Document:

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                                                                   Exhibit 10.96

                                  DEED OF TRUST

                            With Assignment of Rents

    THIS DEED OF TRUST, made into this 1st day of December, 2001, by and between
ARV FULLERTON, L.P., a California limited partnership, with offices at 245
Fischer Avenue, Suite D-1, Costa Mesa, California 92626, herein called Trustor,
and FIDELITY NATIONAL TITLE INSURANCE COMPANY, a California corporation,
Trustee(s), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, with offices at
150 East Gay Street, 22nd Floor, Columbus, Ohio 53215, herein called
Beneficiary.

    WITNESSETH: That Trustor grants, transfers, and assigns to Trustee in trust,
upon the trusts, covenants, conditions and agreements and for the uses and
purposes hereinafter contained, with power of sale, all that real property
situate, lying and being in Orange County, State of California, described as
follows:

                         SEE EXHIBIT "A" ATTACHED HERETO
                             AND MADE A PART HEREOF.

    Together with the rents, issues, and profits thereof, SUBJECT, HOWEVER, to
the right, power, and authority hereinafter given to and conferred upon
Beneficiary to collect and apply such rents, issues, and profits; and together
with all buildings and improvements of every kind and description now or
hereafter erected or placed thereon, and all fixtures, including but not limited
to all gas and electric fixtures, engines and machinery, radiators, heaters,
furnaces, heating equipment, laundry equipment, steam and hot-water boilers,
stoves, ranges, elevators and motors, bath tubs, sinks, water closets, basins,
pipes, faucets and other plumbing and heating fixtures, mantels, cabinets,
refrigerating plant and refrigerators, whether mechanical or otherwise, cooking
apparatus and appurtenances, and all shades, awnings, screens, blinds and other
furnishings, it being hereby agreed that all such fixtures and furnishings shall
to the extent permitted by law be deemed to be permanently affixed to and a part
of the realty; and

    Together with all building materials and equipment now or hereafter
delivered to said premises and intended to be installed therein; and

    Together with all articles of personal property now or hereafter attached to
or used in and about the building or buildings now erected or hereafter to be
erected on the lands described which are necessary to the complete and
comfortable use and occupancy of such building or buildings for the purposes for
which they were or are to be erected, including all other goods and chattels and
personal property as are ever used or furnished in operating a building, or the
activities conducted therein, similar to the one herein described and referred
to, and all renewals

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                                     - 2 -

or replacements thereof or articles in substitution therefor, whether or not the
same are, or shall be attached to said building or buildings in any manner, and
said Trustor agrees to execute a Security Agreement covering the aforesaid
fixtures and articles of personal property, at the time of placing such personal
property or any part thereof in the building or buildings to be erected on the
lands herein described in the manner and form required by law, at its expense
and satisfactory to the Beneficiary.

    To have and to hold the property hereinbefore described together with
appurtenances to the Trustee, its or his successors and assigns forever.

    FOR THE PURPOSE of securing performance of each agreement of Trustor herein
and payment of a just indebtedness of the Trustor to the Beneficiary in the
principal sum of TWO MILLION TWO HUNDRED SEVEN THOUSAND FOUR HUNDRED AND
NO/100THS DOLLARS ($2,207,400.00), evidenced by its Note of even date herewith,
bearing interest from date on outstanding balances at Seven and one-quarter
percent (7.25%) per annum, said principal and interest being payable in monthly
installments as provided in said Note with a final maturity of January 1, 2037,
which Note is identified as being secured hereby by a certificate thereon. Said
Note and all of its terms are incorporated herein by reference and this
conveyance shall secure any and all extensions thereof, however evidenced.

AND TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR COVENANTS AND AGREES:

    1. That it will pay the Note at the times and in the manner provided
therein;

    2. That it will not permit or suffer the use of any of the property for any
purpose other than the use for which the same was intended at the time this Deed
of Trust was executed;

    3. That the Regulatory Agreement, if any, executed by the Trustor and the
Secretary of Housing and Urban Development, acting by and through the Federal
Housing Commissioner, which is being recorded simultaneously herewith, is
incorporated in and made a part of this Deed of Trust. Upon default under the
Regulatory Agreement and upon the request of the Secretary of Housing and Urban
Development, acting by and through the Federal Housing Commissioner, the
Beneficiary, at its option, may declare the whole of the indebtedness secured
hereby to be due and payable;

    4. That all rents, profits and income from the property covered by this Deed
of Trust are hereby assigned to the Beneficiary for the purpose of discharging
the debt hereby secured. Permission is hereby given to Trustor so long as no
default exists hereunder, to collect such rents, profits and income for use in
accordance with the provisions of the Regulatory Agreement;

    That the Trustor grants to the holder or holders of the Note secured hereby
the right and power to appoint a substitute Trustee or Trustees hereunder for
any reason whatsoever by instrument of appointment duly executed and
acknowledged by the holder or holders of the Note and to be filed for record in
the office wherein this Deed of Trust is recorded. Such power of appointment may
be exercised as often as deemed necessary by the holder or holders of the Note.
Upon such appointment, the substitute Trustee or Trustees shall be vested with
all the rights, powers, authority and duties vested in the Trustee hereunder;

    5. That upon default hereunder or under the aforementioned Regulatory
Agreement, Beneficiary shall be entitled to the Appointment of a receiver by any
court having jurisdiction,

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without notice, to take possession and protect the property described herein and
operate same and collect the rents, profits and income therefrom;

