Document:

Exhibit 10.5

 

MORGAN
STANLEY MANDATORILY EXCHANGEABLE INDEMNITY

AGREEMENT

 

 

among

 

MORGAN STANLEY,

as Issuer of 5.875% Mandatorily Exchangeable Securities due October 15, 2008,

 

NUVEEN INVESTMENTS, INC.,

as Issuer of shares of Class A common stock, par value $0.01 per share,

 

THE ST. PAUL TRAVELERS COMPANIES, INC.,

as Selling Stockholder,

 

MORGAN STANLEY & CO. INCORPORATED

and

 

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED,

as Underwriters,

 

and

 

MORGAN STANLEY & CO. INTERNATIONAL
LIMITED,

as Forward Counterparty

 

 

dated as of April 6, 2005

 

 

MORGAN STANLEY MANDATORILY EXCHANGEABLE
INDEMNITY AGREEMENT

 

Morgan Stanley
Mandatorily Exchangeable Indemnity Agreement (this “Agreement”),
dated as of April 6, 2005, among Morgan Stanley, a Delaware corporation (the “Mandatory  Issuer”),
Nuveen Investments, Inc., a Delaware corporation (“Nuveen”),
The St. Paul Travelers Companies, Inc., a Minnesota corporation (“St. Paul Travelers”), Morgan Stanley & Co. Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated (each, an “Underwriter” and together, the “Underwriters”), and Morgan Stanley & Co. International
Limited (the “Forward Counterparty”).

 

WHEREAS, the
Mandatory Issuer has entered into
an underwriting agreement (the “MS Securities Underwriting
Agreement”), pursuant to which the Mandatory Issuer has agreed to
issue and sell to the Underwriters $275,060,000 aggregate principal amount of
5.875% Mandatorily Exchangeable Securities due October 15, 2008 (the “Securities”), mandatorily exchangeable for shares of the
Class A common stock, par value $0.01 per share, of Nuveen (the “Nuveen Class A Shares”) or the cash value
thereof;

 

WHEREAS, the
Securities are to be issued pursuant to the provisions of an indenture dated as
of November 1, 2004, between the Mandatory Issuer and JPMorgan Chase Bank,
N.A.;

 

WHEREAS, the
Mandatory Issuer has filed with the Securities and Exchange Commission (the “Commission”) a registration statement,
including a prospectus, relating to the Securities, dated November 10, 2004
(the “Mandatory  Issuer Basic
Prospectus”), and has filed with, or transmitted for filing to, or
shall promptly hereafter file with or transmit for filing to, the Commission a
prospectus supplement (the “Securities Prospectus
Supplement”) specifically relating to the Securities pursuant to
Rule 424 under the Securities Act of 1933, as amended (the “Securities Act”);

 

WHEREAS, St.
Paul Travelers has entered on the date hereof into a prepaid forward sale
transaction with the Forward Counterparty, pursuant to which St. Paul Travelers
will deliver to the Forward Counterparty 6,067,500 Nuveen Class A Shares
(subject to St. Paul Travelers’ right to cash settle such transaction) (the “MS Forward Agreement”);

 

WHEREAS,
Nuveen has filed with the Commission a registration statement, including a
prospectus, relating to the Nuveen Class A Shares, dated March 18, 2005 (the “Nuveen Basic Prospectus”), and has filed with, or
transmitted for filing to, or shall promptly hereafter file with or transmit
for filing to, the Commission a final prospectus supplement (the “Nuveen Prospectus Supplement”) pursuant to Rule 424 under
the Securities Act specifically relating to the Nuveen Class A Shares to be
delivered pursuant to the MS Forward Agreement;

 

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WHEREAS, the
Mandatory Issuer and the Underwriters are willing to carry out the transactions
contemplated by the MS Securities Underwriting Agreement, and the Forward
Counterparty is willing to enter into the MS Forward Agreement, on the
condition that Nuveen and St. Paul Travelers enter into, and perform their
respective obligations under, this Agreement;

 

THEREFORE, the
parties hereto agree as follows:

 

1.                                       Definitions.  (a)  The following terms, as used herein, have the
following meanings:

 

“1940 Act” has the meaning set forth in Section 2(aa).

 

“Advisers Act” has the meaning set forth in Section 2(bb).

 

“Agreement” has the meaning set forth in the preamble of this
Agreement.

 

“Basic  Prospectus”
means the Nuveen Basic Prospectus or the Mandatory Issuer Basic Prospectus, as
the case may be.

 

“Bridge Facility” means the bridge loan facility, dated April
1, 2005 between Nuveen and Citicorp North America, Inc., as administrative
agent, and the other lenders thereto.

 

“Broker-Dealer Subsidiary” has the meaning set forth in
Section 2(cc).

 

“Closing Date” means the date on which the Mandatory Issuer
shall deliver the Securities and the Underwriters shall pay the purchase price
for the Securities, as set forth in the MS Securities Underwriting Agreement.

 

“Commission” has the meaning set forth in the recitals of
this Agreement.

 

“Common Stock Underwriting Agreement” means the Underwriting
Agreement, dated the date hereof, among Nuveen, the Selling Stockholders, and
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley &
Co. Incorporated, acting severally on behalf of themselves and the several
underwriters named in Schedule I thereto.

 

“Environmental Laws” has the meaning set forth in Section
2(z).

 

“Exchange Act” means the Securities Exchange Act of 1934, as
amended.

 

“Forward Counterparty” has the meaning set forth in the
preamble of this Agreement.

 

“indemnified party” has the meaning set forth in Section
9(d).

 

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“indemnifying party” has the meaning set forth in Section
9(d).

 

“Investment Advisory Subsidiaries” has the meaning set forth
in Section 2(bb).

 

“Mandatory  Issuer” has the
meaning set forth in the preamble of this Agreement.

 

“Mandatory  Issuer Basic Prospectus”
has the meaning set forth in the recitals of this Agreement.

 

“Mandatory  Issuer Registration
Statement” means the registration statement of the Mandatory Issuer
that contains the Securities Prospectus, including the exhibits thereto, as
amended to the date of this Agreement.

 

“Material Adverse Effect” has the meaning set forth in
Section 2(d).

 

“ML Forward Agreement” means the prepaid forward sale
transaction entered into between St. Paul Travelers and Merrill Lynch
International, pursuant to which St. Paul Travelers will deliver to Merrill
Lynch International 5,824,800 Nuveen Class A Shares (subject to St. Paul
Travelers’ right to cash settle such transaction).

 

“MS Forward Agreement” has the meaning set forth in the
recitals of this Agreement.

 

“MS Securities Underwriting Agreement” has the meaning set
forth in the recitals of this Agreement.

 

“Nuveen” has the meaning set forth in the preamble of this
Agreement.

 

“Nuveen Basic Prospectus” has the meaning set forth in the
recitals to this Agreement.

 

“Nuveen Class A Shares” has the meaning set forth in the
recitals of this Agreement.

 

“Nuveen Class B Shares” means shares of
Nuveen Class B common stock, par value $0.01 per share.

 

“Nuveen  Common Stock”
means the Nuveen Class A Shares and Nuveen Class B Shares.

 

“Nuveen preliminary prospectus” means a preliminary Nuveen
Prospectus Supplement specifically relating to the Nuveen Class A Shares to be
delivered pursuant to the MS Forward Agreement, together with the Nuveen Basic
Prospectus.

 

4

 

“Nuveen Prospectus” means the Nuveen Basic Prospectus
together with the Nuveen Prospectus Supplement.

 

“Nuveen  Prospectus Supplement”
has the meaning set forth in the recitals of this Agreement.

 

“Nuveen Registration Statement” means the registration
statement on Form S-3 of Nuveen that contains the Nuveen Prospectus, including
the exhibits thereto, as amended to the date of this Agreement.

 

“Nuveen Repurchase Agreement” means the agreement, dated as
of March 29, 2005, between Nuveen and St. Paul Travelers pursuant to which St.
Paul Travelers will sell to Nuveen $200 million of shares of Nuveen Common
Stock on the Closing Date and $400 million of shares of Nuveen Common Stock on
a forward basis no later than December 23, 2005.

 

“preliminary prospectus” means any Nuveen preliminary
prospectus or any Securities preliminary prospectus.

 

“Prospectus” means the Nuveen Prospectus or the Securities
Prospectus.

 

“Public Offering Price of the Securities” means the price to
the public set forth in the table on the cover of the Securities Prospectus
Supplement.

 

“Securities” has the meaning set forth in the recitals of
this Agreement.

 

“Securities Act” has the meaning set forth
in the recitals of this Agreement.

 

“Securities preliminary prospectus” means a preliminary
Prospectus Supplement specifically relating to the Securities, together with
the Mandatory Issuer Basic Prospectus.

 

“Securities Prospectus” means the Mandatory Issuer Basic
Prospectus together with the Securities Prospectus Supplement.

 

“Securities Prospectus Supplement” has the meaning set forth
in the recitals of this Agreement.

 

“Selling Stockholders” means St. Paul Travelers and St. Paul
Fire and Marine Insurance Company, a Minnesota corporation.

 

“Selling Stockholder Forward
Agreements” means the ML Forward Agreement and the MS Forward
Agreement.

 

“Selling Stockholder Information” means, collectively, all statements
or omissions based upon information relating to the Selling Stockholders
furnished

 

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to Nuveen in
writing by the Selling Stockholders expressly for use in the Nuveen
Registration Statement or the Nuveen Prospectus or any amendments or
supplements thereto.

 

“Separation Agreement” means the separation agreement dated
as of April 1, 2005 between Nuveen and St. Paul Travelers.

 

“Significant Subsidiaries” has the meaning set forth in
Section 2(d).

 

“St. Paul Travelers” has the meaning set forth in the
preamble of this Agreement.

 

“UCC” has the meaning set forth in Section 3(f).

 

“Underwriter” or “Underwriters”
has the meaning set forth in the preamble.

 

(b)                                 Incorporation by Reference. 
As used herein:

 

(i)                    The terms “Basic Prospectus,” “Prospectus” and
“preliminary prospectus” shall include
in each case the documents incorporated by reference therein.

 

(ii)                 The terms “supplement” and “amendment” or “amend” as used in this Agreement shall include, without
limitation, all documents deemed to be incorporated by reference in the
relevant Prospectus that are filed subsequent to the date of the Basic
Prospectus by the respective registrant with the Commission pursuant to the
Exchange Act.

 

(c)                                  All
references in this Agreement to sections and subsections are to sections and
subsections in this Agreement unless otherwise specified.

 

2.                                       Representations and Warranties of Nuveen.  Nuveen represents and warrants to and agrees
with the Mandatory Issuer and each of the Underwriters that:

 

(a)                                  The
Nuveen Registration Statement has been declared effective by the Commission; no
stop order suspending the effectiveness of the Nuveen Registration Statement
has been issued, and no notice has been received from the Commission by Nuveen
that any proceedings for such purpose are pending or, to the knowledge of
Nuveen, threatened by the Commission.

 

(b)                                 (i)
Each document filed or to be filed pursuant to the Exchange Act and
incorporated by reference in the Nuveen Prospectus complied or will comply when
so filed in all material respects with the Exchange Act and the applicable
rules and regulations of the Commission thereunder, (ii) the Nuveen
Registration

 

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Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (iii) the Nuveen
Registration Statement and the Nuveen Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iv) the Nuveen Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph do
not apply to statements or omissions based upon (x) information relating to any
Underwriter (or any “Underwriter” as such term is defined in the Common Stock
Underwriting Agreement) furnished to Nuveen in writing by such Underwriter (or
any “Underwriter” as such term is defined in the Common Stock Underwriting
Agreement) expressly for use therein, or (y) the Selling Stockholder
Information.

 

(c)                                  Nuveen
has been duly incorporated, is validly existing as a corporation in good
standing under the laws of the State of Delaware, has the corporate power and
authority to own its property and to conduct its business as described in the
Nuveen Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the financial condition, earnings or results
of operations of Nuveen and its subsidiaries, taken as a whole (a “Material Adverse Effect”).

 

(d)                                 Each
Investment Advisory Subsidiary (as defined below) and each significant
subsidiary (as that term is defined under Regulation S-X promulgated under the
Exchange Act) of Nuveen (together with the Investment Advisory Subsidiaries,
each, a “Significant Subsidiary”, and
collectively, the “Significant Subsidiaries”)
has been duly incorporated or formed, is validly existing in good standing
under the laws of the jurisdiction of its incorporation or formation, has the
requisite power and authority to own its property and to conduct its business
as described in the Nuveen Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be
in good standing would not have a Material Adverse Effect; all of the issued
shares of capital stock or interests of each Significant Subsidiary of Nuveen
have been duly and validly authorized and issued, are fully paid and
non-assessable, or the substantive equivalent thereto, and (except for
directors’ qualifying shares) are owned directly or indirectly by Nuveen, free
and clear of all liens, encumbrances, equities or claims, except in each case
as would not cause a Material Adverse Effect.

 

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(e)                                  This
Agreement has been duly authorized, executed and delivered by Nuveen.

 

(f)                                    The
Nuveen Repurchase Agreement has been duly authorized, executed and delivered by
Nuveen and is a valid and binding agreement of Nuveen, enforceable against
Nuveen in accordance with its terms except as (A) the enforceability thereof
may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar laws affecting creditors’ rights
generally, (B) the availability of equitable remedies may be limited by
equitable principles of general applicability and (C) may be limited by an
implied covenant of good faith and fair dealing;

 

(g)                                 The
Bridge Facility has been duly authorized, executed and delivered by Nuveen and
is a valid and binding agreement of Nuveen, enforceable against Nuveen in
accordance with its terms except as (A) the enforceability thereof may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar laws affecting creditors’ rights generally, (B) the
availability of equitable remedies may be limited by equitable principles of
general applicability and (C) may be limited by an implied covenant of good
faith and fair dealing;

 

(h)                                 The
Separation Agreement has been duly authorized, executed and delivered by Nuveen
and is a valid and binding agreement of Nuveen, enforceable against Nuveen in
accordance with its terms except as (A) the enforceability thereof may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar laws affecting creditors’ rights generally, (B) the availability
of equitable remedies may be limited by equitable principles of general
applicability and (C) may be limited by an implied covenant of good faith and
fair dealing;

 

(i)                                     The
authorized capital stock of Nuveen conforms as to legal matters to the description
thereof contained in the Nuveen Prospectus.

 

(j)                                     The
outstanding Nuveen Class B Shares held by the Selling Stockholders to be
converted into Nuveen Class A Shares and sold by the Selling Stockholders under
the Common Stock Underwriting Agreement and the outstanding Nuveen Class B
Shares held by St. Paul Travelers to be converted into Nuveen Class A Shares
and sold by St. Paul Travelers under the Selling Stockholder Forward Agreements
and the outstanding Nuveen Class B Shares to be sold by St. Paul Travelers
under the Nuveen Repurchase Agreement have been duly authorized and are validly
issued, fully paid and non-assessable.

 

(k)                                  Except
as disclosed in the Nuveen Prospectus, the execution and delivery by Nuveen of,
and the performance by Nuveen of its obligations under, this Agreement, the
Common Stock Underwriting Agreement, the Nuveen Repurchase Agreement, the
Bridge Facility and the Separation Agreement will

 

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not contravene (i) any provision of applicable law, (ii) the
certificate of incorporation or by-laws of Nuveen, (iii) any agreement or other
instrument binding upon Nuveen or any of its subsidiaries that is material to
Nuveen and its subsidiaries, taken as a whole, or (iv) any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
Nuveen or any subsidiary of Nuveen, except in the case of (i), (iii), and (iv)
as would not have a Material Adverse Effect, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by Nuveen of its obligations under this
Agreement, the Common Stock Underwriting Agreement, the Nuveen Repurchase
Agreement, the Bridge Facility and the Separation Agreement, except those which
have been obtained and made and except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Nuveen Class A Shares and except for those which the failure to
obtain, individually or in the aggregate, would not have a Material Adverse
Effect.

 

(l)                                     There
has not occurred any material adverse change, or any development involving a
prospective material adverse change, in the financial condition or in the
earnings, business or operations of Nuveen and its subsidiaries, taken as a
whole, from that set forth in the Nuveen Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement).

 

(m)                               There
are no legal or governmental proceedings pending or, to the knowledge of
Nuveen, threatened to which Nuveen or any of its subsidiaries is a party or to
which any of the properties of Nuveen or any of its subsidiaries is subject
that are required to be described in the Nuveen Registration Statement or the
Nuveen Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the Nuveen
Registration Statement or the Nuveen Prospectus or to be filed as exhibits to
the Nuveen Registration Statement that are not described or filed as required.

 

(n)                                 Each
preliminary prospectus filed as part of the Nuveen Registration Statement as
originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Securities Act, complied as to form when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.

 

(o)                                 Except
as disclosed in the Nuveen Prospectus, there are no contracts, agreements or
understandings between Nuveen and any person granting such person the right to
require Nuveen to file a registration statement under the Securities Act with
respect to any securities of Nuveen or to require Nuveen to include such
securities with the Nuveen Class A Shares registered pursuant to the Nuveen
Registration Statement.

 

(p)                                 Neither
Nuveen nor any of its subsidiaries is in violation of its certificate of
incorporation, by-laws or other constituent documents; neither

 

9

 

Nuveen nor any of its subsidiaries is in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
agreement or other instrument binding upon Nuveen or any of its subsidiaries,
except to the extent any such violation or default would not, individually or
in the aggregate, have a Material Adverse Effect.

 

(q)                                 Subsequent
to the respective dates as of which information is given in the Nuveen
Registration Statement and the Nuveen Prospectus, (i) Nuveen and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction; (ii) Nuveen has not
purchased any of its outstanding capital stock (other than open market
repurchases pursuant to its open market repurchase program), nor declared, paid
or otherwise made any dividend or distribution of any kind on its capital stock
other than ordinary and customary dividends; and (iii) there has not been any
material change in the capital stock or any increase in short-term debt or
long-term debt of Nuveen and its subsidiaries, except in each case as described
in the Nuveen Prospectus or as contemplated by the offerings and transactions
that are described therein.

 

(r)                                    Nuveen
and its Significant Subsidiaries have good and marketable title in fee simple
to all real property and good and marketable title to all personal property
owned by them which is material to the business of Nuveen and its subsidiaries,
in each case free and clear of all liens, encumbrances and defects except such
as are described in the Nuveen Prospectus or such as do not materially affect
the value of such property and do not interfere with the use made and proposed
to be made of such property by Nuveen and its subsidiaries; and any real
property and buildings held under lease by Nuveen and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by Nuveen and its subsidiaries, in each case
except as described in the Nuveen Prospectus.

 

(s)                                  Nuveen
and its subsidiaries, either directly or through a subsidiary or subsidiaries,
own or possess, or can acquire on reasonable terms, all material patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade names
necessary for the conduct of the business now operated by them, except where
the failure to so own, possess or be able to acquire on reasonable terms would
not, individually or in the aggregate, have a Material Adverse Effect, and
neither Nuveen nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to any
of the foregoing which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect.

 

10

 

(t)                                    No
labor dispute with the employees of Nuveen or any of its subsidiaries exists
or, to the knowledge of Nuveen, is imminent, that would have a Material Adverse
Effect; and Nuveen is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers, manufacturers
or contractors that would have a Material Adverse Effect.

 

(u)                                 Nuveen
and its subsidiaries possess all material certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither
Nuveen nor any of its subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect,
except as described in the Nuveen Prospectus.

 

(v)                                 Nuveen
and each of its subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management’s general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

 

(w)                               The
Nuveen Class A Shares to be sold pursuant to the MS Forward Agreement have been
authorized for listing on the New York Stock Exchange, subject only to official
notice of issuance and have been registered under the Exchange Act.

 

(x)                                   Except
as described in the Nuveen Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement), Nuveen has not
sold, issued or distributed any shares of Nuveen Common Stock during the
six-month period preceding the date hereof, including any sales pursuant to
Rule 144A under, or Regulation D or S of, the Securities Act, other
than shares issued pursuant to employee benefit plans, qualified stock option
plans or other employee compensation plans or pursuant to outstanding options,
rights or warrants.

 

(y)                                 KPMG
LLP, whose report is included in the Nuveen Prospectus, has notified Nuveen
that it is an independent registered public accounting firm with respect to
Nuveen and its combined subsidiaries within the meaning of the Securities Act
and the rules and regulations adopted by the Commission thereunder.  The financial statements of Nuveen and its
combined subsidiaries (including the related notes) included in the Nuveen
Registration Statement and the Nuveen Prospectus present fairly in all material
respects the financial

 

11

 

condition, results of
operations and cash flows of the entities purported to be shown thereby at the
dates and for the periods indicated and have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and conform in all material respects
with the rules and regulations adopted by the Commission under the Securities
Act.

 

(z)                                   Nuveen
and its subsidiaries (i) are in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (“Environmental Laws”),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, individually or in the aggregate, have a Material Adverse Effect.

 

(aa)                            Nuveen
is not, and after giving effect to the offering and sale of the Nuveen Class A
Shares pursuant to the MS Forward Agreement and the application of the proceeds
thereof as described in the Nuveen Prospectus will not be, required to register
as an “investment company” as such term is defined in the Investment Company
Act of 1940, as amended (the “1940 Act”).

 

(bb)                          Except
in each case as would not reasonably be expected to have a Material Adverse
Effect:  Each of Rittenhouse Asset
Management Inc., NWQ Investment Management Company LLC, Symphony Asset
Management Inc., Nuveen Asset Management, Inc., Nuveen Investments Advisers and
Nuveen Investments Institutional Services Group LLC (together, the “Investment Advisory Subsidiaries”) is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and none of the Investment Advisory
Subsidiaries is prohibited by any provision of the Advisers Act or the 1940
Act, or the respective rules and regulations thereunder, from acting as an
investment adviser.  The Investment
Advisory Subsidiaries are the only direct or indirect subsidiaries of Nuveen
required to be registered as investment advisers under the Advisers Act.  Each of the Investment Advisory Subsidiaries
is duly registered, licensed or qualified as an investment adviser in each
jurisdiction where the conduct of its business requires such registration and
is in compliance with all federal, state and foreign laws requiring any such
registration, licensing or qualification or is subject to no material liability
or disability by reason of the failure to be so registered, licensed or
qualified in any such jurisdiction or to be in such compliance.  None of Nuveen or its other direct or
indirect subsidiaries is required to be registered, licensed or qualified as an
investment adviser under the laws requiring any such registration, licensing or
qualification in any jurisdiction in which it or such other subsidiaries
conduct

 

12

 

business or is subject to material liability or disability by reason of
the failure to be so registered, licensed or qualified.

 

(cc)                            Nuveen
Investments, LLC (the “Broker-Dealer Subsidiary”)
is duly registered, licensed or qualified as a broker-dealer under the Exchange
Act, and under the securities laws of each jurisdiction where the conduct of
its business requires such registration and is in compliance with all federal,
state and foreign laws requiring such registration, licensing or qualification
or is subject to no material liability or disability by reason of the failure
to be so registered, licensed or qualified in any such jurisdiction or to be in
such compliance.  The Broker-Dealer
Subsidiary is a member in good standing of National Association of Securities
Dealers, Inc. and each other self regulatory organization where the conduct of
its business requires such membership. 
Neither Nuveen nor any of Nuveen’s other direct or indirect subsidiaries
is required to be registered, licensed or qualified as a broker-dealer under
the laws requiring any such registration, licensing or qualification in any
jurisdiction in which it or such other subsidiaries conduct business or is
subject to any material liability or disability by reason of the failure to be
so registered, licensed or qualified except where the failure to be so
registered, licensed or qualified would not have a Material Adverse Effect.

 

(dd)                          Each
of the Investment Advisory Subsidiaries and the Broker-Dealer Subsidiary is,
has been and will upon consummation of the transactions contemplated herein be,
in compliance with, and each such entity has received no notice of any kind of
any violation of, (A) all laws, regulations, ordinances and rules (including
those of any non-governmental self-regulatory agencies) applicable to it or its
operations relating to investment advisory or broker-dealer activities, as the
case may be, and (B) all other laws, regulations, ordinances and rules
applicable to it and its operations, except, in either case, where any failure
to comply with any such law, regulation, ordinance or rule would not have,
individually or in the aggregate, a Material Adverse Effect.

 

(ee)                            Each
investment advisory agreement between Nuveen and any Investment Advisory
Subsidiary on the one hand and any advisory client on the other hand is a legal
and valid obligation of Nuveen and, to the knowledge of Nuveen, the other
parties thereto, and neither Nuveen nor any Investment Advisory Subsidiary is,
to the knowledge of Nuveen, in breach or violation of or in default under any
such agreement which breach, violation or default would individually or in the
aggregate have a Material Adverse Effect.

 

3.                                       Representations and Warranties of St. Paul Travelers.  St. Paul Travelers represents and warrants to
and agrees with the Mandatory Issuer and each of the Underwriters that:

 

(a)                                  This
Agreement has been duly authorized, executed and delivered by or on behalf of
St. Paul Travelers.

 

13

 

(b)                                 The
MS Forward Agreement has been duly authorized, executed and delivered by St.
Paul Travelers and is a valid and binding agreement of St. Paul Travelers,
enforceable against St. Paul Travelers in accordance with its terms except as
(A) the enforceability thereof may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or similar laws affecting
creditors’ rights generally, (B) the availability of equitable remedies may be
limited by equitable principles of general applicability and (C) may be limited
by an implied covenant of good faith and fair dealing;

 

(c)                                  The
Nuveen Repurchase Agreement has been duly authorized, executed and delivered by
St. Paul Travelers and is a valid and binding agreement of St. Paul Travelers,
enforceable against St. Paul Travelers in accordance with its terms except as
(A) the enforceability thereof may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or similar laws affecting creditors’
rights generally, (B) the availability of equitable remedies may be limited by
equitable principles of general applicability and (C) may be limited by an
implied covenant of good faith and fair dealing;

 

(d)                                 The
Separation Agreement has been duly authorized, executed and delivered by St.
Paul Travelers and is a valid and binding agreement of St. Paul Travelers,
enforceable against St. Paul Travelers in accordance with its terms except as
(A) the enforceability thereof may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or similar laws affecting
creditors’ rights generally, (B) the availability of equitable remedies may be
limited by equitable principles of general applicability and (C) may be limited
by an implied covenant of good faith and fair dealing;

 

(e)                                  The
execution and delivery by St. Paul Travelers of, and the performance by St.
Paul Travelers of its obligations under, this Agreement, the MS Forward
Agreement, the Nuveen Repurchase Agreement and the Separation Agreement will
not contravene (i) any provision of applicable law, (ii) the certificate of
incorporation or by-laws of St. Paul Travelers, (iii) any agreement or other
instrument binding upon St. Paul Travelers that is material to St. Paul Travelers
and its subsidiaries taken as a whole, or (iv) any judgment, order or decree of
any governmental body, agency or court having jurisdiction over St. Paul
Travelers, except in the case of (i), (iii) and (iv) as would not have a
material adverse effect on St. Paul Travelers and its subsidiaries taken as a
whole, and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by St.
Paul Travelers of its obligations under this Agreement, the MS Forward
Agreement, the Nuveen Repurchase Agreement and the Separation Agreement, except
those which have been obtained and made, and as may be required by rules of the
National Association of Securities Dealers, Inc., or by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Nuveen Class A Shares, and except for those the failure of which to obtain
would not have

 

14

 

a material adverse effect on St. Paul Travelers and its subsidiaries
taken as a whole.

