAGE>
 
after Manager has been given at least thirty (30) days in which to cure such
performance deficiencies.

     5.   Events of Default and Remedies.

          (a) Defaults. Each of the following shall constitute an Event of
Default hereunder:

          (i)   if Owner shall fail to pay or allow payment of any installment
of the Fees due to Manager in accordance with Section 8 hereof for a period of
thirty (30) days after written notice of such default from Manager;

          (ii)  if either Owner, on the one hand, or Manager, on the other,
fails to perform in any material respect any term, provision, or covenant of
this Agreement (other than as set forth in Section 5(a)(i)) and (A) such failure
continues for thirty (30) days after written notice from the other party
specifying such failure to perform (unless such failure cannot reasonably be
cured within such 30-day period, in which event, the defaulting party shall have
an additional period, not to exceed an additional thirty (30) days, in which to
cure the default) or (B) the defaulting party fails to endeavor vigorously,
diligently and continuously to cure such default as promptly as is practicable;
or

          (iii) if either Owner, on the one hand, or Manager, on the other, is
dissolved or liquidated, applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or is the subject of an involuntary
bankruptcy filing, makes a general assignment for the benefit of creditors, or
files a petition or an answer seeking reorganization or arrangement with
creditors or to take advantage of any insolvency law, or if an order, judgment
or decree shall be entered by any court of competent jurisdiction, on the
application of a creditor, adjudicating Owner or Manager bankrupt or insolvent
or approving a petition seeking reorganization of Owner or Manager or appointing
a receiver, trustee or liquidator for such party of all or a substantial part of
its assets, and such order, judgment or decree shall continue unstayed and in
effect for any period of sixty (60) consecutive days.

          (b) Remedies. At any time after the occurrence and during the
continuance of an Event of Default, the party who has not committed or suffered
the Event of Default may, at its option, terminate this Agreement by giving
written notice to the other party and, except as provided in this Agreement,
shall be entitled to exercise all rights and remedies available under applicable
law; provided, however, that Owner may cause the effective date of any
termination by Manager to be deferred for up to ninety (90) days to afford Owner
the opportunity to engage a replacement manager of the

                                      -9-
<PAGE>
 
Facility and to facilitate a smooth transition to such replacement manager.

     6.   Facility Operations.

          (a)  No Guarantee of Profitability. Manager does not guarantee that
operation of the Facility will be profitable, but Manager shall use its best
efforts to operate the Facility in as cost effective and profitable a manner as
reasonably possible consistent with maintaining operations in accordance with
the senior and assisted living industry's then prevailing standards in the
geographic area in which the Facility is located.

          (b)  Standard of Performance; Acting within Budget. In performing its
obligations under this Agreement, Manager shall use its reasonable best efforts
and act in good faith and with professionalism in accordance with the Annual
Budgets and the prevailing standards of the senior and assisted living industry
in the geographic area in which the Facility is located.

          (c)  Force Majeure. The parties will not be deemed to be in violation
of this Agreement if they are prevented from performing any of their respective
obligations hereunder for any reason beyond their control, including, without
limitation, strikes, shortages, war, acts of God, or any applicable statute,
regulation or rule of federal, state or local government or agency thereof
having jurisdiction over the Facility or the operations thereof.

     7.   Withdrawal of Funds by Manager. Owner and Manager acknowledge and
agree that the efficient operation of the Facility requires that Manager have
ready access to the funds required therefor. Accordingly, unless otherwise
agreed by Owner and Manager, Owner agrees not to withdraw any funds from the
Facility's bank account(s) reasonably believed by Manager to be required for the
proper operation of the Facility or maintenance of appropriate reserves with
respect thereto as set forth in the most recently approved Annual Budget.

     8.   Fees. During the term of this Agreement, Manager shall be entitled to
receive management fees (the "Fees") equal to five percent (5%) of the gross
revenues of the Facility during each month or portion thereof occurring during
such term. Fees shall be paid on a monthly basis simultaneously with the
delivery by Manager to Owner of the monthly statements provided for in Section
1(a)(vii).

     9.   Assignment. This Agreement shall not be assigned (including by
operation of law, whether by merger or consolidation (excluding a merger
effected solely for the purpose of changing Owner's jurisdiction of
incorporation that does not affect the stock ownership of Owner in any material
respect) or otherwise) by

                                     -10-
<PAGE>
 
Owner, on the one hand, or by Manager, on the other, without the prior written
consent of the other party; provided, however, that to the extent permitted by
applicable law and regulations, and subject to the receipt of all required
licenses, permits, approvals and authorizations of applicable governmental
agencies, this Agreement may be assigned by Manager to one or more corporations
or other legal entities all the shares (and, in the case of legal entities other
than corporations, all the equity ownership and voting control) of which are
owned by Manager or by Brookdale Living Communities, Inc. (the owner of all of
the outstanding stock of Manager).