    6. That at the option of the Trustor the principal balance secured hereby
may be reamortized on terms acceptable to the Secretary of Housing and Urban
Development, acting by and through the Federal Housing Commissioner if a partial
prepayment results from an award in condemnation in accordance with provisions
of Paragraph 21 herein, or from an insurance payment made in accordance with
provisions of Paragraph 7 herein, where there is a resulting loss of project
income;

    7. That the Trustor will keep the improvements now existing or hereafter
erected on the deeded property insured against loss by fire and such other
hazards, casualties, and contingencies, as may be stipulated by the Secretary of
Housing and Urban Development, acting by and through the Federal Housing
Commissioner upon the insurance of the Deed of Trust and other hazards as may be
required from time to time by the Beneficiary, and all such insurance shall be
evidenced by standard fire and extended coverage insurance policy or policies,
in amounts not less than necessary to comply with the applicable Coinsurance
Clause percentage, but in no event shall the amounts of coverage be less than 80
percent of the Insurable Values or not less than the unpaid balance of the
insured Deed of Trust, whichever is the lesser, and in default thereof the
Beneficiary shall have the right to effect insurance. Such policies shall be
endorsed with standard Mortgagee clause with loss payable to the Beneficiary and
the Secretary of Housing and Urban Development as their interests may appear,
and shall be deposited with the Beneficiary; The insurance carrier providing the
insurance shall be chosen by Trustor, subject to approval by Beneficiary,
provided that such approval shall not be unreasonably withheld.

    That if the premises covered hereby, or any part thereof, shall be damaged
by fire or other hazard against which insurance is held as hereinabove provided,
the amounts paid by any insurance company in pursuance of the contract of
insurance to the extent of the indebtedness then remaining unpaid, shall be paid
to the Beneficiary, and, at its option, may be applied to the debt or released
for the repairing or rebuilding of the premises. Any unexpired insurance shall
inure to the benefit of, and pass to, the purchaser of the property covered
thereby at any Trustee's sale held hereunder;

    8. Together with and in addition to the monthly payments of interest or of
principal and interest payable under the terms of said Note, to pay to
Beneficiary monthly until said Note is fully paid, beginning on the first day of
the first month after the date hereof, the following sums:

            (a) An amount sufficient to provide the Beneficiary with funds to
        pay the next mortgage insurance premium if this instrument and the Note
        secured hereby are insured, or a monthly service charge, if they are
        held by the Secretary of Housing and Urban Development, as follows:

                    (I) If and so long as said Note of even date and this
                instrument are insured or are reinsured under the provisions of
                the National Housing Act, an amount sufficient to accumulate in
                the hands of the Beneficiary one month prior to its due date the
                annual mortgage insurance premium, in order to provide such
                Beneficiary with funds to pay such premium to the Secretary of
                Housing and Urban Development, pursuant to the National Housing
                Act, as amended, and applicable Regulations thereunder, or

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                    (II) Beginning with the first day of the month following an
                assignment of this instrument and the Note secured hereby to the
                Secretary of Housing and Urban Development, a monthly service
                charge which shall be an amount equal to one-twelfth of one-half
                percent (1/12 of 1/2%) of the average outstanding principal
                balance due on the Note computed for each successive year
                beginning with the first of the month following such assignment,
                without taking into account delinquencies or prepayments.

            (b) A sum equal to the ground rents, if any, next due, plus the
        premiums that will next become due and payable on policies of fire and
        other property insurance covering the premises covered hereby, plus
        water rates, taxes and assessments next due on the premises covered
        hereby (all as estimated by the Beneficiary) less all sums already paid
        therefor divided by the number of months to elapse before one month
        prior to the date when such ground rents, premiums, water rates, taxes
        and assessments will become delinquent, such sums to be held by
        Beneficiary in trust to pay said ground rents, premiums, water rates,
        taxes, and special assessments.

            (c) All payments mentioned in the two preceding subsections of this
        paragraph and all payments to be made under the Note secured hereby
        shall be added together and the aggregate amount thereof shall be paid
        each month in a single payment to be applied by Beneficiary to the
        following items in the order set forth:

                    (I) premium charges under the Contract of Insurance with the
                Secretary of Housing and Urban Development, acting by and
                through the Federal Housing Commissioner or service charge;

                    (II) ground rents, taxes, special assessments, water rates,
                fire and other property insurance premiums;

                    (III) interest on the Note secured hereby;

                    (IV) amortization of the principal of said Note.

    9. Any excess funds accumulated under paragraph (b) above remaining after
payment of the items therein mentioned, shall be credited to subsequent monthly
payments of the same nature required thereunder; but if any such item shall
exceed the estimate therefor, the Trustor shall without demand forthwith make
good the deficiency. Failure to do so before the due date of such item shall be
a default hereunder. In case of termination of the Contract of Mortgage
Insurance by prepayment of the mortgage in full, or otherwise (except as
hereinafter provided), accumulations under paragraph (a) above not required to
meet payments due under the Contract of Mortgage Insurance, shall be credited to
the Trustor. If the property is sold under foreclosure or is otherwise acquired
by the Beneficiary after default, any remaining balance of the accumulations
under paragraph (b) above shall be credited to the principal of the debt as of
the date of commencement of foreclosure proceedings or as of the date the
property is otherwise acquired; and accumulations under paragraph (a) above
shall be similarly applied unless required to pay sums due to the Secretary of
Housing and Urban Development, acting by and through the Federal Housing
Commissioner under the Contract of Mortgage Insurance;