 

(f)                                    St.
Paul Travelers has (with respect to the Nuveen Class B Shares owned by St. Paul
Travelers prior to the conversion of such Nuveen Class B Shares to Nuveen Class
A Shares), and on the Closing Date and on each date of settlement under the MS
Forward Agreement will have (with respect to the Nuveen Common Stock) valid
title to, or a valid “security entitlement” within the meaning of Section 8-501
of the New York Uniform Commercial Code (the “UCC”)
in respect of, the Nuveen Common Stock to be sold by St. Paul Travelers
pursuant to such MS Forward Agreement on such settlement date, free and clear
of all security interests, claims, liens, equities or other encumbrances (other
than any such encumbrances arising under the MS Forward Agreement) and the
legal right and power, and all authorization and approval required by law, to
enter into such MS Forward Agreement and to sell, transfer and deliver the
Nuveen Common Stock to be sold by St. Paul Travelers pursuant to such MS
Forward Agreement or a security entitlement in respect of such Nuveen Common
Stock.

 

(g)                                 Upon
payment for the Nuveen Class A Shares to be sold by St. Paul Travelers pursuant
to the MS Forward Agreement, delivery of such Nuveen Class A Shares to the
Forward Counterparty, registration of such Nuveen Class A Shares in the name of
the Forward Counterparty (assuming that the Forward Counterparty does not have
notice of any adverse claim (within the meaning of Section 8-105 of the
UCC) to such Nuveen Class A Shares), (A) the Forward Counterparty shall be
a “protected purchaser” of such Nuveen Class A Shares within the meaning of
Section 8-303 of the UCC and (B) no action based on any “adverse
claim”, within the meaning of Section 8-102 of the UCC, to such Nuveen
Class A Shares may be validly asserted against the Forward Counterparty; for
purposes of this representation, St. Paul Travelers may assume that when such
payment, delivery and crediting occur, such Nuveen Class A Shares will have
been registered in the name of the Forward Counterparty on Nuveen’s share
registry in accordance with its certificate of incorporation, bylaws and
applicable law.

 

(h)                                 St.
Paul Travelers is not prompted by any information concerning Nuveen or its
subsidiaries which is not set forth in the Nuveen Prospectus or otherwise has
been publicly disclosed by St. Paul Travelers to sell Nuveen Class A Shares
pursuant to the Selling Stockholder Forward Agreements.

 

(i)                                     (i)  The Nuveen Registration Statement, when it
became effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Nuveen Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the

 

15

 

circumstances under which they were made, not misleading, provided that the representations and warranties set forth
in this paragraph 3(i) are limited to the Selling Stockholder Information.

 

4.                                       “Lock-Up” Agreement of Nuveen and St. Paul Travelers.  Each of Nuveen and St. Paul Travelers hereby
agrees that, without the prior written consent of the Underwriters, it will
not, during the period ending 90 days after the date of the Nuveen Prospectus,
(1) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of Nuveen Common Stock or any securities convertible
into or exercisable or exchangeable for Nuveen Common Stock; or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Nuveen Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Nuveen Common Stock or such other securities, in cash or
otherwise; or (3) file any registration statement with the Commission
relating to the offering of any shares of Nuveen Common Stock or any securities
convertible into or exercisable or exchangeable for Nuveen Common Stock.

 

The
restrictions contained in the preceding paragraph shall not apply to
(a) the Nuveen Class A Shares to be sold under the Common Stock
Underwriting Agreement, (b)  the sale of Nuveen Class A Shares by St. Paul
Travelers in connection with the Selling Stockholder Forward Agreements, (c)
the sale of Nuveen Class A Shares by St. Paul Travelers underlying the
Securities and underlying the 6.75% Mandatorily Exchangeable Securities due
October 15, 2007 of Merrill Lynch & Co., Inc., (d) the sale of shares of
Nuveen Common Stock by St. Paul Travelers pursuant to the Nuveen Repurchase
Agreement, (e) the issuance by Nuveen of shares of Nuveen Common Stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof of which the Underwriters have been advised in writing, (f) the
grant by Nuveen of stock options, restricted stock or other awards pursuant to
Nuveen’s benefit plans in existence on the date hereof or proposed to be
approved by Nuveen’s stockholders at their 2005 annual meeting; provided that such options, restricted stock or awards do
not become exercisable or vest during such 90-day period, or
(g) transactions by St. Paul Travelers relating to shares of Nuveen Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the Securities, provided
that for purposes of this clause (g) no filing under Section 16(a) of the
Exchange Act shall be required or shall be voluntarily made in connection with
subsequent sales of Nuveen Common Stock or other securities acquired in such
open market transactions.  In addition,
St. Paul Travelers, agrees that, without the prior written consent of the
Underwriters, it will not, during the period ending 90 days after the date of
the Nuveen Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Nuveen Common Stock or any security
convertible into or exercisable

 

16

 

or
exchangeable for Nuveen Common Stock. 
St. Paul Travelers consents to the entry of stop transfer instructions
with Nuveen’s transfer agent and registrar against the transfer of any shares
of Nuveen Common Stock held by St. Paul Travelers except in compliance with the
foregoing restrictions.

 

5.                                       Payment of Commission of Underwriters. 
Concurrent with the payment by the Forward Counterparty to
St. Paul Travelers of the purchase price payable pursuant to the MS Forward
Agreement, St. Paul Travelers shall pay to the Underwriters, not later than
10:00 a.m. on the Closing Date, a commission in the amount of $8,251,800
delivered in immediately available funds to account number 38890774, ABA #
021000089 (care of Morgan Stanley & Co. Incorporated); Reference:  Syndicate Operations, Account#: 088-00769-0.

 

6.                                       Conditions to the Mandatory Issuer’s and the Underwriters’ Obligations.  The several obligations of the Mandatory
Issuer and Underwriters under the MS Securities Underwriting Agreement are
subject to the following further conditions:

 

(a)                                  Subsequent
to the execution and delivery of this Agreement and the MS Securities
Underwriting Agreement and prior to the Closing Date:

 

(i)                                     there
shall not have occurred any downgrading, nor shall any notice have been given
of any intended or potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change, in the rating accorded
any of the securities of Nuveen or any of its subsidiaries by any “nationally
recognized statistical rating organization,” as such term is defined for
purposes of Rule 436(g)(2) under the Securities Act; and

 

(ii)                                  there
shall not have occurred any change, or any development involving a prospective
change, in the financial condition or in the earnings, business or operations
of Nuveen and its subsidiaries, taken as a whole, from that set forth in the
Nuveen Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in the judgment of the
Underwriters, is material and adverse and that makes it, in the judgment of the
Underwriters, impracticable to market the Securities on the terms and in the
manner contemplated in the Securities Prospectus.

 

(b)                                 The
Mandatory Issuer, the Underwriters and the Forward Counterparty shall have
received on the Closing Date a certificate, dated the Closing Date and signed
by an executive officer of Nuveen, to the effect set forth in
Section 6(a)(i) above and to the effect that the representations and
warranties of Nuveen contained in this Agreement are true and correct as of the
Closing Date and that Nuveen has complied in all material respects with all of
the agreements

 

17

 

and satisfied in all material respects all of the conditions on its
part to be performed or satisfied hereunder on or before the Closing Date.

 

The officer signing and delivering such
certificate may rely upon the best of his or her knowledge as to proceedings
threatened.

 

(c)                                  The
Mandatory Issuer and the Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of St.
Paul Travelers, to the effect that the representations and warranties of St.
Paul Travelers contained in this Agreement are true and correct as of the
Closing Date and that St. Paul Travelers has complied in all material respects
with all of the agreements and satisfied in all material respects all of the
conditions on its part to be performed or satisfied hereunder on or before the
Closing Date.

 

(d)                                 The
Mandatory Issuer, the Underwriters and the Forward Counterparty shall have
received on the Closing Date an opinion of Wachtell, Lipton, Rosen & Katz,
special counsel for Nuveen, dated the Closing Date, to the effect that:

 

(i)                                     the
authorized capital stock of Nuveen conforms as to legal matters to the
description under the caption “Capital Stock” contained in the Nuveen
Prospectus;

 

(ii)                                  the
shares of Nuveen Common Stock owned by St. Paul Travelers have been duly
authorized and are validly issued, fully paid and non-assessable;

 

(iii)                               this
Agreement has been duly authorized, executed and delivered by Nuveen;

 

(iv)                              the
Nuveen Repurchase Agreement has been duly authorized, executed and delivered by
Nuveen and is a valid and binding agreement of Nuveen, enforceable in
accordance with its terms except as (A) the enforceability thereof may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar laws affecting creditors’ rights generally, (B) the
availability of equitable remedies may be limited by equitable principles of
general applicability and (C) may be limited by an implied covenant of good faith
and fair dealing;

 

(v)                                 the
Bridge Facility has been duly authorized, executed and delivered by Nuveen and
is a valid and binding agreement of Nuveen, enforceable in accordance with its
terms except as (A) the enforceability thereof may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws
affecting creditors’ rights generally, (B) the availability of equitable
remedies may be limited by

 

18

 

equitable principles of general applicability
and (C) may be limited by an implied covenant of good faith and fair
dealing;

 

(vi)          the Separation Agreement has been duly
authorized, executed and delivered by Nuveen and is a valid and binding
agreement of Nuveen, enforceable in accordance with its terms except as (A) the
enforceability thereof may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar laws affecting creditors’
rights generally, (B) the availability of equitable remedies may be
limited by equitable principles of general applicability and (C) may be
limited by an implied covenant of good faith and fair dealing;

 

(vii)         Nuveen is not, and after giving effect
to the offering and sale of the Nuveen Class A Shares and the application
of the proceeds thereof as described in the Nuveen Prospectus will not be,
required to register as an “investment company” as such term is defined in the
1940 Act; and

 

(viii)        the Nuveen Registration Statement and
the Nuveen Prospectus (except for the financial statements and related notes
and other financial or statistical data included therein or omitted therefrom,
as to which such counsel need not comment) appear on their face to be
responsive as to form in all material respects to the requirements of the
Securities Act and the applicable rules and regulations of the Commission
thereunder.

 

In the course
of such counsel’s participation in the preparation of the Nuveen Registration
Statement and Nuveen Prospectus and review and discussion of the contents
thereof, although such counsel has not independently checked or verified, and
is not passing upon and assumes no responsibility for, the accuracy,
completeness, or fairness thereof, or otherwise verified the statements made
therein, other than those mentioned in subclause (i) above, as of the
Closing Date no facts have come to the attention of such counsel that cause
such counsel to believe that (i) the Nuveen Registration Statement or the
Nuveen Prospectus included therein (except for the financial statements and
related notes and other financial or statistical data included therein or
omitted therefrom, as to which such counsel need not comment) on the date the
Nuveen Registration Statement became effective and as of the date of this
Agreement contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the Nuveen Prospectus (except
for the financial statements and related notes and other financial or
statistical data included therein or omitted therefrom, as to which such
counsel need not comment) as of its date or as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to 

 

19

 

state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.

 

In rendering
such opinion, such counsel may rely, without independent verification, as to
matters of fact, to the extent they deem appropriate, on the representations of
Nuveen contained herein and on certificates of responsible officers of Nuveen
and public officials.  Such opinion will
be limited to the laws of the State of New York, the federal laws of the United
States and the General Corporation Law of the State of Delaware, and such
counsel will express no opinion as to the effect on the matters covered by such
opinion of the laws of any other jurisdiction. 
Such opinion may also state that such counsel acted as special counsel
to Nuveen in connection with the offering of the Nuveen Class A Shares
contemplated hereby and did not act, and has not acted, as Nuveen’s regular
outside counsel.

 

(e)           The Mandatory
Issuer, the Underwriters and the Forward Counterparty shall have received on
the Closing Date an opinion of Alan G. Berkshire, Esq., General Counsel to
Nuveen, dated the Closing Date, to the effect that:

 

(i)            Nuveen has been duly incorporated,
is validly existing as a corporation in good standing under the laws of the
State of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Nuveen Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect;

 

(ii)           each Significant Subsidiary of Nuveen
has been duly incorporated or formed, is validly existing in good standing
under the laws of the jurisdiction of its incorporation or formation, has the
requisite corporate power and authority to own its property and to conduct its
business as described in the Nuveen Prospectus and is duly qualified to
transact such business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a Material Adverse Effect;

 

(iii)          the Nuveen Class A Shares to be
sold by the Selling Stockholders have been duly authorized and are validly
issued, fully paid and non-assessable;

 

(iv)          to such counsel’s knowledge and other
than as set forth in the Nuveen Prospectus, there are no legal or governmental
proceedings pending or threatened to which Nuveen or any of its subsidiaries is
a party 

 

20

 

or to which any of the properties of Nuveen
or any of its subsidiaries is subject, which, if determined adversely to Nuveen
or any of its subsidiaries, would individually or in the aggregate have a Material
Adverse Effect;

 

(v)           each of the Investment Advisory
Subsidiaries is duly registered as an investment adviser under the Advisers
Act.  To the best of such counsel’s
knowledge, none of Nuveen or its subsidiaries other than the Investment
Advisory Subsidiaries is required to be registered, licensed, or qualified as
an investment adviser under the Advisers Act and the rules and regulation
of the Commission promulgated thereunder or under applicable state laws, except
where any failure to be so registered, licensed, or qualified would not have a
Material Adverse Effect.  To such counsel’s
knowledge, each of the Investment Advisory Subsidiaries is in compliance with
the Advisers Act and applicable state laws, regulations, ordinances and rules applicable
to it or its operations relating to investment advisory activities except where
any failure by any such Investment Advisory Subsidiary to comply with any such
law, regulation, ordinance or rule would not have a Material Adverse
Effect;

 

(vi)          to the knowledge of such counsel,
neither Nuveen nor any Investment Advisory Subsidiary is in breach or violation
of or in default under any investment advisory contract which would
individually or in the aggregate have a Material Adverse Effect;

 

(vii)         the Broker-Dealer Subsidiary is duly
registered, licensed or qualified as a broker-dealer under the Exchange Act and
in each jurisdiction where the conduct of its business requires registration,
licensing or qualification, except to the extent that the failure to be so registered,
licensed or qualified would not have a Material Adverse Effect.  None of Nuveen or its subsidiaries, other
than the Broker-Dealer Subsidiary, is required to be registered, licensed or
qualified as a broker-dealer under the Exchange Act and the rules and
regulations of the Commission promulgated thereunder or under the laws
requiring any such registration, licensing or qualification in any jurisdiction
in which it conducts business except where any failure to be so registered,
licensed or qualified would not have a Material Adverse Effect.  Each of Nuveen and the Broker-Dealer
Subsidiary is in compliance with all laws, regulations, ordinances and rules (including
those of any self regulatory organizations) as applicable to it or its
operations relating to broker-dealer activities except where any failure to
comply with any such law, regulation, ordinance or rule would not have,
individually or in the aggregate, a Material Adverse Effect;

 

(viii)        except as disclosed in the Nuveen
Prospectus, the execution and delivery by Nuveen of, and the performance by
Nuveen of its 

 

21

 

obligations under, this Agreement, the Common
Stock Underwriting Agreement, the Nuveen Repurchase Agreement, the Bridge
Facility and the Separation Agreement will not contravene (i) any
provision of applicable law or (ii) the certificate of incorporation or
by-laws of Nuveen or, (iii) to such counsel’s knowledge, any agreement or
other instrument binding upon Nuveen or any of its subsidiaries that is
material to Nuveen and its subsidiaries, taken as a whole, or, (iv) to
such counsel’s knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over Nuveen or any subsidiary, and no
consent, approval, authorization or order of, or qualification with, any U.S.
federal, Illinois State or State of Delaware governmental body or agency is
required for the performance by Nuveen of its obligations under this Agreement,
the Common Stock Underwriting Agreement, the Nuveen Repurchase Agreement, the
Bridge Facility and the Separation Agreement except those which have been
obtained and made, and as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of the Nuveen Class A
Shares (it being understood that this opinion is limited to those consents,
approvals, authorizations, orders, and qualifications that, in such counsel’s
experience, are normally applicable to transactions of the type contemplated by
this Agreement and the Common Stock Underwriting Agreement); and

 

(ix)           the Nuveen Registration Statement and
the Nuveen Prospectus (except for the financial statements and related notes
and other financial or statistical data included therein or omitted therefrom,
as to which such counsel need not comment) appear on their face to be
responsive as to form in all material respects to the requirements of the
Securities Act and the applicable rules and regulations of the Commission
thereunder.

 

In the course
of such counsel’s participation in the preparation of the Nuveen Registration
Statement and Nuveen Prospectus and review and discussion of the contents
thereof, although such counsel has not independently checked or verified, and
is not passing upon and assumes no responsibility for, the accuracy,
completeness, or fairness thereof, or otherwise verified the statements made
therein (it being understood that such counsel has prepared and reviewed the
disclosures incorporated by reference in the Prospectus under the captions “Business—Regulatory,”
and “Legal Proceedings”), as of the Closing Date no facts have come to the
attention of such counsel that cause such counsel to believe that (i) the
Nuveen Registration Statement or the prospectus included therein (except for the
financial statements and related notes and other financial or statistical data
included therein or omitted therefrom, as to which such counsel need not
comment) on the date the Nuveen Registration Statement became effective and as
of the date of this Agreement contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or

 

22

 

necessary to
make the statements therein not misleading or (ii) the Nuveen Prospectus
(except for the financial statements and related notes and other financial or
statistical data included therein or omitted therefrom, as to which such
counsel need not comment) as of its date or as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.

 

In rendering
such opinion, such counsel may rely, without independent verification, (x) as
to matters of fact, to the extent he deems appropriate, on certificates of
responsible officers of Nuveen and public officials, and (y) as to matters
involving the application of any jurisdiction other than the State of Illinois,
the federal laws of the United States and the General Corporation Law of the
State of Delaware, to the extent he deems appropriate and specified in such
opinion, upon the opinion of other counsel of good standing whom he reasonably
believes to be reliable and who are reasonably satisfactory to counsel for the
Mandatory Issuer, the Underwriters and the Forward Counterparty.

 

(f)            The Mandatory
Issuer, the Underwriters and the Forward Counterparty shall have received on
the Closing Date an opinion of Wachtell, Lipton, Rosen & Katz, counsel
for St. Paul Travelers, dated the Closing Date, to the effect that:

 

(i)            this Agreement has been duly
authorized, executed and delivered by or on behalf of St. Paul Travelers;

 

(ii)           the MS Forward Agreement has been
duly authorized, executed and delivered by St. Paul Travelers and is a valid
and binding agreement of St. Paul Travelers, enforceable in accordance with its
terms except as (A) the enforceability thereof may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
similar laws affecting creditors’ rights generally, (B) the availability
of equitable remedies may be limited by equitable principles of general
applicability and (C) may be limited by an implied covenant of good faith
and fair dealing;

 

(iii)          the Nuveen Repurchase Agreement has
been duly authorized, executed and delivered by St. Paul Travelers and is a
valid and binding agreement of St. Paul Travelers, enforceable against St. Paul
Travelers in accordance with its terms except as (A) the enforceability
thereof may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar laws affecting creditors’ rights
generally, (B) the availability of equitable remedies may be limited by
equitable principles of general applicability and (C) may be limited by an
implied covenant of good faith and fair dealing;

 

23

 

(iv)          the Separation Agreement has been duly
authorized, executed and delivered by St. Paul Travelers and is a valid and
binding agreement of St. Paul Travelers, enforceable against St. Paul Travelers
in accordance with its terms except as (A) the enforceability thereof may
be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar laws affecting creditors’ rights generally, (B) the
availability of equitable remedies may be limited by equitable principles of
general applicability and (C) may be limited by an implied covenant of
good faith and fair dealing;

 

(v)           the execution and delivery by St.
Paul Travelers of, and the performance by St. Paul Travelers of its obligations
under, this Agreement, the MS Forward Agreement, the Nuveen Repurchase
Agreement and the Separation Agreement will not contravene any provision of
applicable law, or the certificate of incorporation or by-laws of St. Paul
Travelers, or, to such counsel’s knowledge, any agreement or other instrument
binding upon St. Paul Travelers that is material to St. Paul Travelers and its
subsidiaries taken as a whole, or, to such counsel’s knowledge, any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over St. Paul Travelers, and no consent, approval, authorization or order of,
or qualification with, any U.S. federal, New York State or State of Delaware
governmental body or agency is required for the performance by St. Paul
Travelers of its obligations under this Agreement, the Selling Stockholder
Forward Agreements, the Nuveen Repurchase Agreement and the Separation
Agreement, except those which have been obtained and made, and as may be
required by the securities or Blue Sky laws of the various states in connection
with offer and sale of the Nuveen Class A Shares (it being understood that
this opinion is limited to the consents, approvals, authorizations, orders, and
qualifications that, in such counsel’s experience, are normally applicable to
transactions of the type contemplated by this Agreement and the Common Stock
Underwriting Agreement); and

 

(vi)          upon payment for the Nuveen Class A
Shares to be sold by St. Paul Travelers pursuant to the MS Forward Agreement,
delivery of such Nuveen Class A Shares to the Forward Counterparty,
registration of such Nuveen Class A Shares in the name of the Forward
Counterparty (assuming that the Forward Counterparty does not have notice of
any adverse claim (within the meaning of Section 8-105 of the UCC)
to such Nuveen Class A Shares), (A) the Forward Counterparty shall be
a “protected purchaser” of such Nuveen Class A Shares within the meaning
of Section 8-303 of the UCC, and (B) no action based on any “adverse
claim”, within the meaning of Section 8-102 of the UCC, to such
Nuveen Class A Shares may be validly asserted against the Forward
Counterparty; in giving this opinion, counsel for St. Paul Travelers may assume
that 

 

24

 

when such payment, delivery and crediting
occur, such Nuveen Class A Shares will have been registered in the name of
the Forward Counterparty on Nuveen’s share registry in accordance with its
certificate of incorporation, bylaws and applicable law.

 

In rendering
such opinion, such counsel may rely, without independent verification, (x) as
to matters of fact, to the extent they deem appropriate, upon the
representations of each Selling Stockholder contained herein and in other
documents and instruments, provided that the Mandatory Issuer, the Underwriters
and the Forward Counterparty are provided copies of such other documents and
instruments and they are reasonably satisfactory to counsel for the Mandatory
Issuer, the Underwriters and the Forward Counterparty, and (y) as to legal
matters, to the extent they deem appropriate and specified in such opinion,
upon the opinion or opinions of other counsel of good standing whom they
reasonably believe to be reliable and who are reasonably satisfactory to
counsel for the Mandatory Issuer, the Underwriters and the Forward
Counterparty.

 

(g)           The Mandatory
Issuer, the Underwriters and the Forward Counterparty shall have received on
the Closing Date an opinion of Davis Polk & Wardwell, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to in
Sections 6(d)(iii) and the penultimate paragraph of Section 6(d) above,
and further to the effect that the statements relating to legal matters or
documents included in the Nuveen Prospectus under the caption “Underwriting”
fairly summarize in all material respects such matters or documents.

 

With respect to the penultimate paragraph in Section 6(d) above,
Davis Polk & Wardwell may state that their opinions and beliefs are
based upon their participation in the preparation of the Nuveen Registration
Statement and the Nuveen Prospectus and any amendments or supplements thereto
(other than the documents incorporated by reference) and upon review and
discussion of the contents thereof (including documents incorporated by
reference), but are without independent check or verification, except as
specified.

 

The opinions of Wachtell, Lipton, Rosen &
Katz described in Sections 6(d) and 6(e) above (and any opinions
of counsel for St. Paul Travelers referred to in the immediately preceding
paragraph) and the opinion of Alan G. Berkshire in Section 6(e) above
shall be rendered to the Mandatory Issuer and the Underwriters at the request
of Nuveen or St. Paul Travelers, as the case may be, and shall so state
therein.

 

(h)           The Mandatory
Issuer, the Underwriters and the Forward Counterparty shall have received, on
each of the date hereof and the Closing Date, a letter dated the date hereof or
the Closing Date, as the case may be, in form and substance satisfactory to the
Mandatory Issuer, the Underwriters and the Forward Counterparty, from KPMG LLP,
independent public accountants, containing statements and information of the
type ordinarily included in accountants’ 

 

25

 

“comfort letters” to underwriters with respect to the financial
statements and certain financial information contained in or incorporated by
reference into the Nuveen Registration Statement and the Nuveen Prospectus; provided that the letter delivered on the
Closing Date shall use a “cut-off date” not earlier than the date hereof.

 

(i)            The “lock-up”
agreements, each substantially in the form of Exhibit A to the Common
Stock Underwriting Agreement, between the Underwriters under the Common Stock
Underwriting Agreement and certain officers and directors of Nuveen relating to
sales and certain other dispositions of shares of Nuveen Common Stock or
certain other securities, copies of which shall have been delivered to the
Mandatory Issuer and the Underwriters on or before the date hereof, shall be in
full force and effect on the Closing Date.

 

(j)            The Underwriters
shall have received at or prior to 10:00 a.m., New York City time, on the
Closing Date payment of the commission set forth in Section 5 hereof.

 

7.             Covenants of Nuveen. 
Nuveen covenants with the Mandatory Issuer, the Underwriters and the
Forward Counterparty as follows:

 

(a)           Nuveen shall furnish
to the Mandatory Issuer and each Underwriter, without charge, three signed
copies of the Nuveen Registration Statement (including exhibits thereto and
documents incorporated by reference) and furnish to the Mandatory Issuer and
each Underwriter in New York City, without charge, prior to 10:00 a.m. New
York City time on the business day next succeeding the date of this Agreement
and during the period mentioned in Section 7(c) below, as many copies
of the Nuveen Prospectus, any documents incorporated therein by reference and
any supplements and amendments thereto or to the Nuveen Registration Statement
as the Mandatory Issuer and the Underwriters may reasonably request.

 

(b)           Before amending or
supplementing the Nuveen Registration Statement or the Nuveen Prospectus,
Nuveen shall furnish to the Mandatory Issuer and the Underwriters a copy of
each such proposed amendment or supplement and not to file any such proposed
amendment or supplement to which the Mandatory Issuer and the Underwriters
reasonably object, and to file with the Commission within the applicable period
specified in Rule 424(b) under the Securities Act any prospectus
required to be filed pursuant to such Rule.

 

(c)           If, during such
period after the first date of the public offering of the Securities as in the
opinion of counsel for the Underwriters the Nuveen Prospectus is required by
law to be delivered in connection with sales of Securities by an Underwriter or
dealer, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Nuveen Prospectus in order to make the
statements therein, in the light of the circumstances when the 

 

26

 

Nuveen Prospectus is delivered to a purchaser, not misleading, or if,
in the opinion of counsel for the Mandatory Issuer and the Underwriters, it is
necessary to amend or supplement the Nuveen Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and furnish, at
its own expense, to the Underwriters and to the dealers (whose names and
addresses the Mandatory Issuer and the Underwriters shall furnish to Nuveen) to
which Securities may have been sold by the Mandatory Issuer and the
Underwriters on behalf and to any other dealers upon request, either amendments
or supplements to the Nuveen Prospectus so that the statements in the Nuveen
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Nuveen Prospectus is delivered to a purchaser, be
misleading or so that the Nuveen Prospectus, as amended or supplemented, will
comply with law.