     10.  Notices. Any notices required or permitted to be sent hereunder shall
be delivered personally or mailed, certified mail, return receipt requested, or
delivered by overnight courier service to the following addresses, or such other
addresses as shall be given by notice delivered hereunder, and shall be deemed
to have been given upon delivery, if delivered personally, three (3) business
days after mailing, if mailed, or one business day after delivery to the
courier, if delivery by overnight courier service:

     If to Owner, to:

               The Island on Lake Travis, Ltd.
               c/o The Prime Group, Inc.
               77 West Wacker Drive
               Suite 3900
               Chicago, Illinois 60601
               Attn: Michael W. Reschke

     With a copy to:

               The Prime Group, Inc.
               77 West Wacker Drive
               Suite 3900
               Chicago, Illinois 60601
               Attn: Robert J. Rudnik
 
     If to Manager, to:

               Brookdale Living Communities, Inc.
               77 West Wacker Drive
               Suite 3900
               Chicago, Illinois 60601
               Attn:  President

                                     -11-
<PAGE>
 
     With a copy to:

             Winston & Strawn
             35 West Wacker Drive
             Chicago, Illinois 60601
             Attn:  Wayne D. Boberg

     11.  Relationship of the Parties. The relationship of Manager to Owner in
connection with this Agreement shall be that of an independent contractor, and
all acts performed by Manager during the term hereof shall be deemed to be
performed in Manager's capacity as an independent contractor. Nothing contained
in this Agreement is intended to or shall be construed to give rise to or create
a partnership or joint venture or lease between Owner, its successors and
assigns, on the one hand, and Manager, its successors and assigns, on the other
hand.

     12.  Entire Agreement. This Agreement and any documents executed in
connection herewith contain the entire agreement among the parties and shall be
binding upon their respective successors and assigns, and shall be construed in
accordance with the laws of the State of Texas. This Agreement may not be
modified or amended except by written instrument signed by the parties hereto.

     13.  Contract Modifications for Certain Legal Events. In the event any
state or federal laws or regulations, whether now existing or enacted or
promulgated after the effective date of this Agreement, are interpreted by
judicial decision, a regulatory agency or legal counsel of both parties in such
a manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, Owner and Manager agree to cooperate in
restructuring their relationship and this Agreement to eliminate such violation
or to reduce the risk thereof to the extent such restructuring can be
accomplished upon commercially reasonable terms; provided, that any such
restructuring shall, to the maximum extent possible, preserve the underlying
economic and financial arrangements between Owner and Manager. The parties agree
that such amendment may require either or both parties to obtain appropriate
regulatory licenses and approvals.

     14.  Captions. The captions used herein are for convenience of reference
only and shall not be construed in any manner to limit or modify any of the
terms hereof.

     15.  Severability. In the event one or more of the provisions contained in
this Agreement is deemed to be invalid, illegal or unenforceable in any respect
under applicable law, the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be impaired thereby.

                                     -12-
<PAGE>
 
     16.  Remedies Cumulative; No Waiver. No right or remedy herein conferred
upon or reserved to any of the parties hereto is intended to be exclusive of any
other right or remedy, and each and every right and remedy shall be cumulative
and in addition to any other right or remedy given hereunder, or now or
hereafter legally existing upon the occurrence of an Event of Default hereunder.
The failure of any party hereto to insist at any time upon the strict observance
or performance of any of the provisions of this Agreement or to exercise any
right or remedy as provided in this Agreement shall not impair any such right or
remedy or be construed as a waiver or relinquishment thereof with respect to
subsequent defaults. Every right and remedy given by this Agreement to the
respective parties hereto may be exercised from time to time and as often as may
be deemed expedient by such parties. To the extent either party hereto incurs
legal fees and expenses in connection with such party's enforcement of any of
its rights hereunder as a result of a breach of this Agreement by the other
party hereto (the "Breaching Party"), then, to the extent it is determined,
either by the admission of the Breaching Party or by a court having competent
jurisdiction over such dispute, that the Breaching Party had committed the
alleged breach of this Agreement, then the Breaching Party shall pay all such
reasonable attorneys' fees and expenses incurred by the other party in
connection with such enforcement.

     17.  Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and each such counterpart
shall together constitute but one and the same Agreement.

                           [signature page follows]

                                     -13-
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have caused this Management
Agreement to be executed and delivered in their names and on their behalf as of
the date first set forth above.

                                  OWNER:

                                  THE ISLAND ON LAKE TRAVIS, LTD., a 
                                    Texas limited partnership


                                  By:   The Lake Travis Island, Ltd.,
                                        a Texas limited partnership, its General
                                        Partner

                                  By:   The Prime Group, Inc., an Illinois
                                        corporation, its General Partner

                                        By: /s/ Richard S. Curto
                                           ----------------------------------
                                        Name: Richard S. Curto
                                             --------------------------------
                                        Title: Executive Vice President
                                              -------------------------------


                                  MANAGER:
 
                                  BROOKDALE LIVING COMMUNITIES OF TEXAS, INC., a
                                  Delaware corporation


                                  By: /s/ Mark J. Schulte
                                     ----------------------------------------
                                  Name:   Mark J. Schulte
                                       --------------------------------------
                                  Title:  President
                                        -------------------------------------

                                     -14-
<PAGE>
 
                                                                      SCHEDULE A

                            DESCRIPTION OF FACILITY


The real property and improvements commonly known as The Island and Lake Travis
located at 3404 American Drive, Lago Vista, Texas.

                                     -15-