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    10. To keep said property in good condition and repair, not to remove or
demolish any buildings thereon; to complete or restore promptly and in good and
workmanlike manner any building which may be constructed, damaged, or destroyed
thereon and to pay when due all claims for labor performed and materials
furnished therefor; to comply with all laws affecting said property or requiring
any alterations or improvements to be made thereon; not to commit or permit
waste thereof; not to commit, suffer or permit any act upon said property in
violation of law and/or covenants, conditions and/or restrictions affecting said
property; not to permit or suffer any alterations of or addition to the
buildings or improvements hereafter constructed in or upon said property without
the consent of the Beneficiary;

    11. To appear in and defend any action or proceeding purporting to affect
the security hereof or the rights or powers of Beneficiary or Trustee, and to
pay all costs and expenses, including cost of evidence of title and attorney's
fees in a reasonable sum, in any such action or proceeding in which Beneficiary
or Trustee may appear;

    12. Should Trustor fail to make any payment or do any act as herein
provided, then Beneficiary or Trustee, but without obligation so to do and
without notice to or demand upon Trustor and without releasing Trustor from any
obligation hereof, may make or do the same in such manner and to such extent as
either may deem necessary to protect the security hereof, Beneficiary or Trustee
being authorized to enter upon said property for such purposes; may commence,
appear in and/or defend any action or proceeding purporting to affect the
security hereof or the rights or powers of Beneficiary or Trustee; may pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in the
judgment of either appears to be prior or superior hereto; and, in exercising
any such powers, may pay necessary expenses, employ counsel, and pay his
reasonable fees;

    13. The Beneficiary shall have the right to pay mortgage insurance premiums
or fire and other property insurance premiums when due to the extent that
monthly payments made hereunder for the purpose of meeting same are
insufficient. All such payments made by the Beneficiary shall be added to the
principal sum secured hereby;

    14. To pay immediately and without demand all sums so expended by
Beneficiary or Trustee, under permission given under this Deed of Trust, with
interest from date of expenditure at the rate specified in said Note;

    15. The Trustor further covenants that it will not voluntarily create,
suffer, or permit to be created against the property subject to this Deed of
Trust any lien or liens inferior or superior to the lien of this Deed of Trust
and further that it will keep and maintain the same free

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from the claim of all persons supplying labor or materials which will enter into
the construction of any and all buildings now being erected or to be erected on
said premises;

    16. That the improvements upon the premises, covered by the Deed of Trust,
and all plans and specifications comply with all municipal ordinances and
regulations and all of other regulations made or promulgated, now or hereafter,
by lawful authority, and that the same will comply with all such municipal
ordinances and regulations and with the rules of the applicable fire rating or
inspection organization, bureau, association or office;

    17. That so long as this Deed of Trust and the said Note secured hereby are
insured under the provisions of the National Housing Act, or held by the
Secretary of Housing and Urban Development, it will not execute or file for
record any instrument which imposes a restriction upon the sale or occupancy of
the mortgaged property on the basis of race, color, creed or national origin.

ABOVE IT IS MUTUALLY AGREED THAT:

    18. Trustor herein agrees to pay to Beneficiary or to the authorized loan
servicing representative of the Beneficiary a charge not to exceed $15 for
providing a statement regarding the obligation secured by this Deed of Trust as
provided by Section 2954, Article 2, chapter 2, Title 14, Part 4, Division 3, of
the Civil Code of the State of California.

    19. Should the property or any part thereof be taken or damaged by reason of
any public improvement or condemnation preceding, or damaged by fire, or
earthquake, or in any other manner, the Beneficiary shall be entitled to all
compensation, awards, and other payments or relief therefor, and shall be
entitled at its option to commence, appear in and prosecute in its own name any
action to proceedings, or to make any compromise or settlement in connection
with such taking or damage. All awards of compensation in connection with
condemnation for public use of or a taking of any of that property, shall be
paid to the Beneficiary to be applied to the amount due under this Note secured
hereby in (1) amounts equal to the next maturing installment or installments or
principal and (2) with any balance to be credited to the next payment due under
the Note. All awards of damages in connection with any condemnation for public
use of or injury to any residue of that property shall be paid to the
Beneficiary to be applied to a fund held for and on behalf of the Trustor which
fund shall, at the option of the

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Beneficiary, and with the prior approval of the Secretary of Housing and Urban
Development, either be applied to the amount due under the Note as specified in
the preceding sentence, or be disturbed for the restoration or repair of the
damage to the residue. No amount applied to the reduction of the principal
amount due in accordance with (1) shall be considered an optional prepayment as
the term is used in this Deed of Trust and the Note secured hereby, nor relieve
the Trustor from making regular monthly payments commencing on the first day of
the first month following the date of receipt of the award. The Beneficiary is
hereby authorized in the name of the Trustor to execute and deliver valid
acquittances for such awards and to appeal from such award;

    20. Upon default by Trustor in making any monthly payment provided for
herein or in the Note secured hereby, and if such default is not made good prior
to the due date of the next such installment, or if Trustor shall fail to
perform any covenant or agreement in this Deed of Trust, all sums secured hereby
shall, at the option of the Beneficiary, be deemed to have become immediately
due and payable, and shall thereupon be collectable by foreclosure of this Deed
of Trust. In the event of default, Trustee hereunder shall be, and is authorized
and empowered when given notice to do so by Beneficiary after such default, to
cause the property to be sold, which notice Trustee shall cause to be duly filed
for record.