 

(d)           To use reasonable
efforts to qualify the Nuveen Class A Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions as
the Mandatory Issuer and the Underwriters shall reasonably request.

 

(e)           To make generally
available to Nuveen’s security holders and to the Mandatory Issuer and the
Underwriters as soon as practicable an earning statement covering the
twelve-month period ending June 30, 2006 that satisfies the provisions of Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder.

 

8.             Expenses.  Whether or
not the transactions contemplated in the MS Securities Underwriting Agreement
are consummated or the MS Securities Underwriting Agreement and this Agreement
are terminated, St. Paul Travelers agrees to pay or cause to be paid all
expenses incident to the performance of its and Nuveen’s obligations under this
Agreement, including: (i) the fees, disbursements and expenses of Nuveen’s
counsel, Nuveen’s accountants and counsel for the Selling Stockholders in
connection with the registration and delivery of the Nuveen Class A Shares
under the Securities Act and all other fees or expenses in connection with the
preparation and filing of the Nuveen Registration Statement, any Nuveen
preliminary prospectus, the Nuveen Prospectus and amendments and supplements to
any of the foregoing, including all printing costs associated therewith, and
the mailing and delivering of copies thereof to the Underwriters and dealers,
in the quantities hereinabove specified, (ii) the cost of printing or producing
any Blue Sky memorandum in connection with the offer and sale of the Nuveen Class A
Shares under state securities laws and all expenses in connection with the
qualification of the Nuveen Class A Shares to be sold under the MS Forward
Agreement for offer and sale under state securities laws as provided in Section 7(d) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection with such qualification and in connection with
the Blue Sky memorandum, (iii) all costs and expenses incident to listing
the Nuveen Class A Shares on the New York Stock Exchange, (iv) the
cost of printing certificates representing the Nuveen Class A Shares to be
sold under the MS Forward Agreement, (v) the costs 

 

27

 

and charges of any transfer agent, registrar or depositary, (vi) the
costs and expenses of Nuveen relating to investor presentations on any “road
show” undertaken in connection with the marketing of the offering of the
Securities, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of Nuveen, travel and lodging expenses of the representatives
(who, for the avoidance of doubt, shall not include the Underwriters) and
officers of Nuveen and any such consultants, and the cost of any aircraft
chartered in connection with the road show, (vii) the document production
charges and expenses associated with printing this Agreement and (viii) all
other costs and expenses incident to the performance of the obligations of
Nuveen and St. Paul Travelers hereunder for which provision is not otherwise
made in this Section.  It is understood,
however, that except as provided in this Section, Section 9 entitled “Indemnity”
and Section 10 entitled “Contribution”, the Mandatory Issuer, the Forward
Counterparty and the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes payable
on resale of any of the Nuveen Class A Shares by them and any advertising
expenses connected with any offers they may make.

 

The provisions
of this Section shall not supersede or otherwise affect any agreement that
Nuveen and St. Paul Travelers may otherwise have for the allocation of such
expenses among themselves.

 

9.             Indemnity. 
(a) Nuveen agrees to indemnify and hold harmless the Mandatory
Issuer, each Underwriter, each person, if any, who controls the Mandatory
Issuer or any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act and each affiliate of the
Mandatory Issuer or any Underwriter within the meaning of Rule 405 under
the Securities Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim), as incurred, caused by any untrue statement or alleged untrue
statement of a material fact contained in the Nuveen Registration Statement or
any amendment thereof, any Nuveen preliminary prospectus or the Nuveen
Prospectus or any amendment or supplement thereto, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon (i) information
relating to any Underwriter, the Mandatory Issuer or the Forward Counterparty
furnished to Nuveen in writing by such Underwriter, Mandatory Issuer or Forward
Counterparty expressly for use therein, or (ii) the Selling Stockholder
Information; provided, however, that the
foregoing indemnity agreement with respect to any Nuveen preliminary prospectus
shall not inure to the benefit of either Underwriter from whom the person
asserting 

 

28

 

any such losses, claims, damages or liabilities purchased Securities or
Nuveen Class A Shares, or any person controlling such Underwriter or
affiliate of such Underwriter within the meaning of Rule 405 of the
Securities Act, if a copy of the Nuveen Prospectus (as then amended or
supplemented if Nuveen shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Securities or Nuveen Class A
Shares to such person, and if the Nuveen Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities, unless such failure is the result of noncompliance by
Nuveen with Section 7(a) hereof.

 

(b)           St. Paul Travelers
agrees to indemnify and hold harmless the Mandatory Issuer, each Underwriter,
each person, if any, who controls the Mandatory Issuer or any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act and each affiliate of the Mandatory Issuer or any
Underwriter within the meaning of Rule 405 under the Securities Act from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim), as
incurred, caused by any untrue statement or alleged untrue statement of a
material fact contained in the Nuveen Registration Statement or any amendment
thereof, any Nuveen preliminary prospectus or the Nuveen Prospectus or any
amendment or supplement thereto, or caused by any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but only with reference to the
Selling Stockholder Information; provided, however,
that the foregoing indemnity agreement shall not cover any such losses, claims,
damages or liabilities as are caused by any such untrue statement or omission
or alleged untrue statement or omission based upon information relating to any
Underwriter, the Mandatory Issuer or Forward Counterparty furnished to Nuveen
in writing by such Underwriter, the Mandatory Issuer or Forward Counterparty
expressly for use therein; and provided further,
however, that the foregoing indemnity
agreement with respect to any Nuveen preliminary prospectus shall not inure to
the benefit of either Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Securities or Nuveen Class A
Shares, or any person controlling such Underwriter or affiliate of such
Underwriter within the meaning of Rule 405 of the Securities Act, if a
copy of the Nuveen Prospectus (as then amended or supplemented if Nuveen shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Securities or Nuveen Class A Shares to such person, and if the Nuveen
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such losses, claims, damages or liabilities, unless such failure is the
result of noncompliance by Nuveen with Section 7(a) 

 

29

 

hereof.  The liability of St. Paul Travelers under the
indemnity agreement contained in this paragraph shall be limited to an amount
equal to the aggregate purchase price received or to be received by St. Paul
Travelers under the MS Forward Agreement less any commissions paid or payable
under this Agreement.

 

(c)           Each Underwriter
agrees, severally and not jointly, to indemnify and hold harmless the Mandatory
Issuer, Nuveen, St. Paul Travelers, the directors of Nuveen, the officers of
Nuveen who sign the Nuveen Registration Statement, and each person, if any, who
controls the Mandatory Issuer, Nuveen or St. Paul Travelers within the meaning
of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of
a material fact contained in the Nuveen Registration Statement or any amendment
thereof, any Nuveen preliminary prospectus or the Nuveen Prospectus (as amended
or supplemented if Nuveen shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with reference to information relating to such
Underwriter furnished to Nuveen in writing by such Underwriter expressly for
use in the Nuveen Registration Statement, any Nuveen preliminary prospectus,
the Nuveen Prospectus or any amendments or supplements thereto.

 

(d)           In case any
proceeding (including any governmental investigation) shall be instituted
involving any person in respect of which indemnity may be sought pursuant to Section 9(a),
9(b) or 9(c) hereof, such person (the “indemnified party”) shall promptly notify the person against
whom such indemnity may be sought (the “indemnifying
party”) in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding.  In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses of
such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between
them.  It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (i) the fees and expenses of more
than one separate firm (in addition to any local counsel) for all Underwriters
and all persons, if any, who control any Underwriter 

 

30

 

within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act or who are affiliates of any Underwriter within the meaning
of Rule 405 under the Securities Act, (ii) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the
Mandatory Issuer, its directors, and each person, if any, who controls the
Mandatory Issuer within the meaning of either such Section or who are
affiliates of the Mandatory Issuer within the meaning of Rule 405 under
the Securities Act, (iii) the fees and expenses of more than one separate
firm (in addition to any local counsel) for Nuveen, its directors, its officers
who sign the Nuveen Registration Statement and each person, if any, who
controls Nuveen within the meaning of either such Section and (iv) the
fees and expenses of more than one separate firm (in addition to any local
counsel) for St. Paul Travelers and all persons, if any, who control St. Paul
Travelers within the meaning of either such Section, and that all such fees and
expenses shall be reimbursed as they are incurred.  In the case of any such separate firm for the
Mandatory Issuer and such control persons and affiliates of the Mandatory
Issuer, such firm shall be designated in writing by the Mandatory Issuer.  In the case of any such separate firm for the
Underwriters and such control persons and affiliates of any Underwriters, such
firm shall be designated in writing by the Underwriters.  In the case of any such separate firm for
Nuveen, and such directors, officers and control persons of Nuveen, such firm
shall be designated in writing by Nuveen. 
In the case of any such separate firm for St. Paul Travelers and such
control persons of St. Paul Travelers, such firm shall be designated in writing
by St. Paul Travelers.  The indemnifying
party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.  No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is
or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such proceeding.

 

10.           Contribution.  (a) To the extent the indemnification
provided for in Section 9 hereof is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by Nuveen, St. Paul Travelers, the Mandatory
Issuer and the Underwriters, respectively, as set forth in Section 10(b) below,
or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above 

 

31

 

but also the
relative fault of Nuveen, St. Paul Travelers, the Mandatory Issuer and the
Underwriters, respectively, in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations.

 

(b)           For purposes of
determining the relative benefits of Nuveen, St. Paul Travelers, the Mandatory
Issuer and the Underwriters, respectively, the net proceeds from the offering
of the Securities (before deducting expenses) shall be deemed to have been received
by Nuveen and St. Paul Travelers, and the relative benefits of Nuveen and St.
Paul Travelers on the one hand and the Underwriters on the other hand, shall be
in the same respective proportions as the net proceeds from the offering of the
Securities (before deducting expenses) deemed received by Nuveen and St. Paul
Travelers and the total underwriting discounts and commissions received by the
Underwriters (including pursuant to this Agreement), in each case as set forth
in the table on the cover of the Securities Prospectus Supplement (replacing
Nuveen and St. Paul Travelers for the Mandatory Issuer) and including any
discounts received by affiliates of the Underwriters under the Selling
Stockholder Forward Agreements, bear to the aggregate Public Offering Price of
the Securities, and the Mandatory Issuer shall be deemed not to have received
any benefits.

 

(c)           The relative fault
of Nuveen, St. Paul Travelers, the Mandatory Issuer, the Underwriters and the
Forward Counterparty, respectively, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by Nuveen, St. Paul Travelers, the Mandatory Issuer, the
Underwriters or the Forward Counterparty and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.

 

(d)           The Underwriters’
respective obligations to contribute pursuant to this Section 10 are
several in proportion to the aggregate principal
amount of Securities they have purchased under the MS Securities Underwriting
Agreement, and not joint.

 

(e)           The liability of St.
Paul Travelers under the contribution agreement contained in this Section 10
shall be limited to an amount equal to the aggregate purchase price received or
to be received by St. Paul Travelers under the MS Forward Agreement less any
commissions paid or payable under this Agreement; provided
that the liability of the Mandatory Issuer, the Underwriters and the Forward
Counterparty, collectively, under the contribution agreement contained in this Section 10
shall not be increased as a result of this limitation on the liability of St.
Paul Travelers.

 

(f)            Nuveen, St. Paul
Travelers, the Mandatory Issuer and the Underwriters agree that it would not be
just or equitable if contribution pursuant 

 

32

 

to this Section 10
were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in this Section 10.  The amount paid or payable by an indemnified
party as a result of the losses, claims, damages and liabilities referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim.  Notwithstanding the
provisions of this Section 10, the Mandatory Issuer and the Underwriters,
collectively, shall not be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages that the Mandatory Issuer and the Underwriters, collectively, have
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. 
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.

 

(g)           The remedies
provided for in Section 9 and this Section 10 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.

 

11.           Survival.  The indemnity provisions contained in Section 9,
the contribution provisions contained in Section 10, and the
representations, warranties and other statements of Nuveen and St. Paul
Travelers contained in this Agreement shall remain operative and in full force
and effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter, any person controlling
any Underwriter or any affiliate of any Underwriter, the Mandatory Issuer, any
person controlling the Mandatory Issuer or any affiliate of the Mandatory
Issuer, the Forward Counterparty, any person controlling the Forward
Counterparty or any affiliate of the Forward Counterparty, St. Paul Travelers
or any person controlling St. Paul Travelers, or Nuveen, its officers or
directors or any person controlling Nuveen and (c) acceptance of and
payment for any of the Securities.

 

12.           Termination.  This Agreement shall terminate, if after the
execution and delivery of this Agreement and prior to the Closing Date the MS
Securities Underwriting Agreement shall have terminated in accordance with the
termination provisions contained therein prior to the Closing Date.

 

13.           Effectiveness. This Agreement shall become
effective upon the effectiveness of the MS Securities Underwriting Agreement.

 

33

 

14.           Counterparts. This Agreement may be signed
in two or more counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.

 

15.           Applicable Law. This Agreement shall be
governed by and construed in accordance with the internal laws of the State of
New York.

 

16.           Headings. The headings of the sections of
this Agreement have been inserted for convenience of reference only and shall
not be deemed a part of this Agreement.

 

17.           Notices.  All communications hereunder shall
be in writing and effective only upon receipt and if to the Mandatory Issuer
shall be delivered, mailed or sent to Morgan Stanley, 1585 Broadway, New
York, New York 10036, Attention: Treasury; if to the Underwriters shall be
delivered, mailed or sent to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, 4 World Financial Center, New York, New York, 10080, Attention:
Global Origination Counsel, and Morgan Stanley & Co.
Incorporated, 1585 Broadway, New York, New York 10036, Attention:
Syndicate Desk; if to the Forward Counterparty shall be delivered, mailed or
sent to Morgan Stanley, 1585 Broadway, New York, New York 10036; if
to Nuveen shall be delivered, mailed or sent to Nuveen Investments, Inc.,
333 West Wacker Drive, Chicago, Illinois 60606 Attention: Alan G. Berkshire, Esq.;
and if to St. Paul Travelers shall be delivered, mailed or sent to The St. Paul
Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN 55102,
Attention:  Kenneth F. Spence, III.

 

34

 

IN WITNESS WHEREOF, each of the Mandatory Issuer, Nuveen, St. Paul
Travelers, each Underwriter and the Forward Counterparty has caused this Agreement
to be duly executed on its behalf as of the date hereof.

 

 

	
   

  	
  MORGAN STANLEY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Jai Sooklal

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Jai Sooklal

  
	
   

  	
   

  	
  Title:

  	
  Assistant Treasurer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  NUVEEN INVESTMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Alan G. Berkshire

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Alan G. Berkshire

  
	
   

  	
   

  	
  Title:

  	
  Senior Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  THE ST. PAUL TRAVELERS

  COMPANIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Samuel G. Liss

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Samuel G. Liss

  
	
   

  	
   

  	
  Title:

  	
  Executive Vice President

  
					

 

35

 

	
   

  	
  MORGAN STANLEY & CO.

  INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ John Roberts

  	
   

  
	
   

  	
   

  	
  Name:

  	
  John Roberts

  
	
   

  	
   

  	
  Title:

  	
  Managing Director

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  MERRILL LYNCH, PIERCE, FENNER

  & SMITH INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Brian Carroll

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Brian Carroll

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  MORGAN STANLEY & CO.

  INTERNATIONAL LIMITED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Hu, Wei-Chung Bradford

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Hu, Wei-Chung Bradford

  
	
   

  	
   

  	
  Title:

  	
  Managing Director

  
					

 

36Exhibit 10.1

 

 

 

CREDIT AGREEMENT

 

 

 

Dated as of April 6, 2005

 

 

 

by and among

 

 

ARC HOUSING LLC

as a Borrower

 

 

and

 

 

ARC HOUSINGTX LP

as a Borrower

 

 

and

 

 

MERRILL LYNCH MORTGAGE CAPITAL INC.

as the Lender

 

 

 

 

TABLE OF CONTENTS

 

	
   

  	
  ARTICLE I

  	
   

  
	
   

  	
   

  	
   

  
	
  DEFINITIONS AND
  ACCOUNTING MATTERS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 1.01

  	
  Certain
  Defined Terms

  	
   

  
	
  Section 1.02

  	
  Accounting
  Terms and other Definitional Provisions

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE II

  	
   

  
	
   

  	
   

  	
   

  
	
  LOANS, NOTE AND PREPAYMENTS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 2.01

  	
  Loans

  	
   

  
	
  Section 2.02

  	
  Note

  	
   

  
	
  Section 2.03

  	
  Procedure
  for Borrowing

  	
   

  
	
  Section 2.04

  	
  Taxes

  	
   

  
	
  Section 2.05

  	
  Limitation
  on Types of Loans; Illegality

  	
   

  
	
  Section 2.06

  	
  Repayment
  of Loans; Interest

  	
   

  
	
  Section 2.07

  	
  Mandatory
  Prepayments / Maximum Credit Reductions

  	
   

  
	
  Section 2.08

  	
  Optional
  Prepayments

  	
   

  
	
  Section 2.09

  	
  Extension
  of Termination Date

  	
   

  
	
  Section 2.10

  	
  LIBOR
  Rate Lending Unlawful

  	
   

  
	
  Section 2.11

  	
  Deposits
  Unavailable

  	
   

  
	
  Section 2.12

  	
  Increased
  LIBOR Rate Loan Costs, etc.

  	
   

  
	
  Section 2.13

  	
  Replacement Index

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE III

  	
   

  
	
   

  	
   

  	
   

  
	
  PAYMENTS; COMPUTATIONS;
  ETC.

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 3.01

  	
  Payments

  	
   

  
	
  Section 3.02

  	
  Computations

  	
   

  
	
  Section 3.03

  	
  Requirements
  of Law

  	
   

  
	
  Section 3.04

  	
  Non-usage
  Fee

  	
   

  
	
  Section 3.05

  	
  Loan
  Fees

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE IV

  	
   

  
	
   

  	
   

  	
   

  
	
  CONDITIONS PRECEDENT

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 4.01

  	
  Initial
  Loan

  	
   

  
	
  Section 4.02

  	
  Initial
  and Subsequent Loans

  	
   

  

 

i

 

	
   

  	
  ARTICLE V

  	
   

  
	
   

  	
   

  	
   

  
	
  REPRESENTATIONS AND
  WARRANTIES

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 5.01

  	
  Organization, etc.

  	
   

  
	
  Section 5.02

  	
  Due Authorization, Non-Contravention,
  etc.

  	
   

  
	
  Section 5.03

  	
  Government
  Approval, Regulation, etc.

  	
   

  
	
  Section 5.04

  	
  Validity, etc.

  	
   

  
	
  Section 5.05

  	
  Financial Information

  	
   

  
	
  Section 5.06

  	
  Litigation,
  Labor Controversies, etc.

  	
   

  
	
  Section 5.07

  	
  Subsidiaries

  	
   

  
	
  Section 5.08

  	
  Ownership
  of Properties

  	
   

  
	
  Section 5.09

  	
  Taxes

  	
   

  
	
  Section 5.10

  	
  Pension
  and Welfare Plans

  	
   

  
	
  Section 5.11

  	
  Environmental
  Matters

  	
   

  
	
  Section 5.12

  	
  True
  and Complete Disclosure

  	
   

  
	
  Section 5.13

  	
  Margin
  Regulations

  	
   

  
	
  Section 5.14

  	
  Solvency

  	
   

  
	
  Section 5.15

  	
  Anti-Terrorism
  Law

  	
   

  
	
  Section 5.16

  	
  ARC
  Communities

  	
   

  
	
  Section 5.17

  	
  Unit
  Leases

  	
   

  
	
  Section 5.18

  	
  Master
  Leases

  	
   

  
	
  Section 5.19

  	
  Bank
  Accounts

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE VI

  	
   

  
	
   

  	
   

  	
   

  
	
  AFFIRMATIVE COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 6.01

  	
  Financial Information, Collateral
  Reports, etc.

  	
   

  
	
  Section 6.02

  	
  Existence, etc.

  	
   

  
	
  Section 6.03

  	
  Maintenance of Properties

  	
   

  
	
  Section 6.04

  	
  Insurance

  	
   

  
	
  Section 6.05

  	
  Books
  and Records

  	
   

  
	
  Section 6.06

  	
  Environmental
  Law Covenant

  	
   

  
	
  Section 6.07

  	
  Future
  Guarantors, Security, etc.

  	
   

  
	
  Section 6.08

  	
  Required
  Filings

  	
   

  
	
  Section 6.09

  	
  Bank
  Accounts

  	
   

  
	
  Section 6.10

  	
  Withdrawal
  of Funds from the Concentration Account

  	
   

  
	
  Section 6.11

  	
  Notices

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE VII

  	
   

  
	
   

  	
   

  	
   

  
	
  NEGATIVE COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 7.01

  	
  Business
  Activities

  	
   

  
	
  Section 7.02

  	
  Indebtedness

  	
   

  

 

ii

 

	
  Section 7.03

  	
  Limitation on Liens

  	
   

  
	
  Section 7.04

  	
  Limitation on Distributions

  	
   

  
	
  Section 7.05

  	
  Investments

  	
   

  
	
  Section 7.06

  	
  Issuance
  of Capital Stock

  	
   

  
	
  Section 7.07

  	
  Prohibition
  of Fundamental Changes

  	
   

  
	
  Section 7.08

  	
  Permitted
  Dispositions

  	
   

  
	
  Section 7.09

  	
  Transactions
  with Affiliates

  	
   

  
	
  Section 7.10

  	
  Restrictive
  Agreements, etc.

  	
   

  
	
  Section 7.11

  	
  Sale
  and Leaseback

  	
   

  
	
  Section 7.12

  	
  Manager

  	
   

  
	
  Section 7.13

  	
  Anti-Terrorism
  Law; Anti-Money Laundering

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE VIII

  	
   

  
	
   

  	
   

  	
   

  
	
  EVENTS OF DEFAULT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE IX

  	
   

  
	
   

  	
   

  	
   

  
	
  REMEDIES UPON DEFAULT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE X

  	
   

  
	
   

  	
   

  	
   

  
	
  NO DUTY OF LENDER

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE XI

  	
   

  
	
   

  	
   

  	
   

  
	
  MISCELLANEOUS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 11.01

  	
  Waiver

  	
   

  
	
  Section 11.02

  	
  Notices

  	
   

  
	
  Section 11.03

  	
  Indemnification and Expenses

  	
   

  
	
  Section 11.04

  	
  Amendments

  	
   

  
	
  Section 11.05

  	
  Assignments and Participations

  	
   

  
	
  Section 11.06

  	
  Successors and Assigns

  	
   

  
	
  Section 11.07

  	
  Survival

  	
   

  
	
  Section 11.08

  	
  Captions

  	
   

  
	
  Section 11.09

  	
  Execution in Counterparts,
  Effectiveness, etc.

  	
   

  
	
  Section 11.10

  	
  Governing Law

  	
   

  
	
  Section 11.11

  	
  Submission To Jurisdiction; Waivers

  	
   

  
	
  Section 11.12

  	
  WAIVER OF JURY TRIAL

  	
   

  
	
  Section 11.13

  	
  Acknowledgments

  	
   

  
	
  Section 11.14

  	
  Management of Units and Unit Leases

  	
   

  
	
  Section 11.15

  	
  Periodic Due Diligence Review

  	
   

  
	
  Section 11.16

  	
  Set-Off

  	
   

  
	
  Section 11.17

  	
  Guarantee Provisions; Joint and
  Several Liability

  	
   

  

 

iii

 

	
  Section 11.18

  	
  Treatment of Certain Information

  	
   

  
	
  Section 11.19

  	
  Confidentiality

  	
   

  
	
  Section 11.20

  	
  Prescribed Laws

  	
   

  

 

iv

 

	
  SCHEDULES

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SCHEDULE 1

  	
  Filing
  Jurisdictions and Offices

  	
   

  
	
   

  	
  SCHEDULE 2

  	
  Litigation

  	
   

  
	
   

  	
  SCHEDULE 3

  	
  Subsidiaries

  	
   

  
	
   

  	
  SCHEDULE 4

  	
  Environmental Matters

  	
   

  
	
   

  	
  SCHEDULE 5

  	
  ARC Communities; ARC
  Real Estate Subsidiaries; Master Leases

  	
   

  
	
   

  	
  SCHEDULE 6

  	
  Representations and
  Warranties as to Units

  	
   

  
	
   

  	
  SCHEDULE 7

  	
  Representations and
  Warranties as to Unit Leases

  	
   

  
	
   

  	
  SCHEDULE 8

  	
  Corporate Structure

  	
   

  
	
   

  	
  SCHEDULE 9

  	
  Investments

  	
   

  
	
   

  	
  SCHEDULE 10

  	
  Existing Indebtedness

  	
   

  
	
   

  	
  SCHEDULE 11

  	
  Existing Liens

  	
   

  
	
   

  	
  SCHEDULE 12

  	
  Representations and
  Warranties as to Master Leases

  	
   

  
	
   

  	
  SCHEDULE 13

  	
  Bank Accounts

  	
   

  
	
   

  	
  SCHEDULE 14

  	
  CMBS Master
  Lessors

  	
   

  
	
   

  	
  SCHEDULE 15

  	
  ARC Communities
  owned by CMBS Master Lessors

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  EXHIBITS

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  EXHIBIT A

  	
  Form of Promissory Note

  	
   

  
	
   

  	
  EXHIBIT B

  	
  Form of Notice of Borrowing

  	
   

  
	
   

  	
  EXHIBIT C

  	
  Form of Solvency Certificate

  	
   

  
	
   

  	
  EXHIBIT D-1

  	
  Form of Weekly Borrowing Base Report

  	
   

  
	
   

  	
  EXHIBIT D-2

  	
  Form of Monthly Borrowing Base Report

  	
   

  
	
   

  	
  EXHIBIT E-1

  	
  Form of Preliminary Margin Adjustment Certificate

  	
   

  
	
   

  	
  EXHIBIT E-2

  	
  Form of Compliance Certificate

  	
   

  
	
   

  	
  EXHIBIT F

  	
  Form of Custodial Agreement

  	
   

  
	
   

  	
  EXHIBIT G-1

  	
  Form of ARC LP Guarantee

  	
   

  
	
   

  	
  EXHIBIT G-2

  	
  Form of Parent Guarantee

  	
   

  
	
   

  	
  EXHIBIT G-3

  	
  Form of Subsidiary Guarantee

  	
   

  
	
   

  	
  EXHIBIT H-1

  	
  Form of Parent Pledge Agreement

  	
   

  
	
   

  	
  EXHIBIT H-2

  	
  Form of Borrower Pledge and Security Agreement

  	
   

  
	
   

  	
  EXHIBIT H-3

  	
  Form of Subsidiary Pledge and Security Agreement

  	
   

  
	
   

  	
  EXHIBIT I

  	
  Form of Intercompany Subordination Agreement

  	
   

  
	
   

  	
  EXHIBIT J

  	
  Form of Manager Notice and Agreement

  	
   

  
	
   

  	
  EXHIBIT K

  	
  Form of Assignment and Acceptance

  	
   

  
	
   

  	
  EXHIBIT L

  	
  Form of Rent Roll

  	
   

  
	
   

  	
  EXHIBIT M

  	
  Form of Aged Pending Title Report

  	
   

  
	
   

  	
  EXHIBIT N

  	
  Form of Master Lease Estoppel Certificate and
  Agreement

  	
   

  
	
   

  	
  EXHIBIT O-1

  	
  Form of Account Control Agreement (Concentration
  Account)

  	
   

  
	
   

  	
  EXHIBIT O-2

  	
  Form of Account Control Agreement (Operating
  Account)

  	
   

  
	
   

  	
  EXHIBIT O-3

  	
  Form of Account Control Agreement (Feeder Account)

  	
   

  
	
   

  	
  EXHIBIT P

  	
  Form of Section 2.04 Certificate

  	
   

  
					

 

v

 

CREDIT AGREEMENT

 

CREDIT AGREEMENT, dated as of April 6, 2005 (as
amended, restated, supplemented or otherwise modified and in effect from time
to time, this “Agreement”), by and among ARC HOUSING LLC, a Delaware
limited liability company (“Housing LLC”), ARC HOUSINGTX LP, a Delaware
limited partnership (“HousingTX LP”, together with Housing LLC,
collectively, the “Borrowers”, each, a “Borrower”), and MERRILL
LYNCH MORTGAGE CAPITAL INC. (the “Lender”).