    21. After the lapse of such time as may then be required by law following
the recordation of said notice of defaults, and notice of sale having been given
as then required by law, Trustee, without demand on Trustor, shall sell said
property at the time and place fixed by it in said notice of sale, either as a
whole or in separate parcels, and in such order as it may determine at public
auction to the highest bidder for cash in lawful money of the United States,
payable at time of sale. Trustee may postpone sale of all or any portion of said
property by public announcement at the time and place of sale, and from time to
time thereafter may postpone the sale by public announcement at the time fixed
by the preceding postponement. Trustee shall deliver to the purchaser its Deed
conveying the property so sold, but without any covenant or warranty, express or
implied. The recitals in the Deed of any matters or facts shall be conclusive
proof of the truthfulness thereof. Any person, including Trustor, Trustee, or
Beneficiary, may purchase at the sale. The Trustee shall apply the proceeds of
sale to payment of (1) the expenses of such sale, together with the reasonable
expenses of this trust including therein reasonable Trustee's fees or attorney's
fees for conducting the sale, and the actual cost of publishing, recording,
mailing and posting notice of the sale; (2) the cost of any search and/or other
evidence of title procured in connection with such sale and revenue stamps on
Trustees' Deed; (3) all sums expended under the terms hereof, not then repaid,
with accrued interest at the rate specified in said Note; (4) all other sums
then secured hereby; and (5) the remainder, if any, to the person or persons
legally entitled thereto;

    22. Beneficiary may from time to time substitute a successor or successors
to any Trustee named herein or acting hereunder to execute this Trust. Upon such
appointment, and without conveyance to the successor trustee, the latter shall
be vested with all title, powers, and duties conferred upon any Trustee herein
named or acting hereunder. Each such appointment and substitution shall be made
by written instrument executed by Beneficiary, containing reference to this Deed
and its place of record which, when duly recorded in the proper office of the
county or counties in which the property is situated, shall be conclusive proof
of proper appointment of the successor trustee. In the event of default, Trustee
hereunder shall be, and is authorized and empowered when given notice to do so
by Beneficiary after such default to cause the property to be sold, which notice
Trustee shall cause to be duly filed for record.

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    23. The pleading of any statute of limitations as a defense to any and all
obligations secured by this Deed is hereby waived to the full extent permissible
by law;

    24. Upon written request of Beneficiary stating that all sums secured hereby
have been paid, and upon surrender of this Deed of Trust and said Note to
Trustee for cancellation and retention and upon payment of its fees, Trustee
shall reconvey, without warranty, the property then held hereunder. The recitals
in such reconveyance of any matters or fact shall be conclusive proof of the
truthfulness thereof. The grantee in such reconveyance may be described as "the
person or persons legally entitled thereto;"

    25. The trust created hereby is irrevocable by Trustor;

    26. This Deed of Trust applies to, inures to the benefit of, and binds all
parties hereto, their heirs, legatees, devisees, administrators, executors,
successors, and assigns. The term "Beneficiary" shall include not only the
original Beneficiary hereunder but also any future owner and holder including
pledgees, of the Note secured hereby. In this Deed, whenever the context so
requires, the masculine gender includes the feminine and/or neuter, and the
singular number includes the plural. All obligations of each Trustor hereunder
are joint and several;

    27. Trustee accepts this Trust when this Deed of Trust, duly executed and
acknowledged, is made public record as provided by law. Except as otherwise
provided by law the Trustee is not obligated to notify any party hereto of
pending sale under this Deed of Trust or of any action of proceeding in which
Trustor, Beneficiary, or Trustee shall be a party unless brought by Trustee;

    28. The Undersigned TRUSTOR REQUESTS that a copy of any notice of default
and of any notice of sale hereunder be mailed to him at the mailing address
opposite his name hereto. Failure to insert such address shall be deemed a
waiver of any request hereunder for a copy of such notices.

                           Mailing Address for Notices

                          245 Fischer Avenue, Suite D-1
                          Costa Mesa, California 92626

    29. Notwithstanding any other provision contained herein or in the Note,
hereinabove referred to, it is agreed that the execution of the Note shall
impose no personal liability upon the Trustor for payment of the indebtedness
evidenced thereby and in the event of a default, the Beneficiary, as holder of
the Note, shall look solely to the property subject to this Deed of Trust and to
the rents, issues and profits thereof in satisfaction of the indebtedness
evidenced by the Note and will not seek or obtain any deficiency or personal
judgment against the Trustor except such judgment or decree as may be necessary
to foreclose or bar its interest in the property subject to this Deed of Trust
and all other property mortgaged, pledged, conveyed or assigned to secure
payment of the Note; provided, that nothing in this condition and no action so
taken shall operate to impair any obligation of the Trustor under the Regulatory
Agreement herein referred to and made a part hereof.

    30. Notwithstanding any other provision contained herein or in the Note,
hereinafter referred to, it is agreed that the execution of the Note shall
impose no personal liability upon the Trustor (or any of its present or future
limited and general partners) for payment of the

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                                     - 9 -

indebtedness evidenced thereby and in the event of a default, the Beneficiary,
as holder of the Note, shall look solely to the property subject to this Deed of
Trust and to the rents, issues and profits thereof in satisfaction of the
indebtedness evidenced by the Note and will not seek or obtain any deficiency or
personal judgment against the Trustor (or any of its present or future limited
and general partners) except such judgment or decree as may be necessary to
foreclose or bar its interest in the property subject to this Deed of Trust and
all other property mortgaged, pledged, conveyed or assigned to secure payment of
the Note; provided, that nothing in this condition and no action so taken shall
operate to impair any obligation of the Trustor under the Regulatory Agreement
herein referred to and made a part hereof.

    IN WITNESS WHEREOF the Trustor has caused its name to be hereunto subscribed
by its duly authorized General Partner as of the day and year herein first above
written.

                      ARV FULLERTON, L.P.
                      a California limited partnership

                      By: American Retirement Villas Properties II
                          a California limited partnership
                          General Partner

                          By: ARV Assisted Living, Inc.
                              a Delaware corporation
                              General Partner

                              By:
                                  -------------------------------------
                                  Douglas Armstrong
                                  Vice President

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                                     - 11 -

                                   CALIFORNIA

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

                                  DEED OF TRUST

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

                                     Between

                               ARV FULLERTON, L.P.

                                     Trustor

                                       and

                        FIDELITY NATIONAL TITLE INSURANCE
                                    COMPANY

                                    Trustee,

                                       and

                           RED MORTGAGE CAPITAL, INC.

                                  Beneficiary.

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

         Dated:         December 1, 2001

         Recorded:      December ___, 2001

         at             minutes past

         in Liber       at page

         records of Orange County, California

         RECORDER'S INSTRUCTIONS

         Index this document as
         a Deed of Trust and as
         an Assignment of Rents.

         Escrow No.
         Order No.<PAGE>

                                                                   EXHIBIT 10.97

REGULATORY AGREEMENT FOR                         U.S. DEPARTMENT OF HOUSING
MULTIFAMILY HOUSING PROJECTS                     AND URBAN DEVELOPMENT
                                                 Office of Housing
                                                 Federal Housing Commissioner

--------------------------------------------------------------------------------
Under Sections 207,220,221(d)(4), 231 and 232, Except Nonprofits
--------------------------------------------------------------------------------

Project No. 143-22015 PM/ALF/REF

Mortgagee:  RED MORTGAGE CAPITAL, INC.

Amount of Mortgage Note:    $2,207,400.00                 Date: December 1, 2001

Mortgage: Recorded: State: California  County: Orange   Date: December ___, 2001
           Concurrently Herewith       Book  _________  Page  ____________

    Originally endorsed for insurance under Section 232 pursuant to Section
223(f) of the National Housing Act, as amended.

    This Agreement entered into this 1st day of December, 2001, between ARV
FULLERTON, L.P., a California limited partnership whose address is 245 Fischer
Avenue, Suite D-1, Costa Mesa, California 92626, their successors, heirs, and
assigns (jointly and severally, hereinafter referred to as Owners) and the
undersigned SECRETARY OF HOUSING AND URBAN DEVELOPMENT and his successors
(hereinafter referred to as Secretary).

    In consideration of the endorsement for insurance by the Secretary of the
above described note or in consideration of the consent of the Secretary to the
transfer of the mortgaged property or the sale and conveyance of the mortgaged
property by the Secretary, and in order to comply with the requirements of the
National Housing Act, as amended, and the Regulations adopted by the Secretary
pursuant thereto, Owners agree for themselves, their successors, heirs and
assigns, that in connection with the mortgaged property and the project operated
thereon and so long as the contract of mortgage insurance continues in effect,
and during such further period of time as the Secretary shall be the owner,
holder or reinsurer of the mortgage, or during any time the Secretary is
obligated to insure a mortgage on the mortgage property:

    1.  Owners, except as limited by paragraph 17 hereof, assume and agree to
        make promptly all payments due under the note and mortgage.

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                                     - 2 -

    2.  (a) Owners shall establish or continue to maintain a reserve fund for
        replacements by the allocation to such reserve fund in a separate
        account with the mortgagee or in a safe and responsible depository
        designated by the mortgagee, concurrently with the beginning of payments
        towards amortization of the principal of the mortgage insured or held by
        the Secretary of an amount equal to $1,971.67 per month unless a
        different date or amount is approved in writing by the Secretary. Said
        monthly deposit consists of $1,638.75 for Realty and $332.92 for
        Non-Realty. In addition, the Owner has made an initial deposit to the
        fund of $225,657.40 ($23,852.40 to Realty and $201,805.00 to
        Non-Realty). Such fund, whether in the form of a cash deposit or
        invested in obligations of, or fully guaranteed as to principal by, the
        United States of America shall at all times be under the control of the
        mortgagee. Disbursements from such fund, whether for the purpose of
        effecting replacement of structural elements and mechanical equipment of
        the project or for any other purpose, may be made only after receiving
        the consent in writing of the Secretary. In the event that the owner is
        unable to make a mortgage note payment on the due date and that payment
        cannot be made prior to the due day of the next such installment or when
        the mortgagee has agreed to forgo making an election to assign the
        mortgage to the Secretary based on a monetary default, or to withdraw an
        election already made, the Secretary is authorized to instruct the
        mortgagee to withdraw funds from the reserve fund for replacements to be
        applied to the mortgage payment in order to prevent or cure the default.
        In addition, in the event of a default in the terms of the mortgage,
        pursuant to which the loan has been accelerated, the Secretary may apply
        or authorize the application of the balance in such fund to the amount
        due on the mortgage debt as accelerated.