 

RECITALS

 

WHEREAS, each Borrower has requested that the Lender
make available from time to time certain loans on a revolving basis to each
Borrower;

 

WHEREAS, the Lender has agreed to make available such
loans to each Borrower upon the terms and subject to the conditions of this
Agreement.

 

NOW, THEREFORE, each Borrower and the Lender hereby
agree, in consideration of the mutual premises and mutual obligations set forth
herein, the receipt and sufficiency of which is hereby acknowledged, as
follows:

 

ARTICLE I

DEFINITIONS AND ACCOUNTING
MATTERS.

 

Section 1.01           Certain
Defined Terms.  As used herein, the
following terms shall have the following meanings (all terms defined in this Section or
in other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):

 

“Accelerated
Amortization Event” shall, on any date of determination, mean the
occurrence of any of the following:

 

(a)           (i)
an amount equal to the Real Estate Net Segment Income for the two (2) Fiscal
Quarters preceding such date of determination shall be less than 90% of (ii) an
amount equal to the Real Estate Net Segment Income for the four (4) Fiscal
Quarters preceding the Fiscal Quarters described in clause (i) above,
divided by two (2);

 

(b)           The
Aggregate ARC Community Occupancy Ratio shall be less than 79.00% at the end of
any Fiscal Quarter of ARC LP; or

 

(c)           The
Interest Coverage Ratio shall be less than 1.25 : 1.00 for any Fiscal
Quarter;

 

provided,
that an Accelerated Amortization Event shall be deemed to be continuing until
(x) the Borrowers shall have delivered financial statements (together with a
Compliance Certificate) to the Lender pursuant to Section 6.01(a)
through (c) for any Fiscal Quarter following the occurrence of an
Accelerated Amortization Event, and (y) the Lender shall have thereupon

 

 

determined that an
Accelerated Amortization Event no longer continues to exist and shall have
promptly so notified the Borrowers.

 

“Account Control
Agreement” shall mean an Account Control Agreement with respect to each
Bank Account, substantially in the form of Exhibits O-1, O-2 and O-3
to this Agreement or in such other form as shall be approved by the Lender, as
the same may be amended, restated, supplemented or otherwise modified and in
effect from time to time.

 

“Additional Fee Letter”
shall mean the confidential fee letter, dated April 6, 2005, among each
Borrower and the Lender, as amended, restated, supplemented or otherwise
modified and in effect from time to time.

 

“Adjusted Eligible Collateral Value” shall
mean, as of any date of determination, the sum of the Value of Eligible Units, plus,
the Value of Eligible Unperfected Units; provided, that the Value of Eligible
Unperfected Units included in the determination of Adjusted Eligible Collateral
Value shall not exceed an amount equal to (i) if such date of determination is
prior to the date that is six (6) months after the Closing Date, the quotient
of the Value of Eligible Units divided by 0.85, minus the Value
of Eligible Units, or (ii) if such date of determination is on or after the
date that is six (6) months after the Closing Date, the quotient of the Value
of Eligible Units divided by 0.90, minus the Value of Eligible
Units.

 

“Affiliate” shall
mean, as to any Person, any other Person (other than a Subsidiary) which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such Person; provided that no Person shall be determined
to be an Affiliate solely on the basis of their status as a REIT
Shareholder.  For purposes of this
definition, “control” of a Person (including, with its correlative meanings, “controlled
by” and “under common control with”) means the power, directly or indirectly,
either to (a) vote 20% or more of the securities having ordinary voting
power for the election of directors of such Person or (b) direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise.

 

“Aggregate ARC
Community Occupancy Ratio” shall mean, on any date of determination, for
ARC and its Subsidiaries, the ratio of (a) occupied Unit Sites to
(b) aggregate Unit Sites.

 

“Aggregate Borrower
Lease Occupancy Ratio” shall mean, on any date of determination, the ratio
of (a) the total leased Units of the Borrowers to (b) the Lease Pool.  For purposes of this definition, “Lease Pool”
shall mean (i) the aggregate number of Units owned by the Borrowers less
(ii) vacant Units owned by the Borrowers with a model year four years or more
prior to the calendar year of the date of determination.

 

“Applicable Law”
shall mean, with respect to any Person, all provisions of statutes, rules,
regulations and orders of governmental bodies or regulatory agencies applicable
to such Person, and all binding orders and decrees of all courts and
arbitrators in proceedings or actions in which the Person in question is a
party or is subject.

 

“Applicable Margin”
shall mean, with respect to all Loans, (a) commencing as of (i) the
Closing Date or (ii) the Applicable Margin Adjustment Date following an
Applicable Margin Increase Event, and for each Fiscal Quarter thereafter until
the occurrence of an Applicable Margin Reduction Event, seven percent (7.00%)
or (b) commencing as of the Applicable Margin Adjustment Date following an
Applicable Margin Reduction Event and for

 

2

 

each Fiscal Quarter thereafter until the occurrence of
an Applicable Margin Increase Event, three and 1⁄4 percent (3.25%).

 

The Applicable Margin
shall be adjusted downward on the Applicable Margin Adjustment Date upon the
delivery of a Preliminary Margin Adjustment Certificate for the prior Fiscal
Quarter; provided, that, as of the date of delivery of such Preliminary
Margin Adjustment Certificate, no Default has occurred or is continuing, provided,
further that in the event (x) the Preliminary Margin Adjustment
Certificate in support of the downward adjustment of the Applicable Margin is
inaccurate or otherwise misleading, as determined by the Lender in its sole
discretion in good faith based upon a review of the Compliance Certificate and
the Borrowers’ financial statements for such Fiscal Quarter upon receipt
thereof, and (y) such downward adjustment in the Applicable Margin would not have
been made had such Compliance Certificate and the Borrowers’ financial
statements for such prior Fiscal Quarter been used to adjust the Applicable
Margin, then each Borrower shall pay to Lender, within five (5) calendar days
of such determination such additional interest on the Loans that would have
been payable hereunder had the Applicable Margin been so adjusted (or not
adjusted) on such basis and the Applicable Margin shall be readjusted in
accordance with such Compliance Certificate as of the prior Applicable Margin
Adjustment Date.

 

“Applicable Margin
Adjustment Date” shall mean the date which is the first Payment Date
following the date on which a Preliminary Margin Adjustment Certificate is
delivered to the Lender pursuant to Section 6.01(c) of this
Agreement.

 

“Applicable Margin
Increase Event” shall mean, as of any date of determination, the failure of
any of the conditions or events set forth in clauses (a) through (c)
of the definition of “Applicable Margin Reduction Event” to exist following the
occurrence of an Applicable Margin Reduction Event.

 

“Applicable Margin
Reduction Event” shall mean, as of any date of determination, the initial
occurrence of each of the following within the same relevant time period (i)
after the Closing Date or (ii) after the occurrence of any Applicable Margin
Increase Event:

 

(a)           with
respect to each applicable period set forth below, ARC LP and its Affiliates
shall have in the aggregate completed sales not less than the corresponding
number of Units for the corresponding period; provided that, to the
extent that the sales of ARC LP or its Affiliates during any period exceeds the
corresponding number of Units to be sold for such period, no amount may be
carried forward to any succeeding period; and provided  further, that
the failure of ARC LP and its Subsidiaries to sell the minimum required Units
in any one period shall not affect the ability of ARC LP and its Affiliates to
sell the minimum number of Units in a later period:

 

	
  Period

  	
   

  	
  Minimum Units

  in Period Sold

  	
   

  
	
  March 1,
  2005 through June 30, 2005

  	
   

  	
  900

  	
   

  
	
  July 1,
  2005 through September 30, 2005

  	
   

  	
  450

  	
   

  
	
  October 1,
  2005 through December 31, 2005

  	
   

  	
  450

  	
   

  
	
  January 1,
  2006 through March 31, 2006

  	
   

  	
  450

  	
   

  

 

3

 

	
  Period

  	
   

  	
  Minimum Units

  in Period Sold

  	
   

  
	
  April 1,
  2006 through June 30, 2006

  	
   

  	
  550

  	
   

  
	
  July 1,
  2006 through September 30, 2006

  	
   

  	
  550

  	
   

  
	
  October 1,
  2006 through December 31, 2006

  	
   

  	
  550

  	
   

  
	
  January 1,
  2007 through Termination Date

  	
   

  	
  550

  	
   

  

 

(b)           commencing
for the Fiscal Quarter ending June 30, 2005, the
Interest Coverage Ratio as of the last day for the preceding Fiscal Quarter
shall not be less than 2.00:1.00.

 

(c)           commencing
as of the Fiscal Quarter ending June 30, 2005, the Aggregate Borrower
Lease Occupancy Ratio as of the last day for the preceding Fiscal Quarter shall
be equal to or greater than 86.00%.

 

“ARC” shall mean
Affordable Residential Communities Inc., a Maryland corporation.

 

“ARC Community”
shall mean any community owned by an Affiliate of ARC which has been designed and
improved with homesites for the placement of Units.

 

“ARC Dealership”
shall mean ARC Dealership, Inc., a Colorado corporation.

 

“ARC Distribution
Requirement” shall mean distributions reasonably necessary for ARC to
maintain its REIT Status and not be subject to corporate level tax based on
income or to excise tax under Section 4981 of the Code.

 

“ARC GP” shall
mean ARC Housing GP, LLC, a Delaware limited
liability company.

 

“ARCHC” shall mean
ARCHC LLC, a Delaware limited liability company.

 

“ARC LP” shall
mean Affordable Residential Communities LP, a Delaware limited partnership.

 

“ARC LP Guarantee”
shall mean the ARC LP Guarantee, dated as of April 6, 2005, executed and
delivered by ARC LP in favor of the Lender, substantially in the form of Exhibit G-1
to this Agreement, as the same may be amended, restated, supplemented or
otherwise modified and in effect from time to time.

 

“ARCMS” shall mean
ARC Management Services, Inc., a Delaware corporation.

 

“Assignment and
Acceptance” shall mean a Lender Assignment Agreement substantially in the
form of Exhibit K to this Agreement.

 

“Bank Account”
shall mean a deposit, custody, money-market or other similar account (whether,
in any case, time or demand or interest or non-interest bearing) maintained by
a Borrower with a financial institution, including without limitation, each
Feeder Account, the Concentration Account, each Operating Account and the
Interest Reserve Account.

 

4

 

“Bankruptcy Code”
shall mean the United States Bankruptcy Code of 1978 as codified under 11
U.S.C. § 101 et  seq., and as from time to time hereafter
amended, and any successor or similar statute.

 

“Borrower” and “Borrowers”
shall have the meaning provided in the introductory  paragraph of
this Agreement.

 

“Borrower Pledge and
Security Agreements” shall mean each Borrower Pledge and Security
Agreement, dated as of April 6, 2005, among each Borrower and the Lender,
substantially in the form of Exhibit H-2 to this Agreement, as the same
may be amended, restated, supplemented or otherwise modified and in effect from
time to time.

 

“Borrowing Base Amount”
shall mean, on any date of determination, an amount equal to fifty-five percent
(55%) (the “BB Factor”) of Adjusted Eligible Collateral Value, as
certified by each Borrower pursuant to Section 4.02(b) and pursuant
to Section 6.01(e) of this Agreement in connection with the
delivery of the applicable Borrowing Base Report; provided that
(x) the “Borrowing Base Amount” shall be adjusted on the date of delivery
of each Borrowing Base Report by reducing the BB Factor in increments of 0.50%
for each one percentage point (rounded up) by which the Default Percentage
exceeds 6.0%.

 

“Borrowing Base ARC
Community” shall have the meaning set forth in Section 4.02(b)
of this Agreement.

 

“Borrowing Base Report”
shall mean the Weekly Borrowing Base Report and Monthly Borrowing Base Report,
as applicable.

 

“Business” shall
have the meaning provided in Section 5.11(b) of this Agreement.

 

“Business Day”
shall mean any day other than (i) a Saturday or Sunday or (ii) a day
on which the New York Stock Exchange, the Federal Reserve Bank of New York or
the Custodian is authorized or obligated by law or executive order to be
closed.

 

“Capital Expenditures”
shall mean, without duplication, for any period, the aggregate amount of
(a) all expenditures of each Borrower and its Subsidiaries for fixed or
capital assets made during such period which, in accordance with GAAP, would be
classified as capital expenditures and (b) Capital Lease Obligations
incurred by each Borrower and its Subsidiaries during such period.

 

“Capital Lease
Obligations” shall mean, for any Person, all obligations of such Person to
pay rent or other amounts under a lease of (or other agreement conveying the right
to use) Property to the extent such obligations are required to be classified
and accounted for as a capital lease on a balance sheet of such Person under
GAAP, and, for purposes of this Agreement, the amount of such obligations shall
be the capitalized amount thereof, determined in accordance with GAAP.

 

“Capital Stock”
shall mean any and all shares, interests, participations or other equivalents
(however designated) of capital stock of a corporation, any and all similar
ownership interests in a Person (other than a corporation) and any and all
warrants or options to purchase any of the foregoing.

 

5

 

“Cash Equivalents”
shall mean cash and (a) direct obligations of, or obligations the
principal of and interest on which are unconditionally guaranteed by, the
United States (or by any agency thereof to the extent such obligations are
backed by the full faith and credit of the United States), in each case
maturing within one (1) year from the date of acquisition thereof,
(b) certificates of deposit and eurodollar time deposits with maturities
of 270 days or less from the date of acquisition and overnight bank deposits of
any commercial bank having capital and surplus in excess of $100,000,000, (c) repurchase obligations of any commercial bank
satisfying the requirements of clause (b) of this definition,
having a term of not more than thirty (30) days with respect to securities
issued or fully guaranteed or insured by the United States Government,
(d) commercial paper of a domestic issuer rated at least A-1 or the
equivalent thereof by S&P or P-1 or the equivalent thereof by Moody’s and
in either case maturing within 90 days after the day of acquisition,
(e) securities with maturities of 270 days or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least
A by S&P or A by Moody’s, (f) securities with maturities of 270 days
or less from the date of acquisition backed by standby letters of credit issued
by any commercial bank satisfying the requirements of clause (b) of
this definition, or (g) shares of money market, mutual or similar funds
which invest exclusively in assets satisfying the requirements of clauses (a)
through (f) of this definition.

 

“Change in Control”
shall mean the failure of (i) ARC at any time to directly or indirectly own
(beneficially and of record on a fully-diluted basis) not less than 75% of the
Capital Stock of ARC LP, (ii) ARC at any time to be the sole general partner of
ARC LP, (iii) ARC LP at any time to directly or indirectly own
beneficially and of record on a fully diluted basis 99% of the outstanding
Capital Stock of each Parent Guarantor, (iv) ARCHC at any time to directly
or indirectly own beneficially and of record on a fully diluted basis 100% of
the outstanding Capital Stock of Housing LLC, or (v) ARC GP and ARCHC,
collectively, at any time to directly own beneficially and of record on a fully
diluted basis 100% of the outstanding Capital Stock of HousingTX LP, in each
case such Capital Stock to be held free and clear of all Liens (other than
Liens granted under any Loan Document).

 

“Chattel Paper
Commitment Documents” shall mean the documents and instruments contemplated
by the Commitment Letter between the Lender and Enspire Finance, LLC entered
into in connection with a proposed amendment to the Chattel Paper Facility.

 

“Chattel Paper
Facility” shall mean that certain Master Repurchase Agreement, dated as of February 18,
2004, between the Lender and Enspire Finance LLC, and all documents executed
and delivered in connection therewith, in each case as the same may be amended,
supplemented, restated, amended and restated or otherwise modified subsequent
to the date hereof.

 

“Certificate
of Title” shall mean, with respect to a Unit, a certificate of title or
other documentation (i) evidencing ownership of such Unit and
(ii) with respect to which, under applicable state law, a security
interest must be indicated on such certificate of title as a condition or
result of the security interest’s obtaining priority over the rights of a lien
creditor with respect to such Unit.

 

6

 

“Closing Date”
shall mean the date upon which the conditions precedent set forth in Section 4.01
and Section 4.02 of this Agreement shall have been satisfied.

 

“Closing Date
Certificate” shall have the meaning set forth in Section 4.01(f)
of this Agreement.

 

“CMBS Master Lessor”
shall mean the Master Lessors which have entered into commercial
mortgage-backed securities transactions with a third-party lenders as listed on
Schedule 14 attached hereto.

 

“Code” shall mean
the Internal Revenue Code of 1986, as amended from time to time.

 

“Collateral” shall
have the meaning provided in the applicable Pledge and Security Agreement.

 

“Combined Interest
Expense” shall mean, for any Fiscal Quarter with respect to the Borrowers,
the amount which, in conformity with GAAP, would be set forth opposite the
caption “interest expense” or any like caption (including without limitation,
imputed interest included in payments under Capital Lease Obligations) on the
combined income statement of the Borrowers for such period excluding the
amortization of any original issue discount and excluding any amortization of
loan origination costs less Combined Interest Income.

 

“Combined Interest
Income” shall mean, for any Fiscal Quarter with respect to the Borrowers,
the amount of interest income of the Borrowers calculated on a combined basis
in accordance with GAAP.

 

“Combined Net Income”
shall mean, for any period, the net income of the Borrowers on a combined basis
as determined in accordance with GAAP.

 

“Combined NOI”
shall mean, for any Fiscal Quarter with respect to the Borrowers on a combined
basis, the sum, without duplication, for such period of (a) Combined Net
Income of the Borrowers for such period, (b) to the extent deducted in
calculating Combined Net Income, the sum of provisions for such period for
(i) income taxes, (ii) Combined Interest Expense, and (iii)
depreciation and amortization expense used in determining such Combined Net
Income, (c)  amounts deducted in accordance with GAAP in respect of other
non-cash expenses in determining such Combined Net Income, (d) to the
extent deducted in determining Combined Net Income, the amount of any aggregate
extraordinary net loss (or minus any extraordinary net gain) (e) to the
extent deducted in determining Combined Net Income, the amount of any aggregate
net loss (or minus the amount of any net gain) during such period arising from
the sale, exchange or other disposition of capital assets by a Borrower, and
(f) to the extent deducted in determining Combined Net Income, general and
administration expenses and management fees not to exceed five percent (5.0%)
of Combined Revenues.

 

“Combined Revenues”
shall mean, for any Fiscal Quarter with respect to the Borrowers, the amount of
revenues calculated on a combined basis in accordance with GAAP.

 

“Compliance
Certificate” shall mean a certificate duly completed and executed by a
Responsible Officer of each Borrower, substantially in the form of Exhibit
E-2 to the Agreement or as otherwise approved by the Lender, together with
such modifications thereto as

 

7

 

the Lender may make from time to time for the purpose
of monitoring such Borrower’s compliance with the financial covenants contained
herein.

 

“Concentration Account”
shall mean the Bank Account of the Borrowers into which fund are transferred
from the Feeder Account.

 

“Confidential
Information” shall mean information concerning the Borrowers, their
subsidiaries or their Affiliates which is non-public, confidential or
proprietary in nature, or any information that is identified to the Lender as
confidential by or on behalf of the Borrowers, which is furnished to the Lender
by the Borrowers or any of their Affiliates in connection with this Agreement
or the transactions contemplated hereby (at any time on, before or after the
date hereof), together with all analyses, compilations or other materials
prepared by the Lender or its respective directors, officers, employees,
agents, auditors, attorneys, consultants or advisors which contain or otherwise
reflect such information.

 

“Contingent Liability”
shall mean any agreement, undertaking or arrangement by which any Person
guarantees, endorses or otherwise becomes or is contingently liable upon (by
direct or indirect agreement, contingent or otherwise, to provide funds for
payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise
to assure a creditor against loss) the Indebtedness of any other Person (other
than by endorsements of instruments in the course of collection), or guarantees
the payment of dividends or other distributions upon the Capital Stock of any
other Person.  The amount of any Person’s
obligation under any Contingent Liability shall (subject to any limitation set
forth therein) be deemed to be the outstanding principal amount of the debt,
obligation or other liability guaranteed thereby.

 

“Costs” shall have
the meaning set forth in Section 11.03(a) of this Agreement.

 

“Custodial Agreement”
shall mean the Custodial Agreement, dated as of March 31, 2005, by and
among each Borrower, the Custodian and the Lender, substantially in the form of
Exhibit F to this Agreement, as amended, restated, supplemented or
otherwise modified and in effect from time to time.

 

“Custodian” shall
mean Wells Fargo Bank, National Association, as custodian under the Custodial
Agreement, and its successors and permitted assigns thereunder.

 

“Default” shall
mean an Event of Default or an event that with notice or lapse of time or both
would become an Event of Default.

 

“Defaulted Percentage”
shall mean the percentage equal to the amount of Defaulted Unit Lease Payments,
divided  by the gross amount charged for all Unit Leases on a
monthly basis.

 

“Defaulted Unit Lease
Payments” shall mean, as of any date of determination, payments due
pursuant to the Unit Leases that are more than sixty (60) days past due.

 

“Discretionary Capital
Expenditures” shall mean all Capital Expenditures of the Borrowers and
their Subsidiaries, excluding (i) purchases of Units and Unit Set Costs and
(ii) other Capital Expenditures not related to the maintenance,
preservation and repair of its and their respective Properties (including the
Units).

 

8

 

“Disposition” or “Dispose”
shall mean any sale, transfer, lease, contribution or other conveyance
(including by way of merger) of, or the granting of options, warrants or other
rights to, any of the Borrowers’ or their Subsidiaries’ assets (including
accounts receivable and Capital Stock of Subsidiaries) to any other Person
(other than to another Obligor) in a single transaction or series of transactions.

 

“Dollars” and “$”
shall mean lawful money of the United States of America.

 

“Draw Date” shall
mean, during any weekly period measured from Thursday through Wednesday, any
two (2) Business Days designated by the Borrowers from time to time as Funding
Dates (one of which may be a Payment Date).

 

“Due Diligence Review”
shall mean the performance by the Lender of any or all of the reviews permitted
under Section 11.15 of this Agreement with respect to any or all of
the Collateral, as desired by the Lender from time to time.

 

“Effective Date”
shall mean the date this Agreement becomes effective pursuant to Section 11.09
of this Agreement.

 

“Eligible Unit”
shall mean, with respect to each Borrower, at the time of any determination
thereof, a Unit as to which each of the following requirements is satisfied:

 

(a)           such
Unit is owned by a Borrower;

 

(b)           such
Unit is located on an ARC Community;

 

(c)           the Lender has a first-priority perfected
Lien in such Unit; provided, that, in the case of a Unit for which the
Certificate of Title does not reflect the Lien of the Lender on the face of
such Certificate of Title, such “Lien” shall be deemed to be a first priority,
perfected Lien for purposes of this subparagraph (c) three (3) Business
Days after the dispatch of the related Transmittal Package by the Custodian to
the applicable Registry Office via overnight mail for such notation of the
Lender’s Lien (unless otherwise consented to by the Lender).

 

(d)           ownership of such Unit is evidenced by a
Certificate of Title or is represented by an MSO that has been submitted to the
applicable Registry Office for the issuance of a Certificate of Title naming a
Borrower as owner and the Lender as first lien holder; and

 

(e)           the
representations and warranties on Schedule 6 to this Agreement are
true and correct as to such Unit in all material respects.

 

“Eligible Unperfected
Units” shall mean “Eligible Units” as to which clauses (c) and (d)
of the definition of “Eligible Units” and clause (c) of Schedule 6
(Representations and Warranties As To Units) have not been satisfied.

 

“Environmental Laws”
shall mean any and all foreign, Federal, state, local or municipal laws, rules,
orders, regulations, statutes, ordinances, codes, decrees, judicially
enforceable requirements of any Governmental Authority or other Requirements of
Law (including common law) regulating, relating to or imposing liability or
standards of conduct concerning protection of human health or the environment,
as now or may at any time hereafter be in effect.

 

9

 

“ERISA” shall mean
the Employee Retirement Income Security Act of 1974, as amended from time to
time.

 

“ERISA Affiliate”
shall mean any corporation or trade or business that is a member of any group
of organizations (i) described in Section 414(b) or (c) of the Code
of which a Borrower is a member and (ii) solely for purposes of potential
liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which a
Borrower is a member.

 

“Excluded Taxes”
shall have the meaning provided in Section 2.04(f) of this
Agreement.

 

“Executive Order”
shall mean Executive Order No. 13224 on Terrorist Financing, effective September 24,
2001, and relating to Blocking Property and Prohibiting Transactions with
Persons Who Commit, Threaten to Commit, or Support Terrorism.

 

“Event of Default”
shall have the meaning provided in Article VIII of this Agreement.

 

“Facilities” shall
have the meaning provided in Section 5.11(a) of this Agreement.

 

“Federal Funds Rate”
shall mean, for any day, the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published on the next succeeding Business Day by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for the day of such
transactions received by the Lender from three federal funds brokers of
recognized standing selected by it.

 

“Feeder Account”
shall mean a Bank Account into which collections of Unit Lease Receivables are
deposited.

 

“Fee Letter” shall
mean the confidential fee letter, dated March 11, 2005, among each
Borrower and the Lender, as amended, restated, supplemented or otherwise
modified and in effect from time to time.

 

“Fiscal Quarter”
shall mean a quarter ending on the last day of March, June, September or
December.

 

“Fiscal Year”
shall mean any period of twelve consecutive calendar months ending on December 31.

 

“Funding Date”
shall mean the date on which a Loan is made hereunder on a Draw Date.

 

“GAAP” shall mean
generally accepted accounting principles as in effect from time to time in the
United States.

 

“Governmental
Authority” shall mean any nation or government, any state or other
political subdivision, agency or instrumentality thereof, any entity exercising
executive,

 

10

 

legislative, judicial, regulatory or administrative
functions of or pertaining to government and any court or arbitrator having
jurisdiction over any Borrower, any of its Subsidiaries or any of its
properties.

 

“Guarantee” or “Guarantees”
shall mean, individually or collectively, each Parent Guarantee, each
Subsidiary Guarantee and the ARC LP Guarantee.

 

“Guarantor” shall
mean each Parent Guarantor or Subsidiary Guarantor, as the case may be.

 

“Hedging Obligations”
shall mean, with respect to any Person, all liabilities of such Person under
currency exchange agreements, interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and all other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency exchange rates.