        (b) Where Owners are acquiring a project already subject to an insured
        mortgage, the reserve fund for replacements to be established will be
        equal to the amount due to be in such fund under existing agreements or
        charter provisions at the time Owners acquire such project, and payments
        hereunder shall begin with the first payment due on the mortgage after
        acquisition, unless some other method of establishing and maintaining
        the fund is approved in writing by the Secretary.

    3.  Real property covered by the mortgage and this agreement is described in
        Exhibit A attached hereto.

        (This paragraph 4 is not applicable to cases insured under Section 232).

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                                     - 3 -

    4.  (a) If the mortgage is originally a Secretary-held purchase money
        mortgage, or is originally endorsed for insurance under any Section
        other than Sections 231 or 232 and is not designed primarily for
        occupancy by elderly persons, Owners shall not in selecting tenants
        discriminate against any person or persons by reason of the fact that
        there are children in the family.

        (b) If the mortgage is originally endorsed for insurance under Section
        221, Owners shall in selecting tenants give to displaced persons or
        families an absolute preference or priority of occupancy which shall be
        accomplished as follows:

<PAGE>

                                     - 4 -

            (1) For a period of sixty (60) days from the date of original
                offering, unless a shorter period of time is approved in writing
                by the Secretary, all units shall be held for such preferred
                applicants, after which time any remaining unrented units may be
                rented to non-preferred applicants;

            (2) Thereafter, and on a continuing basis, such preferred applicants
                shall be given preference over non-preferred applicants in their
                placement on a waiting list to be maintained by the Owners; and

            (3) Through such further provisions agreed to in writing by the
                parties.

        (c) Without the prior written approval of the Secretary not more than
        25% of the number of units in a project insured under Section 231 shall
        be occupied by persons other than elderly persons.

        (d) All advertising or efforts to rent a project insured under Section
        231 shall reflect a bona fide effort of the Owners to obtain occupancy
        by elderly persons.

    5.  Owners shall not without the prior written approval of the Secretary:

        (a) Convey, transfer, or encumber any of the mortgaged property, or
        permit the conveyance, transfer or encumbrance of such property.

        (b) Assign, transfer, dispose of, or encumber any personal property of
        the project, including rents, or pay out any funds except from surplus
        cash, except for reasonable operating expenses and necessary repairs.

        (c) Convey, assign, or transfer any beneficial interest in any trust
        holding title to the property, or the interest of any general partner in
        a partnership owning the property, or any right to manage or receive the
        rents and profits from the mortgaged property.

        (d) Remodel, add to, reconstruct, or demolish any part of the mortgaged
        property or subtract from any real or personal property of the project.

        (e) Make, or receive and retain, any distribution of assets or any
        income of any kind of the project except surplus cash and except on the
        following conditions:

<PAGE>

                                     - 5 -

            (1) All distributions shall be made only as of and after the end of
                a semiannual or annual fiscal period, and only as permitted by
                the law of the applicable jurisdiction;

            (2) No distribution shall be made from borrowed funds, prior to the
                completion of the project or when there is any default under
                this Agreement or under the note or mortgage;

            (3) Any distribution of any funds of the project, which the party
                receiving such funds is not entitled to retain hereunder, shall
                be held in trust separate and apart from any other funds; and

            (4) There shall have been compliance with all outstanding notices of
                requirements for proper maintenance of the project.

        (f) Engage, except for natural persons, in any other business or
        activity, including the operation of any other rental project, or incur
        any liability or obligation not in connection with the project.

        (g) Require, as a condition of the occupancy or leasing of any unit in
        the project, any consideration or deposit other than the prepayment of
        the first month's rent plus a security deposit in an amount not in
        excess of one month's rent to guarantee the performance of the covenants
        of the lease. Any funds collected as security deposits shall be kept
        separate and apart from all other funds of the project in a trust
        account the amount of which shall at all times equal or exceed the
        aggregate of all outstanding obligations under said account.

        (h) Permit the use of the dwelling accommodations or nursing facilities
        of the project for any purpose except the use which was originally
        intended, or permit commercial use greater than that originally approved
        by the Secretary.

    6.  Owners shall maintain the mortgaged premises, accommodations and the
        grounds and equipment appurtenant thereto, in good repair and condition.
        In the event all or any of the buildings covered by the mortgage shall
        be destroyed or damaged by fire or other casualty, the money derived
        from any insurance on the property shall be applied in accordance with
        the terms of the mortgage.

    7.  Owners shall not file any petition in bankruptcy or for a receiver or in
        insolvency or for reorganization or composition, or make any assignment
        for the benefit of creditors or to a trustee for creditors, or permit an
        adjudication in bankruptcy or

<PAGE>

                                      - 6 -

        the taking possession of the mortgaged property or any part thereof by a
        receiver or the seizure and sale of the mortgaged property or any part
        hereof under judicial process or pursuant to any power of sale, and fail
        to have such adverse actions set aside within forty-five (45) days.

    8.  (a) Any management contract entered into by Owners or any of them
        involving the project shall contain a provision that, in the event of
        default hereunder, it shall be subject to termination without penalty
        upon written request by the Secretary. Upon such request Owners shall
        immediately arrange to terminate the contract within a period of not
        more than thirty (30) days and shall make arrangements satisfactory to
        the Secretary for continuing proper management of the project.

        (b) Payment for services, supplies, or materials shall not exceed the
        amount ordinarily paid for such services, supplies, or materials in the
        area where the services are rendered or the supplies or materials
        furnished.