 

“Housing LLC”
shall have the meaning set forth in the introductory paragraph to this
Agreement.

 

“HousingTX LP”
shall have the meaning set forth in the introductory paragraph to this
Agreement.

 

“Impermissible
Qualification” shall mean any qualification or exception to the opinion or
certification of any independent public accountant as to any financial
statement of each Borrower,

 

(a)           which
is of a “going concern” or similar nature;

 

(b)           which
relates to the limited scope of examination of matters relevant to such
financial statement; or

 

(c)           which
relates to the treatment or classification of any item in such financial
statement and which, as a condition to its removal, would require an adjustment
to such item the effect of which would be to cause such Borrower to be in
Default.

 

“Indebtedness”
shall mean, for any Person without duplication: 
(a) obligations created, issued or incurred by such Person for
borrowed money (whether by loan, the issuance and sale of debt securities or
obligations of such Person under conditional sale or other repurchase agreement
relating to property acquired by such Person; (b) obligations of such
Person to pay the deferred purchase or acquisition price of Property or services,
other than trade accounts payable (other than for borrowed money) arising, and
accrued expenses incurred, in the ordinary course of business so long as such
trade accounts payable are payable within ninety (90) days after the date the
respective goods are delivered or the respective services are rendered;
(c) Indebtedness of others secured by a Lien on the Property of such
Person, whether or not the respective Indebtedness so secured has been assumed
by such Person; provided, that such Indebtedness shall be deemed to not
exceed the fair market value of such Property to the extent such Indebtedness
is Non-Recourse to any other assets of the applicable Borrower, Guarantor or
grantor other than the Property; (d) obligations (contingent or otherwise)
of such Person in respect of letters of credit or similar instruments issued or
accepted by banks and other financial institutions for account of such Person;
(e) Capital Lease Obligations of such Person; (f) obligations of such
Person under repurchase agreements, sale/buy-back agreements or like

 

11

 

arrangements; (g) Hedging Obligations; provided
that, the amount of Indebtedness in respect of Hedging Obligations shall be
adjusted to reflect the effect of any enforceable netting arrangements and
(h) Contingent Liabilities.  The
Indebtedness of any Person shall include the Indebtedness of any other Person
(including any partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such Person’s ownership
interest in or other relationship with such Person, except to the extent the
terms of such Indebtedness provide that such Person is not liable therefor.

 

“Indemnified Party”
shall have the meaning set forth in Section 11.03(a) of this
Agreement.

 

“Intercompany
Subordination Agreement” shall mean the Intercompany Subordination
Agreement, dated as of April 6, 2005, by and among each Borrower, the
Lender and each other designated Affiliate of such Borrower, substantially in
the form of Exhibit I to this Agreement, as amended, restated,
supplemented or otherwise modified and in effect from time to time.

 

“Interest Coverage
Ratio” shall mean, on any date of determination, the ratio of (a) Combined
NOI to (b) Combined Interest Expense.

 

“Interest Period”
shall mean, with respect to any Loan, (a) initially, the period commencing
on the Funding Date to but excluding the first Payment Date; and
(b) thereafter, each period commencing on a Payment Date to but excluding
the next Payment Date.  Notwithstanding
the foregoing, no Interest Period may end after the Termination Date.

 

“Interest Reserve
Account” shall mean a Bank Account in which the Interest Reserve Amount is
held.

 

“Interest Reserve
Amount” shall have the meaning assigned to such term in Section 6.09(e)
of this Agreement.

 

“Investment” shall
mean, relative to any Person,

 

(a)           any
loan, advance or extension of credit made by such Person to any other Person,
including the purchase by such Person of any bonds, notes, debentures or other
debt securities of any other Person;

 

(b)           Contingent
Liabilities in favor of any other Person; and

 

(c)           any
Capital Stock or other investment held by such Person in any other Person.

 

“Lender” shall
have the meaning provided in the introductory paragraph to this
Agreement and any assigns or successors in interest.

 

“LIBOR Rate” shall
mean, with respect to each day a Loan is outstanding, the rate per annum equal
to the rate appearing on the display designated as “BBAM” on Bloomberg (or such
other page as may replace “BBAM” on Bloomberg) as one-month LIBOR on the
previous Payment Date.

 

12

 

“LIBOR Reserve
Percentage” shall mean, relative to any Interest Period for Loans, the
reserve percentage (expressed as a decimal) equal to the maximum aggregate
reserve requirements (including all basic, emergency, supplemental, marginal
and other reserves and taking into account any transitional adjustments or
other scheduled changes in reserve requirements) specified under regulations
issued from time to time by the F.R.S. Board and then applicable to assets or
liabilities consisting of or including “Eurocurrency Liabilities”, as currently
defined in Regulation D of the F.R.S. Board, having a term approximately equal
or comparable to such Interest Period.

 

“Lien” shall mean
any mortgage, lien, pledge, charge, security interest or similar encumbrance.

 

“Loan” and “Loans”
shall have the meaning provided in Section 2.01(a) of this
Agreement.

 

“Loan Documents”
shall mean, collectively, this Agreement, the Note, each Notice of Borrowing,
each Borrower Pledge and Security Agreement, the Parent Pledge Agreement, each
Subsidiary Pledge and Security Agreement, each Parent Guarantee, each
Subsidiary Guarantee, the ARC LP Guarantee, the Custodial Agreement, the
Solvency Certificate, the Fee Letter, the Additional Fee Letter and each other
agreement, certificate, document or instrument delivered in connection with any
of the foregoing whether or not specifically mentioned herein or therein in
each case as amended, restated, supplemented or otherwise modified and in
effect from time to time.

 

“Manager” shall
have the meaning provided in Section 11.14(b) of this Agreement.

 

“Manager Notice and
Agreement” shall mean the Manager Notice and Agreement delivered by each
Borrower to the Lender pursuant to Section 4.01(d) of this
Agreement, in each case substantially in the form of Exhibit J to this
Agreement.

 

“Management Agreement”
shall mean, collectively, each of (i) that certain Property & Asset
Management Agreement, dated as of February 16, 2004, between HousingTX LP
and ARCMS, and (ii) that certain Property & Asset Management Agreement,
dated as of December 31, 2002, between Housing LLC and ARCMS, and any such
replacement management agreement.

 

“Management Records”
shall mean any and all management agreements, files, documents, records, data
bases, computer tapes, insurance policies, proof of insurance coverage, payment
history records, and other records or documents relating to or evidencing the
management of the Units and the Unit Leases.

 

“Master
Lease” shall mean a prime lease between any Subsidiary of ARC, as lessor,
and a Borrower, as lessee, with respect to an ARC Community.

 

“Master
Lessor” shall mean each Subsidiary of ARC that is party to a Master Lease
as lessor.

 

“Master
Lease Estoppel Certificate and Agreement” shall mean,
with respect to each Master Lease, an Estoppel Certificate and Agreement, dated
as of the Closing Date hereof,

 

13

 

made by any Subsidiary of ARC in favor of the
Lender, substantially in the form of Exhibit N to this Agreement, as the
same may be amended, restated, supplemented, or otherwise modified and in
effect from time to time.

 

“Material Adverse Effect”
shall mean a material adverse effect on (a) the business, assets,
liabilities (actual or contingent), operations or condition (financial or
otherwise) of any Borrower or the Borrowers and any other Obligor taken as a
whole, (b) the ability of any Borrower or the Borrowers and any other
Obligor taken as a whole to perform its material obligations under any of the
Loan Documents to which it is a party, (c) the validity or enforceability
of any of the Loan Documents, (d) the rights and remedies of the Lender
under any of the Loan Documents or (e) the Collateral taken as a whole.

 

“Materials of
Environmental Concern” shall mean any gasoline or petroleum (including
crude oil or any fraction thereof) or petroleum products or any hazardous or
toxic substances, materials or wastes, defined or regulated as such in or
under, or which form the basis of liability under, any Environmental Law,
including, without limitation, asbestos, polychlorinated biphenyls and urea
formaldehyde insulation, medical waste, radioactive materials and
electromagnetic fields.

 

“Maximum Credit”
shall mean for each period set forth below, the lesser of (a) the
Borrowing Base, and (b) the amount set forth in the table below opposite
such period; provided that, on any date of determination, in the event
the sum of outstanding Loans under this Agreement and the Chattel Paper
Facility exceeds $200,000,000 in the aggregate, the Maximum Credit shall be
reduced by the difference between such aggregate outstanding balance and
$200,000,000.

 

	
  Period

  	
   

  	
  Maximum Credit

  	
   

  
	
  Closing Date
  through June 30, 2005

  	
   

  	
  $

  	
  75,000,000

  	
   

  
	
  July 1,
  2005 through September 30, 2005

  	
   

  	
  $

  	
  72,000,000

  	
   

  
	
  October 1,
  2005 through December 31, 2005

  	
   

  	
  $

  	
  69,000,000

  	
   

  
	
  January 1,
  2006 through March 31, 2006

  	
   

  	
  $

  	
  66,000,000

  	
   

  
	
  April 1,
  2006 through June 30, 2006

  	
   

  	
  $

  	
  63,000,000

  	
   

  
	
  July 1,
  2006 through September 30, 2006

  	
   

  	
  $

  	
  60,000,000

  	
   

  
	
  October 1,
  2006 through December 31, 2006

  	
   

  	
  $

  	
  57,000,000

  	
   

  
	
  January 1,
  2007 through Termination Date

  	
   

  	
  $

  	
  54,000,000

  	
   

  

 

“ML Indebtedness”
shall mean any Indebtedness of the Borrowers hereunder and under any other
arrangement between any Borrower on the one hand and the Lender or an Affiliate
of the Lender on the other hand.

 

“Monthly Borrowing
Base Report” shall mean a certificate duly completed and executed by the
treasurer, assistant treasurer, chief accounting or other Responsible Officer
of each Borrower which is delivered to the Lender each Wednesday following each
Payment Date, substantially in the form of Exhibit D-2 to this
Agreement.

 

“Moody’s” shall
mean Moody’s Investors Service, Inc.

 

“MSO” shall mean a
manufacturer’s statement of origin, manufacturer’s certificate of origin, or
similar instrument, (i) evidencing ownership of a Unit and (ii) which, in

 

14

 

connection with a sale of such Unit, under applicable
state law, is issued in connection with the initial sale of a manufactured home
to a dealer and must be submitted by a dealer to a Registry Office for the
issuance of a Certificate of Title to the purchaser of a manufactured home from
a dealer.

 

“Multiemployer Plan”
shall mean a multiemployer plan defined as such in Section 3(37) of ERISA
to which, since January 1, 2000, contributions have been or are required
to be made by any Borrower or any ERISA Affiliate and that is covered by Title
IV of ERISA.

 

“Net Book Value”
shall mean, with respect to each Eligible Unit and related Unit Set Costs, the
net book value of such Eligible Unit and related Unit Set Costs determined in
accordance with GAAP; provided that the Net Book Value of an Eligible
Unit shall be adjusted, as the case may be, upon ten (10) calendar days prior
written notice from the Lender, to reflect the age, type, and location of such
Eligible Unit and to give effect to the application of such other criteria from
time to time as may be established by the Lender in the exercise of its
reasonable credit judgment.

 

“1934 Act” shall
mean the Securities and Exchange Act of 1934, as amended.

 

“Non-Excluded Taxes”
shall have the meaning provided in Section 2.04(b) of this
Agreement.

 

“Non-Exempt Lender”
shall have the meaning provided in Section 2.04(f) of this
Agreement.

 

“Non-Master
Lessor Subsidiary” shall mean any Non-Recourse Subsidiary of ARC LP which
is not a Master Lessor.

 

Non-Recourse” or “non-recourse”
shall mean with reference to any obligation or liability, any obligation or
liability for which none of the Affiliates of the obligor thereunder is liable
or obligated, subject to such limited exceptions to the non-recourse nature of
such obligation or liability, such as fraud, misappropriation, misapplication
and environmental indemnities, as are usual and customary in like transactions
involving institutional lenders at the time of such obligation or liability.

 

“Non-Recourse
Subsidiary” shall mean any Subsidiary of ARC LP that is subject to no
Indebtedness other than Non-Recourse Indebtedness.

 

“Note” shall mean
the promissory note delivered by the Borrowers payable to the Lender,
substantially in the form of Exhibit A to this Agreement (as such
promissory note may be amended, endorsed or otherwise modified from time to
time in accordance with the terms hereof and thereof), evidencing the
outstanding Indebtedness of the Borrowers to the Lender in an amount equal to
the Maximum Credit in effect on the Closing Date, and also means all other
promissory notes accepted from time to time in substitution therefor or renewal
thereof.

 

“Notice of Borrowing”
shall mean a loan request and certificate duly executed by a Responsible
Officer of each Borrower, substantially in the form of Exhibit B to this
Agreement.

 

15

 

“Obligations”
shall mean all obligations (monetary or otherwise, whether absolute or
contingent, matured or unmatured) of any Borrower and each other Obligor
arising under or in connection with a Loan Document, including the principal of
and premium, if any, and interest on the Loans.

 

“Obligor” shall
mean, as the context may require, each Borrower, each Parent Guarantor, each
Subsidiary Guarantor, ARC LP and each other Person (other than the Lender or
any Person that is not an Affiliate of ARC) obligated under any Loan Document.

 

“Operating Accounts”
shall mean the Bank Accounts from which the Borrowers pay all expenses of the
Borrowers.

 

“Operating Expenses”
shall mean, for any period of determination, the aggregate amount of
expenditures of the Borrowers and their Subsidiaries attributable to
professional services, insurance expenses, utility expenses, real estate taxes,
general and administrative expenses and other expenditures not capitalized in
accordance with GAAP.

 

“Organic Document”
shall mean, relative to any Obligor and, in respect of Sections 4.01(a)
and 5.02, any Master Lessor, its certificate of incorporation, by laws,
certificate of partnership, partnership agreement, certificate of formation,
limited liability agreement, operating agreement and all shareholder
agreements, voting trusts and similar arrangements applicable to any of such
Obligor’s partnership interests, limited liability company interests or
authorized shares of Capital Stock.

 

“Other Taxes”
shall have the meaning provided in Section 2.04(c) of this
Agreement.

 

“Parent Guarantee”
shall mean, each Parent Guarantee, dated as of April 6, 2005, executed and
delivered by each Parent Guarantor in favor of the Lender, substantially in the
form of Exhibit G-2 to this Agreement, as the same may be amended,
restated, supplemented, or otherwise modified and in effect from time to time.

 

“Parent Guarantor”
shall mean each of ARCHC and ARC GP.

 

“Parent Pledge
Agreement” shall mean the Parent Pledge Agreement, dated as of April 6,
2005, between the Parent Guarantors and the Lender, substantially in the form
of Exhibit H-1 to this Agreement, as the same may be amended, restated,
supplemented, or otherwise modified and in effect from time to time.

 

“Payment Date”
shall mean, with respect to the Loans, the tenth (10th) day of each
calendar month, commencing with the first such date after the related Funding
Date; provided that if the Payment Date for any calendar month would
otherwise fall on a day that is not a Business Day, the Payment Date for such
calendar month shall be the next succeeding Business Day.

 

“PBGC” shall mean
the Pension Benefit Guaranty Corporation or any entity succeeding to any or all
of its functions under ERISA.

 

“Pension Plan”
shall mean a “pension plan”, as such term is defined in Section 3(2) of
ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Plan),

 

16

 

and to which any Borrower or ERISA Affiliate of any
Borrower, may have liability, including any liability by reason of having been
a substantial employer within the meaning of Section 4063 of ERISA at any
time during the preceding five years, or by reason of being deemed to be a
contributing sponsor under Section 4069 of ERISA.

 

“Permitted Affiliate
Transaction” shall mean any of the following:

 

(a)           a
Permitted ARC Disposition; or

 

(b)           any
other arrangement, transaction or contract otherwise permitted under this
Agreement.

 

“Permitted ARC
Disposition” shall mean a Disposition by any Borrower to ARC Dealership of
Units constituting Eligible Units in which the following conditions are
satisfied:

 

(a)           immediately
before and after giving effect to such Disposition, no Default shall have
occurred and be continuing or would result therefrom; and

 

(b)           the
applicable Borrower shall have delivered to the Lender the documentation
relating to such Permitted ARC Disposition at least two (2) Business Days prior
to its consummation, such documentation to be reasonably satisfactory in form
and substance to the Lender and to be accompanied by all customary requirements
(unless otherwise consented to by the Lender).

 

“Permitted
Consolidation” shall mean the liquidation, dissolution of, or merger of,
any Subsidiary with and into any Borrower or any other Subsidiary (provided,
however, that a Guarantor may only liquidate or dissolve into, or merge
with and into, such Borrower or another Guarantor), and the assets or Capital
Stock of any Subsidiary may be purchased or otherwise acquired by any Borrower
or any other Subsidiary (provided, however, that the assets or
Capital Stock of any Guarantor may only be purchased or otherwise acquired by
such Borrower or another Guarantor); provided, further, that in
no event shall any Pledged Subsidiary consolidate with or merge with and into
any Subsidiary other than another Pledged Subsidiary unless after giving effect
thereto, the Lender shall have a perfected pledge of, and security interest in
and to, at least the same percentage of the issued and outstanding interests of
Capital Stock (on a fully diluted basis) of the surviving Person as the Lender
had immediately prior to such merger or consolidation in form and substance
satisfactory to the Lender and its counsel, pursuant to such documentation and
opinions as shall be necessary in the opinion of the Lender to create, perfect
or maintain the collateral position of the Lender therein.

 

“Permitted
Dispositions” shall mean any of the following:

 

(a)           a
Permitted ARC Disposition;

 

(b)           Dispositions
constituting Permitted Liens;

 

(c)           Dispositions
permitted by Section 7.08 of this Agreement;

 

(d)           Disposition
of non-economical, surplus, obsolete or worn-out assets in the ordinary course
of business and consistent with past practices;

 

17

 

(e)           Disposition
of any inventory, equipment or supplies not constituting Eligible Units in the
ordinary course of business and consistent with past practices;

 

(f)            Disposition
of Cash Equivalents permitted under Section 7.05 of this Agreement;

 

(g)           Dispositions
by way of sale or factoring arrangement of Unit Lease Receivables (i) which
have been delinquent by a period greater than 180 days and (ii) as to which efforts
to collect the Indebtedness represented by such Unit Lease Receivables have
been commenced prior to such sale or factoring arrangement; and

 

(h)           Dispositions
among the Borrowers not otherwise prohibited by Section 7.11 of
this Agreement.

 

“Permitted Indebtedness”
shall mean any of the following:

 

(a)           Indebtedness
in respect of the Obligations;

 

(b)           Indebtedness
existing as of the Closing Date which is identified in Schedule 10
to this Agreement, and the refinancing of such Indebtedness; provided,
that, (x) the principal amount (as such amount may have been reduced following
the Closing Date) thereof is not increased, (y) the maturity date thereof is
not shortened, and (z) the material terms thereof are not materially more
onerous on the Borrowers than the terms contained in the Indebtedness being
refinanced;

 

(c)           unsecured
Indebtedness of any Guarantor owing to any Borrower or any other Guarantor,

 

(i)            which
Indebtedness shall not be forgiven or otherwise discharged for any
consideration other than payment in full or in part in cash (provided,
that only the amount repaid in part shall be discharged); and

 

(ii)           to
the extent such Indebtedness is payable to such Borrower or a Guarantor and
evidenced by one or more promissory notes, any such promissory notes shall be
delivered in pledge to the Lender pursuant to a Loan Document;

 

(d)           unsecured
Indebtedness (not evidenced by a note or other instrument) of any Borrower
owing to ARC or any of its Subsidiaries that has previously executed and
delivered to the Lender the Intercompany Subordination Agreement,

 

(e)           Indebtedness
incurred in connection with the honoring by a bank or other financial
institution of a check or other negotiable instrument (pursuant to Article 3
of the UCC) against insufficient funds in the ordinary course of business in an
amount not to exceed $5,000;

 

(f)            Indebtedness
in respect of performance, surety or appeal bonds in respect of Unit Leases in
the ordinary course of business consistent with past practices; and

 

(g)           Contingent
Liabilities otherwise permitted as Indebtedness pursuant to the definition of “Permitted
Indebtedness.”

 

18

 

“Permitted Investments”
shall mean any of the following:

 

(a)           Investments
existing on the Closing Date and identified in Schedule 9 to this
Agreement;

 

(b)           Cash
Equivalents;

 

(c)           Investments
by way of contributions to capital or purchases of Capital Stock by any
Borrower in any Guarantor or by any Guarantor in any Borrower or any other
Guarantor; or

 

(d)           Investments
constituting Permitted Indebtedness;

 

provided, however, that

 

(i)            any
Investment which when made complies with the requirements of the definition of
the term “Cash Equivalents” may continue to be held notwithstanding that such
Investment if made thereafter would not comply with such requirements; and

 

(ii)           no
Investment otherwise permitted by clause (c) of this definition shall be
permitted to be made if any Default has occurred and is continuing or would
result therefrom.

 

“Permitted Liens”
shall mean any of the following:

 

(a)           Liens
securing payment of the Obligations;

 

(b)           (i)
Liens existing on the Closing Date and disclosed Schedule 11 and
securing Indebtedness described in clause (b) of definition of “Permitted
Indebtedness” and (ii) Liens securing any extension, renewal or replacement of
any obligations secured by any such Lien; provided, that (x) in respect of
Liens permitted pursuant to clause (b)(i) of this definition, no such
Lien shall encumber any additional property and the amount of Indebtedness
secured by such Lien is not increased from that existing on the Closing Date,
and (y) in respect of Liens permitted pursuant to clause (b)(ii) of this
definition, such Lien shall only cover the same assets which originally secured
the obligations being extended, renewed or replaced;

 

(c)           Liens
in favor of carriers, warehousemen, mechanics, materialmen, lessors of personal
property and landlords granted or arising in the ordinary course of business or
as a matter of law for amounts not overdue or being diligently contested in
good faith by appropriate proceedings and for which adequate reserves in
accordance with GAAP shall have been set aside on its books;

 

(d)           Liens
incurred or deposits made in the ordinary course of business in connection with
worker’s compensation, unemployment insurance or other forms of governmental
insurance or benefits;

 

(e)           judgment
Liens which do not otherwise result in an Event of Default under Article VIII(g)
of this Agreement;

 

19

 

(f)            easements,
rights-of-way and zoning restrictions;

 

(g)           Liens
constituting Permitted Dispositions; or

 

(h)           Liens
for Taxes not yet due or payable that are being diligently contested in good
faith by appropriate proceedings and for which adequate reserves in accordance
with GAAP shall have been set aside on its books.

 

“Permitted Net
Disposition Proceeds” shall mean, with respect to any Permitted
Disposition, the excess of:

 

(a)           the gross cash
proceeds received by each Borrower from any such Permitted Disposition and any
cash payments received in respect of promissory notes or other non-cash
consideration delivered to such Borrower in respect thereof,

 

less

 

(b)           the
sum (without duplication) of (i) all reasonable and customary fees and expenses
with respect to legal, investment banking, brokerage, accounting and other
professional fees, sales commissions and disbursements and all other reasonable
fees, expenses and charges, in each case actually incurred in connection with
such Permitted Disposition, (ii) all taxes and other governmental costs and
expenses actually paid or estimated by such Borrower (in good faith) to be
payable in cash in connection with such Permitted Disposition, and (iii)
payments made by such Borrower to retire Indebtedness (other than the Loans) of
such Borrower where payment of such Indebtedness is required in connection with
such Permitted Disposition;

 

provided, however, that if,
after the payment of all taxes with respect to such Permitted Disposition, the
amount of estimated taxes, if any, pursuant to clause (b)(ii) of this
definition exceeded the amount actually paid in cash in respect of such
Permitted Disposition, the aggregate amount of such excess shall be promptly
paid as Permitted Net Disposition Proceeds.

 

“Person” shall
mean any individual, corporation, company, voluntary association, partnership,
joint venture, limited liability company, trust, unincorporated association or
government (or any agency, instrumentality or political subdivision thereof).

 

“Plan” shall mean
an employee benefit or other plan established or maintained by any Borrower or
any ERISA Affiliate and covered by Title IV of ERISA, other than a
Multiemployer Plan.

 

“Pledge and Security
Agreement” shall mean the Parent Pledge Agreement, each Borrower Pledge and
Security Agreement and each Subsidiary Pledge and Security Agreement.

 

“Pledged Subsidiary”
shall mean each Subsidiary in respect of which the Lender has been granted a
security interest in or a pledge of any of the Capital Stock of such Subsidiary.

 

“Post-Default Rate”
shall mean, in respect of all outstanding principal of any Loan or any other
amount under this Agreement, the Note or any other Loan Document that is not
paid when due to the Lender (whether at stated maturity, by acceleration, by optional
or mandatory prepayment or otherwise), (a) a rate per annum on the unpaid
principal balance of any Loans during the period from and including the due
date to but excluding the date on which such

 

20

 

amount is paid in full equal to 3% per annum (whether
before or after the entry of a judgment thereon) plus the applicable
interest rate in effect at such time, and (b) any overdue interest, fees
or other amount payable under this Agreement and the Loan Documents shall bear
interest, payable on demand, at a rate per annum (whether before or after the
entry of a judgment thereon) equal to 3% per annum (whether before or after the
entry of a judgment thereon) plus the applicable interest rate in effect
at such time.

 

“Preliminary Margin
Adjustment Certificate” shall mean a certificate duly completed and
executed by a Responsible Officer of each Borrower, substantially in the form
of Exhibit E-1 to this Agreement or as otherwise approved by the Lender.

 

“Prescribed Laws”
shall mean, collectively, (a) the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (Public Law 107-56) (The USA PATRIOT Act), (b) the Executive Order,
(c) the International Emergency Economic Power Act, 50 U.S.C. §1701 et
seq. and (d) all other Requirements of Law relating to money laundering or
terrorism.

 

“Property” shall
mean any right or interest in or to property of any kind whatsoever, whether
real, personal or mixed and whether tangible or intangible.

 

“Register” shall
have the meaning provided in Section 11.05(e) of this Agreement.

 

“Registry Office” shall mean the bureau or
office to which a Certificate of Title is submitted under applicable state law
to have a Lien noted thereon.

 

“Regulations T, U and
X” shall mean Regulations T, U and X of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be modified and
supplemented and in effect from time to time.

 

“Real Estate Net
Segment Income” shall mean, for any period the sum of (a)(i) the portion of
the aggregate net income of the ARC Communities for such period, determined in
accordance with GAAP, attributable to rental operations, plus, (ii) the portion of the net income of the ARC Communities
for such period, determined in accordance with
GAAP, attributable to utilities and other related operations, minus, (b)
the aggregate amount of operating expenses and property taxes for all ARC
Communities, adjusted in accordance with GAAP for discontinued operations, all
as reported by ARC, from time to time, in its “Supplemental Operating and
Financial Data” under the heading “Total Real Estate Segment” as filed with the
Securities and Exchange Commission on Form 8K, 10Q, or 10K, as applicable.

 

“REIT Shareholder”
shall mean, at any time of determination, any holder of Capital Stock of ARC.

 

“REIT Status”
shall mean with respect to any Person, such Person’s status as a real estate
investment trust, as defined in Section 856(a) of the Code, that satisfies
the conditions and limitations set forth in Section 856(b) and 856(c)of
the Code.