        (c) The mortgaged property, equipment, buildings, plans, offices,
        apparatus, devices, books, contracts, records, documents, and other
        papers relating thereto shall at all times be maintained in reasonable
        condition for proper audit and subject to examination and inspection at
        any reasonable time by the Secretary or his duly authorized agents.
        Owners shall keep copies of all written contracts or other instruments
        which affect the mortgaged property, all or any of which may be subject
        to inspection and examination by the Secretary or his duly authorized
        agents.

        (d) The books and accounts of the operations of the mortgaged property
        and of the project shall be kept in accordance with the requirements of
        the Secretary.

        (e) Within sixty (60) days following the end of each fiscal year the
        Secretary shall be furnished with a complete annual financial report
        based upon an examination of the books and records of mortgagor prepared
        in accordance with the requirements of the Secretary, prepared and
        certified to by an officer or responsible Owner and, when required by
        the Secretary, prepared and certified by a Certified Public Accountant,
        or other person acceptable to the Secretary.

        (f) At the request of the Secretary, his agents, employees, or
        attorneys, the Owners shall furnish monthly occupancy reports and shall
        give specific answers to questions upon which information is desired
        from time to time relative to

<PAGE>

                                     - 7 -

        income, assets, liabilities, contracts, operation, and condition of the
        property and the status of the insured mortgage.

        (g) All rents and other receipts of the project shall be deposited in
        the name of the project in a financial institution, whose deposits are
        insured by an agency of the Federal Government. Such funds shall be
        withdrawn only in accordance with the provisions of this Agreement for
        expenses of the project or for distributions of surplus cash as
        permitted by paragraph 6(e) above. Any Owner receiving funds of the
        project other than by such distribution of surplus cash shall
        immediately deposit such funds in the project bank account and failing
        so to do in violation of this Agreement shall hold such funds in trust.
        Any Owner receiving property of the project in violation of this
        Agreement shall hold such funds in trust. At such time as the Owners
        shall have lost control and/or possession of the project, all funds held
        in trust shall be delivered to the mortgagee to the extent that the
        mortgage indebtedness has not been satisfied.

        (h) If the mortgage is insured under Section 232:

            1. The Owners or lessees shall at all times maintain in full force
            and effect from the state or other licensing authority such license
            as may be required to operate the project as a nursing home and
            shall not lease all or part of the project except on terms approved
            by the Secretary.

            2. The Owners shall suitably equip the project for nursing home
            operations.

            3. The Owners shall execute a Security Agreement and Financing
            Statement (or other form of chattel lien) upon all items of
            equipment, except as the Secretary may exempt, which are not
            incorporated as security for the insured mortgage. The Security
            Agreement and Financing Statement shall constitute a first lien upon
            such equipment and shall run in favor of the mortgagee as additional
            security for the insured mortgage.

        (i) If the mortgage is insured under Section 231, Owners or lessees
            shall at all times maintain in full force and effect from the state
            or other licensing authority such license as may be required to
            operate the project as housing for the elderly.

    9.  Owners will comply with the provisions of any Federal, State, or local
        law prohibiting discrimination in housing on the grounds of race, color,
        religion or

<PAGE>

                                     - 8 -

        creed, sex, or national origin, including Title VIII of the Civil Rights
        Act of 1968 (Public Law 90-284; 82 Stat. 73), as amended, Executive
        Order 11063, and all requirements imposed by or pursuant to the
        regulations of the Department of Housing and Urban Development
        implementing these authorities (including 24 CFR Parts 100, 107 and 110,
        and Subparts I and M of Part 200).

    10. Upon a violation of any of the above provisions of this Agreement by
        Owners, the Secretary may give written notice thereof, to Owners, by
        registered or certified mail, addressed to the addresses stated in this
        Agreement, or such other addresses as may subsequently, upon appropriate
        written notice thereof to the Secretary, be designated by the Owners as
        their legal business address. If such violation is not corrected to the
        satisfaction of the Secretary within thirty (30) days after the date
        such notice is mailed or within such further time as the Secretary
        determines is necessary to correct the violation, without further notice
        the Secretary may declare a default under this Agreement effective on
        the date of such declaration of default and upon such default the
        Secretary may:

        (a) (i) If the Secretary holds the note - declare the whole of said
                indebtedness immediately due and payable and then proceed with
                the foreclosure of the mortgage;

            (ii) If said note is not held by the Secretary - notify the holder
                of the note of such default and request holder to declare a
                default under the note and mortgage, and holder after receiving
                such notice and request, but not otherwise, at its option, may
                declare the whole indebtedness due, and thereupon proceed with
                foreclosure of the mortgage, or assign the note and mortgage to
                the Secretary as provided in the Regulations;

        (b) Collect all rents and charges in connection with the operation of
        the project and use such collections to pay the Owners' obligations
        under this Agreement and under the note and mortgage and the necessary
        expenses of preserving the property and operating the project.

        (c) Take possession of the project, bring any action necessary to
        enforce any rights of the Owners growing out of the project operation,
        and operate the project in accordance with the terms of this Agreement
        until such time as the Secretary in his discretion determines that the
        Owners are again in a position to operate the project in accordance with
        the terms of this Agreement and in compliance with the requirements of
        the note and mortgage.

<PAGE>

                                     - 9 -

        (d) Apply to any court, state or Federal, for specific performance of
        this Agreement, for an injunction against any violation of the
        Agreement, for the appointment of a receiver to take over and operate
        the project in accordance with the terms of the Agreement, or for such
        other relief as may be appropriate, since the injury to the Secretary
        arising from a default under any of the terms of this Agreement would be
        irreparable and the amount of damage would be difficult to ascertain.

    11. As security for the payment due under this Agreement to the reserve fund
        for replacements, and to secure the Secretary because of his liability
        under the endorsement of the note for insurance, and as security for the
        other obligations under this Agreement, the Owners respectively assign,
        pledge and mortgage to the Secretary their rights to the rents, profits,
        income and charges of whatsoever sort which they may receive or be
        entitled to receive from the operation of the mortgaged property,
        subject, however, to any assignment of rents in the insured mortgage
        referred to herein. Until a default is declared under this Agreement,
        however, permission is granted to Owners to collect and retain under the
        provisions of this Agreement such rents, profits, income, and charges,
        but upon default this permission is terminated as to all rents due or
        collected thereafter.

    12. As used in this Agreement the term:

        (a) "Mortgage" includes "Deed of Trust", "Chattel Mortgage", "Security
        Instrument", and any other security for the note identified herein, and
        endorsed for insurance or held by the Secretary;

        (b) "Mortgagee" refers to the holder of the mortgage identified herein,
        its successors and assigns;

        (c) "Owners" refers to the persons named in the first paragraph hereof
        and designated as Owners, their successors, heirs and assigns;

        (d) "Mortgaged Property" includes all property, real, personal or mixed,
        covered by the mortgage or mortgages securing the note endorsed for
        insurance or held by the Secretary;

        (e) "Project" includes the mortgaged property and all its other assets
        of whatsoever nature or wheresoever situate, used in or owned by the
        business conducted on said mortgaged property, which business is
        providing housing and other activities as are incidental thereto;

<PAGE>

                                     - 10 -

        (f) "Surplus Cash" means any cash remaining after:

            (1) the payment of:

                (i) All sums due or currently required to be paid under the
                    terms of any mortgage or note insured or held by the
                    Secretary;

               (ii) All amounts required to be deposited in the reserve fund
                    for replacements;

               (iii) All obligations of the project other than the insured
                    mortgage unless funds for payment are set aside or deferment
                    of payment has been approved by the Secretary; and

            (2) the segregation of:

                (i) An amount equal to the aggregate of all special funds
                    required to be maintained by the project; and

                (ii) All tenant security deposits held.

        (g) "Distribution" means any withdrawal or taking of cash or any assets
        of the project, including the segregation of cash or assets for
        subsequent withdrawal within the limitations of Paragraph 6(e) hereof,
        and excluding payment for reasonable expenses incident to the operation
        and maintenance of the project.

        (h) "Default" means a default declared by the Secretary when a violation
        of this Agreement is not corrected to his satisfaction within the time
        allowed by this Agreement or such further time as may be allowed by the
        Secretary after written notice;

        (i) "Section" refers to a Section of the National Housing Act, as
        amended.

        (j) "Displaced persons or families" shall mean a family or families, or
        a person, displaced from an urban renewal area, or as the result of
        government action, or as a result of a major disaster as determined by
        the President pursuant to the Disaster Relief Act of 1970.

<PAGE>

                                     - 11 -

        (k) "Elderly person" means any person, married or single, who is
        sixty-two years of age or over.

    13. This instrument shall bind, and the benefits shall inure to, the
        respective Owners, their heirs, legal representatives, executors,
        administrators, successors in office or interest, and assigns, and to
        the Secretary and his successors so long as the contract of mortgage
        insurance continues in effect, and during such further time as the
        Secretary shall be the owner, holder, or reinsurer of the mortgage, or
        obligated to reinsure the mortgage.

    14. Owners warrant that they have not, and will not, execute any other
        agreement with provisions contradictory of, or in opposition to, the
        provisions hereof, and that, in any event, the requirements of this
        Agreement are paramount and controlling as to the rights and obligations
        set forth and supersede any other requirements in conflict therewith.

    15. The invalidity of any clause, part or provision of this Agreement shall
        not affect the validity or the remaining portions thereof.

    16. The following Owners: ARV Fullerton, L.P., a California limited
        partnership, and all present and future limited and general partners
        thereof, do not assume personal liability for payments due under the
        note and mortgage, or for the payments to the reserve for replacements,
        or for matters not under their control, provided that said Owners shall
        remain liable under this Agreement only with respect to the matters
        hereinafter stated; namely:

        (a) for funds or property of the project coming into their hands which,
        by the provisions hereof, they are not entitled to retain; and

        (b) for their own acts and deeds or acts and deeds of others which they
        have authorized in violation of the provisions hereof.

(To be executed with formalities for recording a deed to real estate)

<PAGE>

                                     - 12 -

    All references herein to the terms "nursing home" or nursing homes" shall
mean and include the terms "assisted living facility" and "assisted living
facilities."

    See Rider I attached hereto and made a part hereof.

    IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the
date first hereinabove written.

                        ARV FULLERTON, L.P.
                        a California limited partnership

                        By: American Retirement Villas Properties II
                            a California limited partnership
                            General Partner

                            By: ARV Assisted Living, Inc.
                                a Delaware corporation
                                General Partner

                                By:
                                    ----------------------------------
                                    Douglas Armstrong
                                    Vice President

                        December 1, 2001

                        SECRETARY OF HOUSING AND URBAN
                        DEVELOPMENT ACTING BY AND
                        THROUGH THE FEDERAL HOUSING
                        COMMISSIONER

                        By:
                            ----------------------------------------
                            Authorized Agent

                        December 1, 2001

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