 

“Reportable Event”
shall mean a reportable event as defined in Title IV of ERISA, except actions
of general applicability by the Secretary of Labor under Section 110 of
ERISA.

 

21

 

“Requirement of Law”
shall mean as to any Person, the certificate of incorporation and by-laws or
other organizational or governing documents of such Person, and any law
(including, without limitation, Prescribed Laws), treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its property or
to which such Person or any of its property is subject.

 

“Responsible Officer”
shall mean, relative to (a) any Obligor, (b) ARCMS, in respect of Section 4.01(d)(ii),
(b) ARC, in respect of Section 6.01(a)(i), and (d) any Master
Lessor, in respect of Section 4.02(b), the chief executive officer,
president, vice-president or such other of its officers, general partners and
managing members having authority to bind such Obligor, Master Lessor, ARCMS or
ARC, as applicable, whose signatures and incumbency shall have been certified
to the Lender.

 

“S&P” shall
mean Standard & Poor’s Ratings Services, a division of The McGraw-Hill
Companies, Inc.

 

“SEC” shall mean
the Securities and Exchange Commission.

 

“Section 2.04
Certificate” shall mean a certificate in substantially the form of Exhibit P
to this Agreement.

 

“Single Employer Plan”
shall mean any Plan which is not a Multiemployer Plan.

 

“Solvency Certificate”
shall mean the Solvency Certificate delivered by each Borrower to the Lender
pursuant to Section 4.01(i) of this Agreement, in each case
substantially in the form of Exhibit C to this Agreement.

 

“Solvent” shall
mean, with respect to any Person, on any date of determination, (a) the
amount of the “present fair saleable value” of the assets of such Person which
shall, as of such date, exceed the amount of all “liabilities of such Person,
contingent or otherwise”, as of such date, as such quoted terms are determined
in accordance with applicable federal and state laws governing determinations
of the insolvency of debtors, (b) the present fair salable value of the
assets of such Person shall, as of such date, be greater than the amount that
shall be required to pay the liabilities of such Person on its debts as such
debts become absolute and matured, (c) such Person shall not have, as of
such date, an unreasonably small amount of capital with which to conduct its
business, and (d) such Person shall be able to pay its debts as they
mature.  For purposes of this definition,
(i) ”debt” means liability on a “claim”, and (ii) ”claim” means
(x) right to payment, whether or not such a right is reduced by judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured or (y) right to an
equitable remedy for breach of performance if such breach gives rise to a right
of payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, or unmatured, disputed, undisputed,
secured or unsecured.

 

“Specified Event” shall mean the occurrence
and continuance of a Default under Article VIII(k)(v) of this
Agreement or any other Event of Default.

 

“Submission Schedule”
shall have the meaning set forth in the Custodial Agreement.

 

22

 

“Subsidiary” shall
mean, with respect to any Person, any corporation, partnership or other entity
of which at least a majority of the securities or other ownership interests
having by the terms thereof ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions of such
corporation, partnership or other entity (irrespective of whether or not at the
time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or might have voting
power by reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by such Person or one or more Subsidiaries of
such Person or by such Person and one or more Subsidiaries of such Person.

 

“Subsidiary Guarantee”
shall mean each Subsidiary Guarantee, executed and delivered by each Subsidiary
Guarantor in favor of the Lender, substantially in the form of Exhibit G-3
to this Agreement, as amended, restated, supplemented or otherwise modified and
in effect from time to time.

 

“Subsidiary Guarantor”
shall mean each Subsidiary that has executed and delivered to the Lender a
Subsidiary Guarantee.

 

“Subsidiary Pledge and
Security Agreements” shall mean each Subsidiary Pledge and Security
Agreement, dated as of the Closing Date, among each Subsidiary Guarantor and
the Lender, substantially in the form of Exhibit H-3 to this Agreement,
as amended, restated, supplemented or otherwise modified and in effect from
time to time.

 

“Taxes” shall have
the meaning set forth in Section 2.04(b) of this Agreement.

 

“Termination Date”
shall mean the earlier of (a) April 6, 2007, (b) subject to the
provisions of Article IX(a) of this Agreement, the occurrence and
continuance of an Event of Default, or (c) such earlier date on which this
Agreement shall terminate in accordance with the provisions hereof or by
operation of law.

 

“Transaction”
shall have the meaning set forth in Section 11.18 of this
Agreement.

 

“Transmittal Package”
shall have the meaning set forth in the Custodial Agreement.

 

“Trust Receipt”
shall have the meaning set forth in the Custodial Agreement.

 

“Uniform Commercial
Code” or “UCC” shall mean the Uniform Commercial Code as in effect
from time to time in the State of New York; provided that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the security interest or the renewal or enforcement thereof in any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than New York, “Uniform Commercial Code” shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions hereof relating to such perfection or effect of perfection or
non-perfection.

 

“Unit” shall mean
a unit of new, pre-owned or used manufactured housing consisting of a
pre-fabricated manufactured home unit, or a mobile home, including all
accessions thereto.

 

23

 

“Unit Lease” shall
mean an agreement between a Borrower and a third-party customer evidencing
(a) the transfer of a leasehold interest in a Unit and a sublease in the
Unit Site on which such Unit is located by such Borrower to such third-party
customer on such terms and conditions as set forth therein and (b) as a
result of such transfer, the creation of a Unit Lease Receivable in favor of
such Borrower.

 

“Unit Lease Receivable”
shall mean any right to payment for goods sold or leased, whether or not earned
by performance.

 

“Unit Set Costs”
shall mean, with respect to each Unit, the actual set costs incurred for each
such Unit in connection with its installation at a Unit Site as determined in a
manner consistent with industry practice.

 

“Unit
Site” shall mean, with respect to any Unit, the parcel of real property on
which such Unit is located.

 

“Value” shall
mean, with respect to each Unit, Net Book Value; provided, that the
Value assigned to each Unit shall not exceed (x) in the case of Units
constituting single-wide pre-fabricated manufactured home units, an amount
equal to $45,000 and (y) in the case of Units constituting double-wide
pre-fabricated manufactured home units, an amount equal to $60,000.

 

“Voting Power”
shall mean, with regard to any Voting Stock, the number of votes such Voting
Stock are entitled to cast for directors of any Borrower at any meeting of
stockholders of such Borrower.

 

“Voting Stock”
shall mean all securities issued by any Borrower having the ordinary power to
vote in the election of directors of such Borrower, other than securities having
such power only upon the occurrence of a default or any other extraordinary
contingency.

 

“Weekly Borrowing Base
Report” shall mean a certificate duly completed and executed by the
treasurer, assistant treasurer, chief accounting or other Responsible Officer
of each Borrower, substantially in the form of Exhibit D-1 to this
Agreement.

 

“Welfare Plan”
shall mean a “welfare plan”, as such term is defined in Section 3(1) of
ERISA which is sponsored or maintained by a Borrower or any of its ERISA
Affiliates.

 

Section 1.02           Accounting Terms and other
Definitional Provisions.

 

(a)           Unless
otherwise specified therein, all terms defined in this Agreement shall have the
defined meanings when used in the Note or any other Loan Documents or any
certificate or other document made or delivered pursuant hereto or
thereto.  All terms not specifically
defined herein or by GAAP, which terms are defined in the UCC as in effect in
the State of New York, have the meanings assigned to them herein.

 

(b)           Except as
otherwise expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lender hereunder shall be
prepared, in accordance with GAAP.

 

24

 

(c)           The words “hereof”,
“herein” and “hereunder” and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement, and Section, Schedule and Exhibit
references are to this Agreement unless otherwise specified.

 

(d)           The words “including”
and “include” shall mean including without limiting the generality of
any description preceding such term, and, for purposes of each Loan Document,
the parties hereto agree that the rule of ejusdem generis shall not be
applicable to limit a general statement, which is followed by or referable to
an enumeration of specific matters, to matters similar to the matters
specifically mentioned.

 

(e)           The
meanings given to terms defined herein shall be equally applicable to both the
singular and plural forms of such terms.

 

ARTICLE II

LOANS, NOTE AND PREPAYMENTS.

 

Section 2.01           Loans.

 

(a)           Subject to
the fulfillment of the conditions precedent set forth in Sections 4.01
and 4.02 of this Agreement, and provided that (x) no Default shall have
occurred and be continuing hereunder and (y) no Accelerated Amortization Event
shall have occurred and is continuing, the Lender agrees from time to time to
make, on the terms and subject to the conditions of this Agreement, loans
(individually, a “Loan” and, collectively, the “Loans”) to the
Borrowers in Dollars, from and including the Closing Date to and including the
Termination Date in an aggregate principal amount at any one time outstanding
not to exceed the Maximum Credit as in effect from time to time.

 

(b)           Subject to
the terms and conditions of this Agreement, during such period the Borrowers
may (i) borrow, (ii) repay the Loan, in full or in part, without penalty,
and (iii) reborrow hereunder; provided that, notwithstanding the
foregoing, the Lender shall have no obligation to make Loans to the Borrowers
in excess of the then current Maximum Credit and, in the event the obligation
of the Lender to make Loans to the Borrowers is terminated as permitted
hereunder, the Lender shall have no further obligation to make additional Loans
hereunder.

 

Section 2.02           Note.

 

(a)           The Loans
made by the Lender shall be evidenced by a Note duly executed and delivered by
the Borrowers.  The Lender shall have the
right to have its Note subdivided, by exchange for promissory notes of lesser
denominations or otherwise.

 

(b)           The date,
amount and interest rate of each Loan made by the Lender to the Borrowers, and
each payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of the Note, endorsed by the
Lender on the schedule attached to the Note or any continuation
thereof.  Such notations shall be
conclusive and binding on the Borrowers absent manifest error; provided, however,
that the failure of the Lender to make any such notations shall not limit or
otherwise affect any Obligations of such

 

25

 

Borrower.  The Loans evidenced by any the Note and
interest thereon shall at all times be payable to the order of the payee named
therein and its registered assigns.

 

Section 2.03                                Procedure
for Borrowing.

 

(a)                                  The
Borrowers may request a borrowing hereunder, on any Draw Date during the period
from and including the Closing Date to and including the Termination Date, by
delivering to the Lender a Notice of Borrowing which must be received by the
Lender prior to 12:00 noon, New York City time, on the requested Funding
Date.  Such Notice of Borrowing shall
(i) specify the requested Funding Date and the amount requested to be
borrowed, and (ii) include an officer’s certification signed by a
Responsible Officer of the Borrowers as required by Section 4.02(b)
of this Agreement.

 

(b)                                 Upon
the Borrowers’ request for a borrowing pursuant to Section 2.03(a)
of this Agreement, the Lender shall, upon satisfaction of all applicable
conditions precedent set forth in Section 4.01 and 4.02 of
this Agreement and provided that (x) no Default shall have occurred and be
continuing, (y) no Accelerated Amortization Event shall have occurred and be
continuing and (z) the most recent applicable Borrowing Base Report shall have
been delivered, make a Loan to a Borrower for which all Borrowers shall be
jointly and severally liable on the requested Funding Date, in the amount so
requested.

 

(c)                                  Subject
to Article IV of this Agreement, such borrowing will then be made
available to the Borrowers by the Lender transferring, via wire transfer, the
aggregate amount of such borrowing in funds immediately available to such
Borrower in its Operating Account.

 

Section 2.04                                Taxes.

 

(a)                                  For
purposes of applying this Section 2.04, the term “Lender”
shall include any participant, assignee, successor or transferee of or to a
Lender’s rights or obligations under this Agreement.

 

(b)                                 Any
and all payments by each Borrower under or in respect of this Agreement shall
be made free and clear of, and without deduction or withholding for or on
account of, any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities (including penalties, interest and
additions to tax) with respect thereto, whether now or hereafter imposed,
levied, collected, withheld or assessed by any taxation authority or other
Governmental Authority (collectively, “Taxes”), unless required by
law.  If any Borrower shall be required
under any applicable Requirement of Law to deduct or withhold any Taxes from or
in respect of any sum payable under or in respect of this Agreement to the
Lender, (i) such Borrower shall make all such deductions and withholdings in
respect of Taxes, (ii) such Borrower shall pay the full amount deducted or
withheld in respect of Taxes to the relevant taxation authority or other
Governmental Authority in accordance with the applicable Requirement of Law,
and (iii) the sum payable by such Borrower shall be increased as may be
necessary so that after such Borrower has made all required deductions and
withholdings (including deductions and withholdings applicable to additional
sums payable under this Section) such Lender receives an amount equal to the
sum it would have received had no such deductions or withholdings been made in
respect of Non-Excluded Taxes.  For
purposes of this Agreement, the term “Non-Excluded Taxes” are Taxes
other than, in the case of the Lender, Taxes that are imposed as a result of
any present or former connection between the Lender and the relevant 

 

26

 

taxing
jurisdiction, unless such Taxes are imposed solely as a result of such Lender
having executed, delivered or performed its obligations or received payments
under, or enforced, this Agreement (in which case such Taxes will be treated as
Non-Excluded Taxes).

 

(c)                                  In
addition, each Borrower hereby agrees to pay any present or future stamp,
recording, documentary, excise, property or similar taxes, charges or levies
that arise from any payment made under or in respect of this Agreement or from
the execution, delivery or registration of, any performance under, or otherwise
with respect to, this Agreement (collectively, “Other Taxes”).

 

(d)                                 Each
Borrower hereby agrees to indemnify the Lender, and to hold it harmless
against, the full amount of Non-Excluded Taxes and Other Taxes, and the full
amount of Taxes of any kind imposed by any jurisdiction on amounts payable to
Lender under this Section, imposed on or paid by the Lender, and any liability
(including penalties, additions to tax, interest and expenses) arising
therefrom or with respect thereto.  The
indemnity by each Borrower provided for in this Section 2.04(d)
shall apply and be made whether or not the Non-Excluded Taxes or Other Taxes
for which indemnification hereunder is sought have been correctly or legally
asserted.  Amounts payable by each
Borrower under the indemnity set forth in this Section 2.04(d)
shall be paid within 30 days from the date on which the Lender makes written
demand therefor.

 

(e)                                  As
soon as practicable after the date of any payment of Taxes or Other Taxes by
each Borrower to the relevant Governmental Authority, such Borrower will
deliver to the Lender the original or a certified copy of the receipt issued by
such Governmental Authority evidencing payment thereof.

 

(f)                                    Any
Lender that either (i) is not incorporated under the laws of the United States,
any State thereof, or the District of Columbia or (ii) whose name does not
include “Incorporated,” “Inc.,” “Corporation,” “Corp.,” “P.C.,” “insurance
company,” or “assurance company” (a “Non-Exempt
Lender”) shall deliver or cause to be delivered to the Borrowers
either of the following properly completed and duly executed documents:

 

(i)                                     in
the case of a Non-Exempt Lender that is not a United States person, a complete
and executed (x) U.S. Internal Revenue Form W-8BEN with Part II completed in
which the Lender claims the benefits of a tax treaty with the United States
providing for a zero or reduced rate of withholding (or any successor forms
thereto), including all appropriate attachments or (y) a U.S. Internal Revenue
Service Form W-8ECI (or any successor forms thereto); or

 

(ii)                                  in
the case of an individual, (x) a complete and executed U.S. Internal Revenue
Service Form W-8BEN (or any successor forms thereto) and a Section 2.04 Certificate
or (y) a complete and executed U.S. Internal Revenue Service Form W-9 (or any
successor forms thereto); or

 

(iii)                               in the case of a
Non-Exempt Lender that is organized under the laws of the United States, any
State thereof, or the District of Columbia, a complete and executed U.S.
Internal Revenue Service Form W-9 (or any successor forms thereto), including
all appropriate attachments; or

 

27

 

(iv)                              in
the case of a Non-Exempt Lender that (x) is not organized under the laws of the
United States, any State thereof, or the District of Columbia and (y) is
treated as a corporation for U.S. federal income tax purposes, a complete and
executed U.S. Internal Revenue Service Form W-8BEN claiming a zero rate of
withholding (or any successor forms thereto) and a Section 2.04
Certificate; or

 

(v)                                 in
the case of a Non-Exempt Lender that (A) is treated as a partnership or other
non-corporate entity, and (B) is not organized under the laws of the United
States, any State thereof, or the District of Columbia, (x)(i) a complete and
executed U.S. Internal Revenue Service Form W-8IMY (or any successor forms
thereto) (including all required documents and attachments) and (ii) a Section 2.04
Certificate, and (y) without duplication, with respect to each of its
beneficial owners and the beneficial owners of such beneficial owners looking
through chains of owners to individuals or entities that are treated as
corporations for U.S. federal income tax purposes (all such owners, “beneficial owners”), the documents that would
be required by clause (i), (ii), (iii), (iv), (vi), (vii) and/or this clause
(v) with respect to each such beneficial owner if such beneficial owner were
Lender, provided, however, that no such documents will be
required with respect to a beneficial owner to the extent the actual Lender is
determined to be in compliance with the requirements for certification on
behalf of its beneficial owner as may be provided in applicable U.S. Treasury
regulations, or the requirements of this clause (v) are otherwise determined to
be unnecessary, all such determinations under this clause (v) to be made in the
sole discretion of the Borrowers, provided, however, that Lender shall be
provided an opportunity to establish such compliance as reasonable; or

 

(vi)                              in
the case of a Non-Exempt Lender that is disregarded for U.S. federal income tax
purposes, the document that would be required by clause (i), (ii), (iii), (iv),
(v), (vii) and/or this clause (vi) of this Section 2.04(f) with
respect to its beneficial owner if such beneficial owner were the Lender; or

 

(vii)                           in the case of a Non-Exempt
Lender that (A) is not a United States person and (B) is acting in the capacity
as an “intermediary” (as defined in U.S. Treasury Regulations), (x)(i) a U.S.
Internal Revenue Service Form W-8IMY (or any successor form thereto) (including
all required documents and attachments) and (ii) a Section 2.04
Certificate, and (y) if the intermediary is a “non-qualified intermediary” (as
defined in U.S. Treasury Regulations), from each person upon whose behalf the “non-qualified
intermediary” is acting the documents that would be required by clause (i),
(ii), (iii), (iv), (v), (vi), and/or this clause (vii) with respect to each
such person if each such person were Lender.

 

If the forms
referred to above in this Section 2.04(f) that are provided by the
Lender at the time the Lender first becomes a party to this Agreement indicate
a United States interest withholding tax rate in excess of zero, withholding tax
at such rate shall be treated as Taxes other than “Non-Excluded Taxes” (“Excluded
Taxes”) and shall not qualify as Non-Excluded Taxes unless and until the
Lender provides the appropriate form certifying that a lesser rate applies,
whereupon withholding tax at such lesser rate shall be considered Excluded
Taxes solely for the periods governed by such form.

 

(g)                                 If,
however, on the date the Lender transferee becomes a party to this Agreement,
the Lender transferor was entitled to indemnification or additional amounts
under 

 

28

 

this Section 2.04,
then, to such extent (and only to such extent), the term “Non-Excluded Taxes”
shall include (in addition to Taxes that may be imposed in the future or other
amounts otherwise includable in Taxes) such Taxes, if any, applicable with
respect to the Lender transferee on such date. 
Any additional Taxes in respect of a Lender that result solely and
directly from a change in the principal office of such Lender shall be treated
as Excluded Taxes unless (A) any such additional Taxes are imposed as a result
of a change in the applicable Requirement of Law, or in the interpretation or
application thereof, occurring after the date of such change or (B) such change
is made pursuant to the terms of Section 2.04(i) or otherwise as a
result of a request therefor by the Borrowers.

 

(h)                                 For
any period with respect to which the Lender has failed to provide the Borrowers
with the appropriate form, certificate or other document described in Section 2.04(f)
(other than (i) if such failure is due to a change in any law, or in the
interpretation or application thereof, occurring after the date on which a
form, certificate or other document originally was required to be provided,
(ii) if such form, certificate or other document otherwise is not required
under Section 2.04(f) or (iii) if it is legally inadvisable or otherwise
commercially disadvantageous for the Lender to deliver such form, certificate
or other document), the Lender shall not be entitled to payment or
indemnification under Sections 2.04  (b) or (d) with
respect to Non-Excluded Taxes by reason of such failure; provided, however,
that should the Lender become subject to Non-Excluded Taxes because of its
failure to deliver a form, certificate or other document required hereunder,
the Borrowers shall take such steps, at the sole expense of the Lender, as the
Lender shall reasonably request to assist the Lender in recovering such
Non-Excluded Taxes.

 

(i)                                     The
Lender hereby agrees that, upon the occurrence of any circumstances entitling
the Lender to additional amounts pursuant to this Section, the Lender shall use
reasonable efforts (consistent with its internal policy and legal and
regulatory restrictions), at the sole expense of the Borrowers, to designate a
different applicable lending office if the making of such a change would avoid
the need for, or materially reduce the amount of, any such additional amounts
that may thereafter accrue and would not be, in the sole judgment of the Lender,
legally inadvisable or commercially or otherwise disadvantageous to the Lender
in any respect.

 

(j)                                     Without
prejudice to the survival of any other agreement of the Borrowers hereunder,
the agreements and obligations of the Borrowers contained in this Section shall
survive the termination of this Agreement. 
Nothing contained in this Section shall require the Lender to make
available any of its tax returns or any other information that it deems to be
confidential or proprietary.

 

Section 2.05                                Limitation
on Types of Loans; Illegality. 
Anything herein to the contrary notwithstanding, if, on or prior to the
determination of any LIBOR Rate:  the
Lender determines, which determination shall be conclusive, that quotations of
interest rates for the relevant deposits referred to in the definition of “LIBOR
Rate” in Section 1.01 of this Agreement are not being provided in
the relevant amounts or for the relevant maturities for purposes of determining
rates of interest for Loans as provided herein; or

 

(a)                                  the
Lender determines, which determination shall be conclusive, that the relevant
rate of interest referred to in the definition of “LIBOR Rate” in Section 1.01
of this Agreement upon the basis of which the rate of interest for Loans is to
be determined is not likely adequately to cover the cost to the Lender of
making or maintaining Loans; or

 

29

 

(b)                                 it
becomes unlawful for the Lender to honor its obligation to make or maintain
Loans hereunder using a LIBOR Rate;

 

then the Lender shall give the Borrowers prompt notice
thereof and, so long as such condition remains in effect, the Lender shall be
under no obligation to make additional Loans, and the Borrowers shall, either
prepay all such Loans as may be outstanding or pay interest on such Loans at a
rate per annum equal to the Federal Funds Rate plus 0.50% plus the
Applicable Margin.

 

Section 2.06                                Repayment
of Loans; Interest.

 

(a)                                  The
Borrowers hereby promise, jointly and severally, to repay in full on the
Termination Date the then aggregate outstanding principal amount of the Loans.

 

(b)                                 The
Borrowers hereby promise, jointly and severally, to pay to the Lender interest
on the unpaid principal amount of each Loan for the period from and including
the date of such Loan to but excluding the date such Loan shall be paid in
full, at a rate per annum equal to the LIBOR Rate plus the Applicable
Margin; provided, that in no event shall such rate per annum exceed the
maximum rate permitted by law. 
Notwithstanding the foregoing, the Borrowers hereby promise, jointly and
severally, to pay to the Lender interest at the applicable Post-Default Rate on
any principal of any Loan and on any other amount payable by the Borrowers
hereunder or under any Note that shall not be paid in full when due (whether at
stated maturity, by acceleration or by mandatory prepayment or otherwise) for
the period from and including the due date thereof to but excluding the date
the same is paid in full.  Accrued interest
on each Loan shall be payable monthly on the first Business Day of each month
and for the last month of this Agreement on the first Business Day of such last
month and on the Termination Date; provided, that, the Lender may, in
its sole discretion, require accrued interest to be paid simultaneously with
any prepayment of principal made by the Borrowers on account of any of the
Loans outstanding.  Interest payable at
the Post-Default Rate shall accrue daily and shall be payable upon such
accrual.  Promptly after the
determination of any interest rate provided for herein or any change therein,
the Lender shall give notice thereof to the Borrowers.

 

(c)                                  It
is understood and agreed that, unless and until (i) an Event of Default shall
have occurred and be continuing or (ii) an Accelerated Amortization Event shall
have occurred and be continuing , the Borrowers shall be entitled to the
proceeds of the Unit Leases or Units pledged to the Lender hereunder subject to
Section 2.07 and Section 6.10 of this Agreement.

 

Section 2.07                                Mandatory
Prepayments / Maximum Credit Reductions.

 

(a)                                  If
the aggregate unpaid principal balance of the Loans shall exceed the Borrowing
Base Amount at any time, the Borrowers shall no later than one (1) Business Day
after receipt of notice thereof, either (i) prepay the Loans in the amount
of such excess or (ii) pledge additional Eligible Units to the Lender,
such that after giving effect to the inclusion of such additional Eligible
Units in the Borrowing Base Amount, the aggregate outstanding principal amount
of the Loans does not exceed the Maximum Credit.

 

(b)                                 In
the event the aggregate outstanding principal amount of all Loans exceeds the
Maximum Credit as a result of the reduction of the Maximum Credit pursuant to
clause (b) of the definition of “Maximum Credit”, the Borrowers shall no
later than the date of

 

30

 

such reduction,
prepay the Loans such that, after giving effect to such prepayment, the
aggregate outstanding principal amount of the Loans does not exceed the Maximum
Credit then in effect.

 

(c)                                  In the event that the average daily unpaid
principal balance of the Loans for any Fiscal Quarter after June 30, 2005,
shall be less than $10,000,000, the Lender may, by notice to the Borrowers,
require that the Loans be repaid in full as set forth in Section 6.10
of this Agreement, together with all
other amounts owing hereunder, and this Agreement shall terminate, and all
amounts owing hereunder shall be due and payable, on the thirtieth (30th)
calendar day (or next succeeding Business Day) following the date of delivery
of such notice.

 

(d)                                 Concurrently
with the receipt of any Permitted Net Disposition Proceeds, such Permitted Net
Disposition Proceeds on deposit in the Concentration Account shall be applied
as set forth in Section 6.10 of this Agreement.

 

(e)                                  On
or after the occurrence of an Accelerated Amortization Event, the Borrowers
shall prepay the Loans on each Payment Date in an amount equal to the greater
of (x) the balance remaining in the ARC Concentration Account following
application of the amounts paid pursuant to Section 6.10(c)(i)
through (v) and (y) an amount equal to the aggregate Loans outstanding
as of the date of the Accelerated Amortization Event, divided by 72.

 

(f)                                    Following
any failure of the Borrowers to deliver a Borrowing Base Report as provided for
in Section 6.01(e) of this Agreement, all amounts on deposit in the
Concentration Account shall be applied as set forth in Section 6.10(d)
of this Agreement.

 

Section 2.08                                Optional
Prepayments.  The Borrowers may at
any time and from time to time, prepay the Loans, in whole or in part upon
irrevocable notice to the Lender.  If any
such notice is given, the amount specified in such notice shall be due and
payable on the date specified therein, together with any accrued interest to
such date on the amount prepaid.  Each
partial prepayment of Loans pursuant to this subsection shall be in an
aggregate principal amount of $100,000 or such amount plus a whole
multiple of $100,000 in excess thereof, or, if less, the outstanding principal
balance of the Loans.

 

Section 2.09                                Extension
of Termination Date.  At the request
of the Borrowers made at least ninety (90) days, but in no event earlier than
one hundred twenty (120) days, prior to the then current Termination Date, the
Lender may in its sole discretion extend the Termination Date for a period to
be requested by Borrowers and approved by Lender in its sole discretion by
giving written notice of such extension to the Borrowers no later than
sixty (60) days, but in no event earlier than thirty (30) days, prior to
the then current Termination Date.  Any
failure by the Lender to deliver such notice of extension shall be deemed to be
the Lender’s determination not to extend the then current Termination Date.

 

Section 2.10                                LIBOR
Rate Lending Unlawful.  If the Lender
shall determine (which determination shall, upon notice thereof to each
Borrower, be conclusive and binding on each Borrower) that the introduction of
or any change in or in the interpretation of any law makes it unlawful, or any
Governmental Authority asserts that it is unlawful, for the Lender to make or
continue any Loan at the LIBOR Rate, the obligations of the Lender to make or
continue any such Loan at the LIBOR Rate shall, upon such determination, forthwith
be suspended until the Lender shall notify the Borrowers that the circumstances
causing such suspension no longer exist, and all outstanding Loans at the LIBOR
Rate payable to the Lender shall automatically 

 

31

 

convert into Loans at a rate per annum equal
to the Federal Funds Rate plus 0.50% plus the Applicable Margin at the end of
the then current Interest Periods with respect thereto or sooner, if required
by such law or assertion.

 

Section 2.11                                Deposits
Unavailable.  If the Lender shall
have determined that

 

(a)                                  Dollar
deposits in the relevant amount and for the relevant Interest Period are not
available to it in its relevant market; or

 

(b)                                 by
reason of circumstances affecting it’s relevant market, adequate means do not
exist for ascertaining the interest rate applicable hereunder to Loans;

 

then, upon notice from the Lender to each Borrower,
the obligations of the Lender under Section 2.3 and Section 2.4
of this Agreement to make or continue any Loans at the LIBOR Rate shall
forthwith be suspended until the Lender shall notify each Borrower that the
circumstances causing such suspension no longer exist.

 

Section 2.12                                Increased
LIBOR Rate Loan Costs, etc.

 

(a)                                  Each
Borrower agrees to reimburse the Lender for any increase in the cost to the
Lender of, or any reduction in the amount of any sum receivable by the Lender
in respect of, the making of Loans hereunder (including the making, continuing
or maintaining (or of its obligation to make or continue) any Loans at the
LIBOR Rate) that arise in connection with any change in, or the introduction,
adoption, effectiveness, interpretation, reinterpretation or phase-in after the
Closing Date of, any law or regulation, directive, guideline, decision or
request (whether or not having the force of law) of any Governmental Authority,
except for such changes with respect to increased capital costs and Taxes.  The Lender shall promptly notify each
Borrower in writing of the occurrence of any such event, stating the reasons
therefor and the additional amount required fully to compensate the Lender for
such increased cost or reduced amount. 
Such additional amounts shall be payable by the Borrowers directly to
the Lender within five days of its receipt of such notice, and such notice
shall, in the absence of manifest error, be conclusive and binding on each
Borrower.

 

(b)                                 A
certificate of the Lender setting forth the amount or amounts necessary to
compensate the Lender and setting forth in reasonable detail the manner in which
such amount or amounts were determined shall be delivered to the Borrowers and
shall be conclusive absent manifest error. 
The Borrowers shall pay the Lender the amount shown as due on any such
certificate within ten (10) Business Days after receipt thereof.

 

(c)                                  A
certificate as to any additional amounts payable pursuant to this Section submitted
by the Lender to any Borrower shall be conclusive in the absence of manifest
error.  Notwithstanding anything to the
contrary in this Section, each Borrower shall not be required to compensate a
Lender pursuant to this Section for any amounts incurred more than 180
days prior to the date that the Lender notifies such Borrower of the Lender’s
intention to claim compensation therefor; provided, that, if the circumstances
giving rise to such claim have a retroactive effect, then such 180 day period
shall be extended to include the period of such retroactive effect.  The obligations of each Borrower pursuant to
this Section shall survive the termination of this Agreement and the
payment of the Loans and all other amounts payable hereunder.

 

32

 

Section 2.13                                Replacement
Index.  In the event of the
application of Sections 2.10, 2.11 and 2.12 of this
Agreement, the Borrowers and the Lender shall agree to negotiate in good faith
to replace the LIBOR Rate as index for the Loans with a mutually acceptable
loan index; provided, that in the event the parties are unable to agree
on a replacement index within thirty (30) calendar days, all outstanding Loans
at the LIBOR Rate payable to the Lender shall automatically convert into Loans
at a rate per annum equal to the Federal Funds Rate, plus, 0.50%, plus,
the Applicable Margin, until the earlier of (x) the date the Lender and the Borrowers
have agreed on a replacement index and (y) the Termination Date.

 

ARTICLE III

PAYMENTS; COMPUTATIONS; ETC.

 

Section 3.01                                Payments.

 

(a)                                  Except
to the extent otherwise provided herein, all payments of principal, interest
and other amounts to be made by the Borrowers under this Agreement and the
Note, shall be made in Dollars, in immediately available funds, without
deduction, set-off or counterclaim, to the Lender at the following account
maintained by the Lender:  Account
No.  A/C 008-12-914, for the account of
Lender, Bankers Trust Co., ABA No. 021-001-033, Attn: MLMCI Matchbook, not
later than 1:00 p.m., New York City time, on the date on which such payment
shall become due (and each such payment made after such time on such due date
shall be deemed to have been made on the next succeeding Business Day).  Each Borrower acknowledges that it has no
rights of withdrawal from the foregoing account.

 

(b)                                 Except
to the extent otherwise expressly provided herein, if the due date of any
payment under this Agreement or the Note would otherwise fall on a day that is
not a Business Day, such date shall be extended to the next succeeding Business
Day, and interest shall be payable for any principal so extended for the period
of such extension.

 

Section 3.02                                Computations.  Interest on the Loans shall be computed on
the basis of a 360-day year for the actual days elapsed (including the first
day but excluding the last day) occurring in the period for which payable.

 

Section 3.03                                Requirements
of Law.

 

(a)                                  If
the introduction or adoption of or any change (other than any change by way of
the imposition of or increase in reserve requirements included in the LIBOR
Rate Reserve Percentage) in any Requirement of Law (other than with respect to
any amendment made to the Lender’s certificate of incorporation and by-laws or
other organizational or governing documents) or any change which is effective
after the Closing Date in the interpretation or application thereof or
compliance by the Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof:

 

(i)                                     shall
subject the Lender to any Tax of any kind whatsoever with respect to this
Agreement, the Note or any Loan made by it (excluding Taxes that are imposed as
a result of any present or former connection between the Lender and the
relevant taxing jurisdiction, unless such Taxes are imposed solely as a result
of the Lender having 

 

33

 

executed,
delivered or performed its obligations or received payments under, or enforced,
this Agreement) or change the basis of taxation of payments to the Lender in
respect thereof;

 

(ii)                                  shall
impose, modify or hold applicable any reserve, special deposit, compulsory Loan
or similar requirement against assets held by, deposits or other liabilities in
or for the account of, advances, Loans or other extensions of credit by, or any
other acquisition of funds by, any office of the Lender which is not otherwise
included in the determination of the LIBOR Rate hereunder;

 

(iii)                               shall impose on the
Lender any other condition affecting the Agreement or Loans made hereunder (not
including any condition with respect to taxes, which shall be governed exclusively
by subparagraph (i) of this Section);

 

and the result of any of the foregoing is to increase
the cost to the Lender, by an amount which the Lender in its sole discretion
deems to be material, of making, participating in, continuing or maintaining any
Loan or to reduce any amount due or owing hereunder in respect thereof, then,
in any such case, the Borrowers shall promptly pay the Lender such additional
amount or amounts as will compensate the Lender for such increased cost or
reduced amount receivable.

 

(b)                                 If
the Lender shall have determined that the adoption of or any change in any
Requirement of Law applicable to Lender (other than with respect to any
amendment made to the Lender’s certificate of incorporation and by-laws or
other organizational or governing documents) regarding capital adequacy or in
the interpretation or application thereof or compliance by the Lender or any
corporation controlling the Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on the Lender’s or such corporation’s capital as a
consequence of its obligations hereunder to a level below that which the Lender
or such corporation would have achieved but for such adoption, change or
compliance (taking into consideration the Lender’s or such corporation’s
policies with respect to capital adequacy) by an amount deemed by the Lender to
be material, then from time to time, the Borrowers, jointly and severally,
shall promptly pay to the Lender such additional amount or amounts as will
compensate the Lender for such reduction.

 

(c)                                  A
certificate of the Lender setting forth the amount or amounts necessary to
compensate the Lender and setting forth in reasonable detail the manner in
which such amount or amounts were determined shall be delivered to the
Borrowers and shall be conclusive absent manifest error.  The Borrowers shall pay the Lender the amount
shown as due on any such certificate within ten (10) Business Days after
receipt thereof.

 

(d)                                 A
certificate as to any additional amounts payable pursuant to this Section submitted
by Lender to any Borrower shall be conclusive in the absence of manifest
error.  Notwithstanding anything to the
contrary in this Section, each Borrower shall not be required to compensate the
Lender pursuant to this Section for any amounts incurred more than 180
days prior to the date that the Lender notifies such Borrower of the Lender’s
intention to claim compensation therefor; provided, that, if the
circumstances giving rise to such claim have a retroactive effect, then such
180 day period shall be extended to include the period of such retroactive
effect.  The obligations of such Borrower
pursuant to this Section shall survive the

 

34

 

termination of
this Agreement and the payment of the Loans and all other amounts payable
hereunder.

 

Section 3.04                                Non-usage
Fee.  The Borrowers, jointly and severally,
agree to pay to the Lender a non-usage fee from and including the Closing Date
to the Termination Date, computed at the rate of 0.375% per annum on the
average daily amount of the unutilized portion of the Maximum Credit during the
period for which payment is made, in each case payable quarterly in arrears on
the first Payment Date of each Fiscal Quarter and on the Termination Date such
payment to be made in Dollars, in immediately available funds, without
deduction, set-off or counterclaim, to the Lender at the account set forth in Section 3.01(a)
of this Agreement.

 

Section 3.05                                Loan
Fees.  The Borrowers, jointly and
severally, agree to pay to the Lender the Loan Fee as described in the Fee
Letter, such payments to be made in Dollars, in immediately available funds,
without deduction, set-off or counterclaim, to the Lender at the account set
forth in Section 3.01(a) of this Agreement.

 

ARTICLE IV

CONDITIONS PRECEDENT.

 

Section 4.01                                Initial
Loan.  The obligation of the Lender
to make its initial Loan hereunder is subject to the satisfaction, immediately
prior to or concurrently with the making of such Loan, of the condition
precedent that the Lender shall have received all of the following items, each
of which shall be satisfactory to the Lender and its counsel in form and
substance:

 

(a)                                  Resolutions,
etc.  The Lender shall have received
(i) from each Obligor, a copy of a current good standing certificate of the
Secretary of State (or comparable official) of the jurisdiction of organization
of such Person and (ii) from each Obligor and CMBS Master Lessor, a
certificate duly executed and delivered by such Person’s Secretary or Assistant
Secretary as to (A) resolutions of such Person’s board of directors (or
analogous governing body as Person or Persons) then in full force and effect
authorizing the execution, delivery and performance of this Agreement, each
other Loan Document and the Master Lease Estoppel Certificate and Agreement to
be executed by such Person and the transactions contemplated hereby and
thereby, (B) the incumbency and signatures of those of such Person’s
officers authorized to act with respect to this Agreement, each other Loan
Document and the Master Lease Estoppel Certificate and Agreement to be executed
by such Person, and (C) the full force and validity of each Organic
Document of such Person and copies thereof, upon which certificates the Lender
may conclusively rely until it shall have received a further certificate of the
Secretary or Assistant Secretary of such Obligor and CMBS Master Lessor
canceling or amending such prior certificate.

 

(b)                                 Credit
Agreement; Delivery of Note.  The
Lender shall have received (i) this Agreement and (ii) the Note, in
each case duly executed and delivered by a Responsible Officer of each
Borrower.

 

(c)                                  Transaction;
Additional Documents.  The Lender
shall be reasonably satisfied with all aspects of the transactions contemplated
hereunder, including, (i) the capital and corporate structure of ARC LP,
ARCHC, ARC GP, each Borrower and each of their respective Subsidiaries shall be
as set forth on Schedule 8 to this Agreement and (ii) have 

 

35

 

received evidence
that all transactions contemplated under the Chattel Paper Commitment Documents
shall have been consummated.

 

(d)                                 Management
Agreement; Manager Notice and Agreement. 
The Lender shall have received (i) a copy of the Management
Agreement, certified as true and correct by a Responsible Officer of a
Borrower, and (ii) the Manager Notice and Agreement, duly executed and
delivered by a Responsible Officer of ARCMS.

 

(e)                                  Intercompany
Subordination Agreement.  The Lender
shall have received the Intercompany Subordination Agreement, duly executed and
delivered by a Responsible Officer of each Borrower.

 

(f)                                    Closing
Date Certificate.  The Lender shall
have received the Closing Date Certificate, duly executed and delivered by a
Responsible Officer of each Borrower (the “Closing Date Certificate”),
in which certificate each Borrower shall agree and acknowledge that the
statements made therein shall be deemed to be true and correct representations
and warranties of each Borrower made as of such date under this Agreement, and,
at the time such certificate is delivered, such statements shall in fact be
true and correct.  All documents and
agreements required to be appended to the Closing Date Certificate shall be in
form and substance reasonably satisfactory to the Lender.

 

(g)                                 Guarantees.  The Lender shall have received each Guarantee
duly executed and delivered by a Responsible Officer of each Guarantor.

 

(h)                                 Pledge
and Security Agreements, etc.  The
Lender shall have received executed counterparts of:

 

(i)                                     the
Parent Pledge Agreement, duly executed by a Responsible Officer of the Parent
Guarantors;

 

(ii)                                  each
Borrower Pledge and Security Agreement, duly executed and delivered by a
Responsible Officer of each Borrower; and

 

(iii)                               the Lender and their
counsel shall be satisfied that (A) the Lien granted to the Lender in the
Collateral is a first priority (or local equivalent thereof) security interest
and (B) no Lien exists on any of the collateral described above other than
the Lien created in favor of the Lender pursuant to a Loan Document and the
Permitted Liens; and

 

(iv)                              UCC
lien searches in such jurisdictions as shall be applicable to each Parent
Guarantors, each Borrower, each Subsidiary Guarantor and the Collateral, the
results of which shall be satisfaction to the Lender.

 

(i)                                     Solvency
Certificate.  The Lender shall have
received the Solvency Certificate, duly executed and delivered by a Responsible
Officer of each Borrower.

 

(j)                                     Account
Control Agreements.  The Lender shall
have received Account Control Agreements in respect of each Bank Account of the
Borrowers, in each case duly executed and delivered by a Responsible Officer of
each Borrower and the applicable depository institution.

 

36

 

(k)                                  Custodial
Agreement.  The Lender shall have
received the Custodial Agreement, duly executed and delivered by a Responsible Officer
of each Borrower and the Custodian.

 

(l)                                     Borrowing
Base Report; Compliance Certificate. 
The Lender shall have received,

 

(i)                                     a
Monthly Borrowing Base Report, in respect of each Borrower’s Eligible Units,
duly executed by a Responsible Officer of each Borrower evidencing compliance
with the Borrowing Base; and

 

(ii)                                  a
Compliance Certificate, prepared on a pro  forma basis and as to
such items therein as the Lender reasonably requests, duly executed (and with
all schedules thereto duly completed) and delivered by a Responsible Officer of
each Borrower.

 

(m)                               Financial
Information, etc.  The Lender shall
have received (i) the audited consolidated income and cash flow statements
and balance sheet of ARC Inc. and its Subsidiaries and (ii) the unaudited pro
forma combined income and cash flow statements and balance sheets of the
Borrowers; in each case above, certified by the Responsible Officer of each
Borrower.

 

(n)                                 Closing
Fees, Expenses, etc.  The Lender
shall have received for its own respective account all fees, costs and expenses
due and payable pursuant to Section 3.05 of this Agreement and the
Fee Letter.

 

(o)                                 Insurance.  The Lender shall have received reasonably
satisfactory evidence of the existence of insurance in compliance with this
Agreement (including all endorsements included therein), and the Lender shall
be named additional insured or loss payee, pursuant to documentation reasonably
satisfactory to the Lender.

 

(p)                                 Opinions
of Counsel.  The Lender shall have
received opinions, each dated as of the Closing Date and addressed to the
Lender, from Skadden, Arps, Slate, Meagher & Flom LLP, special New York
counsel to each of the Obligors and CMBS Master Lessors, in form and substance
reasonably satisfactory to the Lender.

 

(q)                                 Organizational
Documents.  The Borrowers shall have
delivered current good standing certificates of the Secretary of State (or
comparable official) of the jurisdiction of organization of such Person and
certified copies of the charter and by-laws (or equivalent documents) of each
Borrower and of all corporate or other authority for each Borrower with respect
to the execution, delivery and performance of the Loan Documents and each other
document to be delivered by such Borrower from time to time in connection
herewith (and the Lender may conclusively rely on such certificate until it
receives notice in writing from such Borrower to the contrary).

 

(r)                                    Consents,
Licenses, Approvals, etc.  The
Borrowers shall have delivered copies certified by each Borrower of all
consents, licenses and approvals, if any, required in connection with the
execution, delivery and performance by such Borrower of, and the validity and
enforceability of, the Loan Documents, which consents, licenses and approvals
shall be in full force and effect.

 

37

 

(s)                                  Certificates.  On or prior to the Closing Date, the
Custodian shall have received from each Borrower (or another entity designated
by the Lender) Certificates of Title or MSOs for each Eligible Unit.  Each such Certificate of Title or MSO shall
be accompanied by a duly completed Transmittal Package.

 

(t)                                    Master
Lease Estoppel Certificate and Agreement. 
The Lender shall have received, from each Subsidiary of ARC that is party to a Master Lease, as lessor,
a duly executed Master Lease Estoppel Certificate and Agreement, with respect
to the ARC Community owned by such
Subsidiary and the Master Lease to which such Subsidiary is a party.

 

(u)                                 Deliveries.  The Lender shall have received each
applicable schedule, exhibit, annex, or certificate attached to any Loan
Document or the Master Lease Estoppel Certificate and Agreement, each of which
shall be subject to the satisfaction of the Lender.

 

Section 4.02                                Initial
and Subsequent Loans.  The making of
each Loan to the Borrowers (including the initial Loan) on any Business Day is
subject to the satisfaction of the following further conditions precedent, both
immediately prior to the making of such Loan and also after giving effect
thereto and to the intended use thereof:

 

(a)                                  No
Default; No Accelerated Amortization Event. 
No Default or Event of Default shall have occurred and be continuing,
and no Accelerated Amortization Event shall have occurred and be continuing .

 

(b)                                 Representations
and Warranties.  Both immediately
prior to the making of such Loan and also after giving effect thereto and to
the intended use thereof, the representations and warranties made by the
Borrowers in Article V of this Agreement, and elsewhere in each of
the Loan Documents and the Master Lease Estoppel Certificate and Agreement,
shall be true, correct and complete in all material respects on and as of the
date of the making of such Loan (in the case of the representations and
warranties in Section 5.12 of this Agreement, solely with respect
to the Eligible Units included in the Borrowing Base Amount and, in the case of
representations and warranties set forth in the Master Lease Estoppel
Certificate and Agreements, solely with respect to the Master Lease Estoppel
Certificate and Agreements relating to Master Leases in respect of ARC
Communities containing Unit Sites on which Units included in the Borrowing Base
are located (any such ARC Community, a “Borrowing Base ARC Community”)
with the same force and effect as if made on and as of such date (or, if any
such representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date). 
The Lender shall have received an officer’s certification signed by a
Responsible Officer of each Borrower certifying as to the truth, accuracy and
completeness of the above.

 

(c)                                  Maximum
Credit.  The aggregate outstanding
Indebtedness shall not exceed the Maximum Credit.

 

(d)                                 Interest
Reserve Amount.  The Lender shall
have received evidence that the Interest Reserve Amount has been deposited into
the Interest Reserve Account.

 

(e)                                  Trust
Receipts; Custodial Reports.  The
Lender shall have received one or more Trust Receipts (as defined in the
Custodial Agreement) and Custodial Reports (as so defined) from the Custodian,
duly completed, confirming that the Custodian is holding Certificates of Title
for each Unit that is included in the Borrowing Base Amount, with the Lien 

 

38

 

of the Lender duly
noted on each such Certificate of Title by the applicable Registry Office in
conformity with the requirements of applicable state law (or that the Custodian
shall have sent out a Certificate of Title or an MSO, together with a
Transmittal Package, to the applicable Registry Office for a Certificate of
Title to be issued with such Lien to be so noted).

 

(f)                                    Weekly
Borrowing Base Report.  The Lender
shall have timely received the most recent Weekly Borrowing Base Report
required to be delivered by Section 6.01(e) of this Agreement,
establishing that the Borrowing Base Amount is not less than the aggregate
principal amount of all Loans (after giving effect to the Loan proposed to be
made).

 

(g)                                 Fees
and Expenses.  The Lender shall have
received all reasonable and documented fees and expenses of counsel to the
Lender as contemplated by Section 11.03 of this Agreement, which
amount, at the Lender’s option, may be netted from any Loan advanced under this
Agreement.

 

Each request for a borrowing by the Borrowers
hereunder shall constitute a certification by the Borrowers that all the
conditions set forth in this Article IV to this Agreement have been
satisfied (both as of the date of such notice, request or confirmation and as
of the date of such borrowing).

 

ARTICLE V

REPRESENTATIONS AND WARRANTIES.

 

Each Borrower represents and warrants to the Lender
that throughout the term of this Agreement:

 

Section 5.01                                Organization,
etc.  Each Obligor and other than as
to clause (b) hereof, each Master Lessor (a) is validly organized and
existing and in good standing under the laws of the state or jurisdiction of
its incorporation or organization, (b) is duly qualified to do business and is
in good standing as a foreign entity in each jurisdiction where the nature of
its business requires such qualification except where failure to do so could
not reasonably be expected to have a Material Adverse Effect, (c) has full
power and authority and (d) holds all requisite governmental licenses,
permits and other approvals to enter into and perform its Obligations under each
Loan Document and the Master Lease Estoppel Certificate and Agreement to which
it is a party, to own and hold under lease its property and to conduct its
business substantially as currently conducted by it except where failure to do
so would not could reasonably be expected to have a Material Adverse Effect.

 

Section 5.02                                Due Authorization, Non-Contravention, etc.  The
execution, delivery and performance by each Obligor and each Master Lessor of
each Loan Document executed or to be executed by it and the Master Lease
Estoppel Certificate and Agreement, as applicable, and the execution, delivery
and performance by the Borrowers, (if applicable) any Obligor or any Master
Lessor of the agreements executed and delivered by it in connection with the
Transaction are in each case within such Person’s powers, have been duly
authorized by all necessary action, and do not

 

(a)                                  contravene
any (i) Obligor’s or Master Lessor’s Organic Documents, (ii) or
result in a default under any contractual restriction binding on or affecting
any Obligor,

 

39

 

(iii) court
decree or order binding on or affecting any Obligor or (iv) law or
governmental regulation binding on or affecting any Obligor; or

 

(b)                                 result
in, or require the creation or imposition of, any Lien on any Obligor’s
properties (except as permitted by this Agreement).

 

Section 5.03                                Government
Approval, Regulation, etc.  No
authorization or approval or other action by, and no notice to or filing with,
any Governmental Authority (other than those that have been, or on the Closing
Date will be, duly obtained or made and which are, or on the Closing Date will
be, in full force and effect except filings or recordings necessary to perfect
Liens under the Loan Documents) is required for the consummation of this
Agreement or the due execution, delivery or performance by any Obligor or
Master Lessor of any Loan Document or Master Lease Estoppel Certificate and
Agreement, as applicable, to which it is a party, or for the due execution,
delivery and/or performance of Loan Documents and the Master Lease Estoppel
Certificate and Agreement, in each case by the parties thereto other than the
Lender.  Neither the Borrowers nor any of
their Subsidiaries are an “investment company” within the meaning of the
Investment Company Act of 1940, as amended, or a “holding company”, or a “subsidiary
company” of a “holding company”, or an “affiliate” of a “holding company” or of
a “subsidiary company” of a “holding company”, within the meaning of the Public
Utility Holding Company Act of 1935, as amended.

 

Section 5.04                                Validity,
etc.  Each Loan Document and the
Master Lease Estoppel Certificate and Agreement to which any Obligor or Master
Lessor, as applicable, is a party, constitutes the legal, valid and binding
obligations of such Obligor or Master Lessor, enforceable against such Obligor
or Master Lessor, as applicable, in accordance with their respective terms
(except, in any case, as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors’
rights generally and by principles of equity).

 

Section 5.05                                Financial
Information.  The (a) consolidated
financial statements of ARC and its Subsidiaries and (b) the combined financial
statements of the Borrowers, in each case furnished to the Lender pursuant to Section 6.01
of this Agreement have been prepared in accordance with GAAP (subject, other
than in the case of audited financial statements, to year-end adjustments and
the absence of footnotes) consistently applied, and present fairly the
consolidated financial condition of the Persons covered thereby as at the dates
thereof and the results of their operations for the periods then ended.  All balance sheets, all statements of income
and of cash flow (subject to Section 5.12 of this Agreement)
furnished pursuant to Section 6.01 of this Agreement have been and
will for periods following the Closing Date be prepared in accordance with GAAP
(subject, other than in the case of audited financial statements, to year-end
adjustments and the absence of footnotes) consistently applied with the
financial statements delivered pursuant to Section 6.01 of this
Agreement, and present fairly the consolidated financial condition of the
Persons covered thereby as at the dates thereof and the results of their
operations for the periods then ended.

 

Section 5.06                                Litigation,
Labor Controversies, etc.  Except as
set forth in Schedule 2 to this Agreement, there is no pending or,
to the knowledge of any Borrower or any of their Subsidiaries, threatened
litigation, action, proceeding or labor controversy:

 

(a)                                  affecting
any Borrower, any of their Subsidiaries or any other Obligor, or any of their
respective properties, businesses, assets or revenues, and no adverse development

 

40

 

has occurred in
any labor controversy, litigation, arbitration or governmental investigation or
proceeding, which could reasonably be expected to have a Material Adverse
Effect; or

 

(b)                                 which
purports to affect the legality, validity or enforceability of any Loan
Document.

 

Section 5.07                                Subsidiaries.
 As of the Closing Date, Schedule 3
to this Agreement sets forth the name of each direct or indirect Subsidiary of
the Borrowers and of the holders of Capital Stock of the Borrowers, its form of
organization, its jurisdiction of organization, the total number of issued and
outstanding shares or other interests of Capital Stock thereof, the classes and
number of issued and outstanding shares or other interests of Capital Stock of
each such class, the name of each holder of Capital Stock thereof and the
number of shares or other interests of such Capital Stock held by each such
holder and the percentage of all outstanding shares or other interests of such
class of Capital Stock held by such holders.

 

Section 5.08                                Ownership
of Properties.  Each Borrower and
each of their Subsidiaries owns (i) in the case of owned real property,
good and marketable fee title to, and (ii) in the case of owned personal
property, good and valid title to, or, in the case of leased real or personal
property, valid and enforceable leasehold interests (as the case may be) in,
all of its properties and assets, real and personal, tangible and intangible,
of any nature whatsoever, except in each case of defects which would not
reasonably be expected to have a Material Adverse Effect.

 

Section 5.09                                Taxes.
Each Borrower and their Subsidiaries have filed on a timely basis all U.S.
federal, state and local income tax returns and all other material tax returns
that are required to be filed by or in respect of them and have paid all Taxes
due pursuant to such returns or pursuant to any assessment received by any of
them, except for any such Taxes as are being appropriately contested in good
faith by appropriate proceedings diligently conducted and with respect to which
adequate reserves in accordance with GAAP shall have been provided.  The charges, accruals and reserves on the
books of each Borrower and each of their Subsidiaries in respect of Taxes and
other governmental charges are, in the opinion of each Borrower, adequate.

 

Section 5.10                                Pension
and Welfare Plans.  During the
twelve-consecutive-month period prior to the Closing Date and prior to the date
of any Funding Date hereunder, no steps have been taken to terminate any
Pension Plan, and no contribution failure has occurred with respect to any
Pension Plan sufficient to give rise to a Lien under Section 302(f) of
ERISA.  No condition exists or event or
transaction has occurred with respect to any Pension Plan which might result in
the incurrence by the Borrowers or any of their ERISA Affiliates of any
material liability, fine or penalty. 
Neither the Borrowers nor any of their ERISA Affiliates have any
contingent liability with respect to any post-retirement benefit under a
Welfare Plan, other than liability for continuation coverage described in Part
6 of Title I of ERISA.

 

Section 5.11                                Environmental
Matters.  Except as set forth in Schedule 4
to this Agreement:

 

(a)                                  The
facilities and properties owned, leased or operated by the Borrowers or their
Subsidiaries (the “Facilities”) do not contain any Materials of
Environmental Concern in amounts or concentrations which (i) constitute a
violation of, or (ii) could reasonably be 

 

41

 

expected to give
rise to liability under, any applicable Environmental Law, which could
reasonably be expected to have a Material Adverse Effect.

 

(b)                                 The
Facilities and all operations at the Facilities are in compliance with all
applicable Environmental Laws and there is no contamination at, under or about
the Facilities or violation of any Environmental Law with respect to the
Facilities or the business operated by the Borrowers or any of their
Subsidiaries (the “Business”) which could reasonably be expected to have
a Material Adverse Effect.

 

(c)                                  Neither
the Borrowers nor their Subsidiaries have received any notice of violation,
alleged violation, non compliance, liability or potential liability regarding
environmental matters or compliance with Environmental Laws with regard to any
of the Facilities or the Business, which could reasonably be expected to have a
Material Adverse Effect nor does any Borrower have any actual knowledge or
reason to believe that any such notice will be received or is being threatened.

 

(d)                                 Materials
of Environmental Concern have not been transported or disposed of from the
Facilities in violation of, or in a manner or to a location which could give
rise to liability under, any Environmental Law, nor have any Materials of
Environmental Concern been generated, treated, stored or disposed of at, on or
under any of the Facilities in violation of, or in a manner that could give
rise to liability under, any applicable Environmental Law, which could
reasonably be expected to have a Material Adverse Effect.

 

(e)                                  No
judicial proceeding or governmental or administrative action is pending or, to
the knowledge of any Borrower or any Responsible Officer of any Borrower,
threatened, under any Environmental Law to which any Borrower or any Subsidiary
is or will be named as a party with respect to the Facilities or the Business,
which could reasonably be expected to have a Material Adverse Effect, nor are
there any consent decrees or other decrees, consent orders, administrative
orders or other orders, or other administrative or judicial requirements
outstanding under any Environmental Law with respect to the Facilities or the
Business, which could reasonably be expected to have a Material Adverse Effect.

 

(f)                                    There
has been no release or threat of release of Materials of Environmental Concern
at or from the Facilities, which could reasonably be expected to have a
Material Adverse Effect, or arising from or related to the operations of the
Borrowers or any of their Subsidiaries in connection with the Facilities or
otherwise in connection with the Business, which could reasonably be expected
to have a Material Adverse Effect, in violation of or in amounts or in a manner
that could give rise to liability under Environmental Laws.

 

Section 5.12                                True
and Complete Disclosure.  The
information, reports, financial statements, exhibits and schedules furnished in
writing to the Lender by or on behalf of any Obligor in connection with the
negotiation, preparation or delivery of this Agreement and the other Loan
Documents or included herein or therein or delivered pursuant hereto or
thereto, when taken as a whole, do not contain any untrue statement of material
fact or omit to state any material fact necessary to make the statements herein
or therein, in light of the circumstances under which they were made, not
misleading.  All written information
furnished after the date hereof by or on behalf of any Obligor to the Lender in
connection with this Agreement and the other Loan Documents and the
transactions contemplated hereby and thereby will be true, complete and
accurate in all material respects, or (in the case of projections) based on
reasonable 

 

42

 

estimates, in each case taken as a whole and
on the date as of which such information is stated or certified.  The projections and pro  forma
financial information contained in the materials referenced above are based
upon good faith estimates and assumptions believed by management of ARC, ARC LP
and each Borrower to be reasonable at the time made, it being recognized by the
Lender that such financial information as it relates to future events is not to
be viewed as fact and that actual results during the period or periods covered
by such financial information may differ from the projected results set forth
therein by a material amount.  There is
no fact known to a Responsible Officer of any Borrower, after due inquiry, that
could reasonably be expected to have a Material Adverse Effect that has not
been disclosed herein, in the other Loan Documents or in a report, financial
statement, exhibit, schedule, disclosure letter or other writing furnished to
the Lender for use in connection with the transactions contemplated hereby or thereby.

 

Section 5.13                                Margin
Regulations.  Neither the making of
any Loan hereunder, nor the use of the proceeds thereof, will violate or be
inconsistent with the provisions of Regulations T, U or X.

 

Section 5.14                                Solvency.  Each Borrower is Solvent.

 

Section 5.15                                Anti-Terrorism
Law.

 

(a)                                  The
Borrowers are not and, to the knowledge of each Borrower, none of their
Affiliates are in violation of any of the Prescribed Laws.

 

(b)                                 The
Borrowers are not and, to the knowledge of the Borrowers, no Affiliate or broker
or other agent of the Borrowers acting or benefiting in any capacity in
connection with the Loans is any of the following:

 

(i)                                     a
Person that is listed in the annex to, or is otherwise subject to the
provisions of, the Executive Order;

 

(ii)                                  a
Person owned or controlled by, or acting for or on behalf of, any Person that
is listed in the annex to, or is otherwise subject to the provisions of, the
Executive Order;

 

(iii)                               a Person with which the
Lender is prohibited from dealing or otherwise engaging in any transaction by
any Prescribed Law;

 

(iv)                              a
Person that commits, threatens or conspires to commit or supports “terrorism”
as defined in the Executive Order; or

 

(v)                                 a
Person that is named as a “specially designated national and blocked person” on
the most current list published by the U.S. Treasury Department Office of
Foreign Assets Control (“OFAC”) at its official website or any
replacement website or other replacement official publication of such list.

 

(c)                                  The
Borrowers are not and, to the knowledge of each Borrower, no broker or other
agent of the Borrowers acting in any capacity in connection with the Loans
(i) conducts any business or engages in making or receiving any
contribution of funds, goods or services to or for the benefit of any person
described in paragraph (b) above, (ii) deals in, or otherwise engages in
any transaction relating to, any property or interests in property blocked
pursuant to the 

 

43

 

Executive Order,
or (iii) engages in or conspires to engage in any transaction that evades
or avoids, or has the purpose of evading or avoiding, or attempts to violate,
any of the prohibitions set forth in any Anti-Terrorism Law.

 

Section 5.16                                ARC
Communities.  Each ARC Community,
each Subsidiary of ARC that owns each such ARC Community and the Master Lease
to which each such Subsidiary of ARC is a party, as of the Closing Date, are
set forth on Schedule 5 to this Agreement.

 

Section 5.17                                Unit
Leases.  The representations and
warranties on Schedule 7 to this Agreement are true and correct as
to each Unit Lease in all material respects.

 

Section 5.18                                Master
Leases.  The representations and
warranties on Schedule 12 to this Agreement are true and correct as
to each Master Lease in all material respects.

 

Section 5.19                                Bank
Accounts.  The Borrowers maintain no
Bank Accounts other than the Concentration Account, the Feeder Accounts and the
Operating Accounts. As of the Closing Date, each of the Bank Accounts is
identified on Schedule 13 to this Agreement.

 

Section 5.20                                ARC
Communities of CMBS Master Lessors. As of the Closing Date, each of the ARC
Communities owned by a CMBS Master Lessor are set forth on Schedule 15
to this Agreement.

 

ARTICLE VI

AFFIRMATIVE COVENANTS.

 

Each Borrower agrees with the Lender that until the
Termination Date has occurred, each Borrower will, and will cause its
Subsidiaries to, perform or cause to be performed the obligations set forth
below.

 

Section 6.01                                Financial Information, Collateral Reports, etc.  The
Borrowers will furnish the Lender copies of the following financial statements,
reports, notices and information:

 

(a)                                  (i)
as soon as available and in any event within forty-five (45) days after the end
of each of the first three Fiscal Quarters of each Fiscal Year, an unaudited
consolidated balance sheet of ARC and its Subsidiaries and as of the end of
such Fiscal Quarter and the related consolidated statements of income and cash
flow of ARC and its Subsidiaries for such Fiscal Quarter and for the period
commencing at the end of the previous Fiscal Year and ending with the end of
such Fiscal Quarter, and including (in each case), in comparative form the
figures for the corresponding Fiscal Quarter in, and year to date portion of,
the immediately preceding Fiscal Year, certified as complete and correct by the
chief financial or accounting Responsible Officer of ARC; and (ii) as soon as
available and in any event within forty-five (45)  days after the end of each of the first three
Fiscal Quarters of each Fiscal Year, an unaudited combined balance sheet of the
Borrowers and as of the end of such Fiscal Quarter and the related combined
statements of income and cash flow of the Borrowers for such Fiscal Quarter and
for the period commencing at the end of the previous Fiscal Year and ending
with the end of such Fiscal Quarter, and including (in each case), in
comparative form the figures for the corresponding Fiscal Quarter in, and year
to date portion of, the immediately preceding Fiscal Year, certified as
complete and correct by the chief financial or accounting Responsible Officer
of each Borrower;

 

44

 

(b)                                 (i)
as soon as available and in any event within ninety (90) days after the end of
each Fiscal Year, a copy of the consolidated balance sheet of ARC and its
respective Subsidiaries and the related consolidated statements of income and
cash flow of each of ARC and its respective Subsidiaries for such Fiscal Year,
setting forth in comparative form the figures for the immediately preceding
Fiscal Year, audited (without any Impermissible Qualification) by independent
public accountants acceptable to the Lender; and (ii) as soon as available and
in any event within ninety (90) days after the end of each Fiscal Year, a copy
of the combined balance sheet of the Borrowers and the related combined
statements of income and cash flow of the Borrowers for such Fiscal Year,
setting forth in comparative form the figures for the immediately preceding
Fiscal Year;

 

(c)                                  (i)
as soon as the information permitting the preparation of a Preliminary Margin
Adjustment Certificate becomes available, if an Applicable Margin Reduction
Event or Applicable Margin Increase Event shall have occurred, following the
end of a Fiscal Quarter but prior to the delivery of the financial information
pursuant to subsections (a) and (b) of this Section (together
with the delivery of a Compliance Certificate), a Preliminary Margin Adjustment
Certificate executed by the chief financial or accounting Responsible Officer
of each Borrower, stating that (A) an Applicable Margin Reduction Event has
occurred, and showing that the requirements for an Applicable Margin Reduction
Event or an Applicable Margin Increase Event, as applicable, have been met, (B)
no Accelerated Amortization Event has occurred and is continuing and showing
the basis for such statement and (C) no Default has occurred and is continuing
(or, if a Default has occurred, specifying the details of such Default and the
action that such Borrower or an Obligor has taken or proposes to take with
respect thereto), and (ii) concurrently with the delivery of the financial
information pursuant to subsections (a) and (b) of this
Section, a Compliance Certificate, executed by the chief financial or
accounting Responsible Officer of the Borrowers, (A) stating whether an
Accelerated Amortization Event has occurred and is continuing and showing the
basis for such statement, (B) if a Preliminary Margin Adjustment Certificate
shall have been delivered, confirming whether an Applicable Margin Reduction
Event or Applicable Margin Increase Event has occurred and showing the basis
for such statement, (C) if a Preliminary Margin Adjustment Certificate shall
have not have been delivered, stating whether an Applicable Margin Reduction
Event or Applicable Margin Increase Event has occurred and showing the basis
for such statement, and (D) stating that no Default has occurred and is
continuing (or, if a Default has occurred, specifying the details of such
Default and the action that such Borrower or an Obligor has taken or proposes
to take with respect thereto);

 

(d)                                 promptly
upon receipt thereof, copies of any formal “management letters” submitted to
the Borrowers or any other Obligor by the independent public accountants
referred to in subsection (b) of this Section in connection
with each annual audit made by such accountants;

 

(e)                                  (i)
on each Wednesday for the weekly period ending on the immediately preceding
day, a certified Weekly Borrowing Base Report, as of the Business Day prior to
delivery and (ii) each Payment Date, not later than 5:00 p.m., New York City
time, in each case for the end of the prior month as of the Business Day prior
to delivery, a certified Monthly Borrowing Base Report;

 

45

 

(f)                                    on
a monthly basis, on or before the tenth (10th) Business Day after
the closing date for the immediately preceding monthly period for such period
or more frequently as Lender may reasonably request, a collateral pool data
report;

 

(g)                                 on
a monthly basis, on or before the last day of the following month for the prior
month’s report which may include:

 

(i)                                     operating
statements in respect of the Borrowers and their Subsidiaries;

 

(ii)                                  rent
rolls in substantially the form set forth in Exhibit L to this Agreement;
and

 

(iii)                               sales reports for each
Unit sold by ARC or any of its Subsidiaries.

 

(h)                                 on
a quarterly basis, on or before the forty-fifth (45th) Business Day
after the closing date for the immediately preceding Fiscal Quarter, an aged
pending title report, substantially in the form of Exhibit M to this
Agreement.

 

(i)                                     such
other financial and other information as the Lender may from time to time
reasonably request (including information and reports in such detail as the
Lender may request with respect to the terms of and information provided
pursuant to the Compliance Certificate).

 

Section 6.02                                Existence,
etc.  Each Borrower shall:

 

(a)                                  preserve
and maintain (i) its legal existence and (ii) all of its material
rights, privileges, licenses and franchises (provided that nothing in this Section shall
prohibit any transaction expressly permitted under Section 7.07 of
this Agreement) other than in the case of clause (ii) where the failure to do
so would have a Material Adverse Effect;

 

(b)                                 comply
with the requirements of all applicable laws, rules, regulations and orders of
Governmental Authorities (including, without limitation, Prescribed Laws, all
Environmental Laws, all laws with respect to unfair and deceptive lending
practices and predatory lending practices) if failure to comply with such
requirements would be reasonably likely (either individually or in the
aggregate) to have a Material Adverse Effect;

 

(c)                                  keep
adequate records and books of account, in which complete entries will be made
in accordance with GAAP consistently applied;

 

(d)                                 not
move its chief executive office from the address referred to in the “Address
for Notices” specified below its name on the signature pages to this Agreement
or change its jurisdiction of organization from the jurisdiction referred to in
Schedule 1 to this Agreement unless it shall have provided the
Lender thirty (30) days’ prior written notice of such change;

 

(e)                                  pay
and discharge or cause to be paid and discharged, or adequately reserve for
(and set aside cost for repayment of) the payment of, all Taxes, assessments
and governmental charges or levies imposed on it or on its income or profits or
on any of its Property prior to the date on which penalties attach thereto,
except for any such tax, assessment, charge or 

 

46

 

levy the payment
of which is being contested in good faith and by proper proceedings and against
which adequate reserves are being maintained in conformance with GAAP; and

 

(f)                                    file
on a timely basis all U.S. federal, state and local income tax returns,
franchise tax returns and other material information returns, reports and any
other information statements or schedules required to be filed by or in respect
of it and pay or cause to be paid all Taxes due pursuant to such returns,
reports and other information statements or schedules or pursuant to any
assessment received by it.

 

Section 6.03                                Maintenance
of Properties.  Each Borrower will,
and will cause each of its Subsidiaries to, maintain, preserve, protect and
keep its and their respective properties in good repair, working order and
condition (ordinary wear and tear excepted), and make necessary repairs,
renewals and replacements so that the business carried on by the Borrowers and
their Subsidiaries may be properly conducted at all times, unless a Borrower or
its Subsidiary determines in good faith that the continued maintenance of such
property is no longer economically desirable.

 

Section 6.04                                Insurance.  The Borrowers shall, and shall cause each of
their Subsidiaries to maintain:

 

(a)                                  insurance
on its property with financially sound and reputable insurance companies
against loss and damage in at least the amounts (and with only those
deductibles) customarily maintained, and against such risks as are typically
insured against in the same general area, by Persons of comparable size engaged
in the same or similar business as the Borrowers and their Subsidiaries; and

 

(b)                                 all
worker’s compensation, employer’s liability insurance or similar insurance as may
be required under the laws of any state or jurisdiction in which it may be
engaged in business.

 

Without limiting the foregoing, all insurance policies
required pursuant to this Section shall (i) name the Lender as
mortgagee (in the case of property insurance) or additional insured (in the
case of liability insurance), as applicable, and provide that no cancellation
or modification of the policies shall be made without thirty (30) days’ prior
written notice to the Lender and (ii) be in addition to any requirements
to maintain specific types of insurance contained in the other Loan Documents.

 

Section 6.05                                Books
and Records.  Each Borrower shall,
and shall cause each of their Subsidiaries to, keep books and records in
accordance with GAAP, as applicable, which accurately reflect all of its
business affairs and transactions and permit the Lender or any of its
respective representatives, at reasonable times and intervals upon reasonable
notice to such Borrower, to visit each Obligor’s offices, to discuss such
Obligor’s financial matters with its officers and employees, and its
independent public accountants (if prior to the occurrence of an Event of
Default, in the presence of a Responsible Officer of the Borrowers) and to
examine (and photocopy extracts from) any of its books and records.  The Borrowers shall pay any fees of such
independent public accountant incurred in connection with the Lender’s exercise
of its rights pursuant to this Section.

 

Section 6.06                                Environmental
Law Covenant.  The Borrowers shall,
and shall cause each of their Subsidiaries to,

 

47

 

(a)                                  use
and operate all of its and their facilities and properties in material
compliance with all applicable Environmental Laws, keep all necessary material
permits, approvals, certificates, licenses and other authorizations relating to
environmental matters in effect and remain in material compliance therewith,
and handle all Materials of Environmental Concern in material compliance with
all applicable Environmental Laws; and

 

(b)                                 promptly
notify the Lender and provide copies upon receipt of all written material
claims, complaints, notices or inquiries relating to the condition of its
facilities and properties in respect of, or as to compliance with, Environmental
Laws, and shall take all steps reasonably necessary to resolve any material
non-compliance with Environmental Laws and keep its property free of any Lien
imposed by any Environmental Law.

 

Section 6.07                                Future
Guarantors, Security, etc.

 

(a)                                  The
Borrowers shall, and shall cause each Subsidiary to, execute any documents,
UCC-1 filing statements, agreements and instruments, and take all further
action that may be required under applicable law, or that the Lender may
reasonably request, in order to effectuate the transactions contemplated by the
Loan Documents and in order to grant, preserve, protect and perfect the
validity and first priority of the Liens created or intended to be created by
the Loan Documents.

 

(b)                                 The
Borrowers shall cause any subsequently acquired or organized Subsidiary to
execute a Subsidiary Guarantee (or a supplement thereto) and each applicable
Loan Document in favor of the Lender.  In
addition, from time to time, the Borrowers will, at their cost and expense,
promptly secure the Obligations by pledging or creating, or causing to be
pledged or created, perfected Liens with respect to such of its assets and
properties as the Lender shall designate, it being agreed that it is the intent
of the parties that the Obligations shall be secured by, among other things,
substantially all the assets of the Borrowers and their Subsidiaries (including
real and personal property acquired subsequent to the Closing Date).

 

(c)                                  Such
Liens will be created under the Loan Documents in form and substance
satisfactory to the Lender, and the Borrowers shall deliver or cause to be
delivered to the Lender all such instruments and documents (including legal
opinions, title insurance policies and lien searches) as the Lender shall
reasonably request to evidence compliance with this Section.

 

Section 6.08                                Required
Filings.  Each Borrower shall
promptly provide the Lender notice of availability (whether by electronic mail
or telecopy) of all documents which such Borrower or any Affiliate of such
Borrower is required to file with the SEC in accordance with the 1934 Act or
any rules thereunder no later than three (3) days after the filing of such
documents.

 

Section 6.09                                Bank
Accounts.

 

(a)                                  The
Borrowers shall have established and shall maintain the Feeder Accounts, the
Concentration Account, the Operating Accounts and the Interest Reserve
Account.  The Borrowers shall not change
any Bank Account, or open any new Bank Account, without the prior written
consent of the Lender.

 

48

 

(b)                                 The
Borrowers hereby grant the Lender a Lien on and security interest in the Bank
Accounts and all sums at any time and from time to time on deposit therein, as
first priority collateral security for the prompt payment in full when due, whether
at stated maturity, by acceleration or otherwise of all the Obligations
(including execution of Account Control Agreements as requested by the
Lender).  Each Borrower agrees that at
any time and from time to time at its expense, it will promptly execute and
deliver to the Lender any further instruments and documents, and take any
further actions, that the Lender may reasonably request, within five (5) days
of such request, in order to perfect and protect any first priority security
interest granted or purported to be granted hereby or enable the Lender to
exercise and enforce its rights and remedies hereunder with respect to any Bank
Account.

 

(c)                                  Each
Borrower shall deposit all proceeds from its collections (including the Units,
the Unit Leases and the Unit Lease Receivables) in every form, including,
without limitation, cash, checks and other forms of receipts on the first seven
(7) Business Days of each calendar month and on a weekly basis thereafter into
a Feeder Account (and such Borrower shall satisfy the requirements of this
sentence by complying herewith in all material respects).  Pursuant to an Account Control Agreement, all
such funds deposited into a Feeder Account shall only be sent by wire transfer
or bank internal transfer to the Concentration Account.

 

(d)                                 Each
Borrower shall pay expenses solely from the Operating Account.  Prior to the occurrence and continuance of an
Event of Default, the Borrowers may withdraw funds from the Operating Account
without the prior consent of the Lender. 
After the occurrence and during the continuance of an Event of Default,
the Lender may, by notice to the applicable Account Bank, condition withdrawals
from the Operating Account on the consent of the Lender or otherwise control
withdrawals from the Operating Account.

 

(e)                                  The
Borrowers shall maintain a cash reserve in the Interest Reserve Account in an
amount equal to $840,000, representing the sum of interest payments for two (2)
successive monthly periods based on an interest rate of 7% and an outstanding principal
amount equal to $72,000,000 (the “Interest Reserve Amount”). The
Borrowers shall be permitted to invest the Interest Reserve Amount in certain
permitted investments upon terms acceptable to both the Borrowers and the
Lender; provided, that any such account containing such investments
shall be subject to an account control agreement.  Following two consecutive calendar quarters
of compliance with the tests set forth in the definition of “Accelerated
Amortization Event”, an amount equal to 50% of the Interest Reserve Amount
shall be released to the Operating Account from the Reserve Account.  Upon the occurrence of a Default, any amounts
so released to the Operating Account shall be redeposited to the Interest Reserve
Account in accordance with this Section within one (1) Business Day.

 

(f)                                    For
the purposes of calculating the amount of the Loans available to each Borrower,
such payments will be applied (conditional upon final collection) pursuant to Section 6.10
of this Agreement.  For purposes of calculating
interest on the Obligations, such payments or other funds received will be
applied (conditional upon final collection) to the Obligations on the date of
receipt of immediately available funds by the Lender in the Concentration
Account, provided such payments or such other funds and notice thereof are
received in accordance with the Lender’s usual and customary practices as in
effect from time to time and within sufficient time to credit such Borrower’s
loan account on such day, and if not, then on the next succeeding Business Day.

 

49

 

Section 6.10                                Withdrawal
of Funds from the Concentration Account.

 

(a)                                  In
the absence of the occurrence and continuance of a Specified Event and a
mandatory prepayment event under Section 2.07(a) through (f)
of this Agreement, amounts in the Operating Account may be withdrawn and
distributed as and when required in accordance with Section 6.10(b)
of this Agreement; provided, that upon the occurrence and continuance of
an Accelerated Amortization Event, all amounts in the Concentration Account
(including interest and other proceeds of the cash and other property in the
Concentration Account) shall be paid or released in accordance with subsection (c)
of this Section; provided, further that upon the failure to
deliver a Borrowing Base Report, all amounts in the Concentration Account
(including interest and other proceeds of the cash and other property in the
Concentration Account) shall be paid or released in accordance with subsection (d)
of this Section; provided, further that upon the occurrence of
any of the mandatory prepayment events under Section 2.07(a)
through (f) of this Agreement, all amounts in the Concentration
Account (including interest and other proceeds of the cash and other property
in the Concentration Account) shall be paid or released in accordance with subsection (e)
of this Section; provided  further, that upon the occurrence and
continuance of a Specified Event, all amounts in each Bank Account (including interest
and other proceeds of the cash and other property in such Bank Account) shall
be paid or released, other than as directed by the Lender, in accordance with Section 6.2
of each Borrower Pledge and Security Agreement. The failure of the Borrowers to
make a payment to the Lender in an amount required by this Section shall
constitute an Event of Default subject to the terms of Article VIII (e)
of this Agreement.

 

(b)                                 (i)
In the absence of the occurrence and continuance of a Specified Event, the
Termination Date or the occurrence of any mandatory prepayment event pursuant
to Section 2.07(a) through (f) of this Agreement, on any
Payment Date, any amounts in the Concentration Account shall be applied from
the Bank Account (upon instructions of the Lender) in the following order:

 

(A)                              first,
to the Lender for payment of all fees and expenses due and payable pursuant to
the Fee Letter and Sections 3.04, 3.05, 11.03 and other
applicable provisions of this Agreement and the other Loan Documents;

 

(B)                                second,
to the Lender for payment of all interest due and payable pursuant to Section 2.06(b)
of this Agreement;

 

(C)                                third,
to the payment of outstanding Loans, if requested by the Borrowers; and

 

(D)                               fourth,
the balance to the Operating Account.

 

(ii)                                  In
the absence of the occurrence and continuance of a Specified Event, the
Termination Date or the occurrence of any mandatory prepayment event pursuant
to of Section 2.07(a) through (f) of this Agreement, on any
Draw Date, any amounts in the Concentration Account shall be applied by the
Account Bank (upon instructions by the Lender) in any order designated by the
Borrower as follows:

 

(A)                              for
transfer to any Operating Account;

 

(B)                                for
payment to the Lender of any of the Obligations.

 

50

 

(c)                                  Upon
the occurrence and continuance of an Accelerated Amortization Event, but in the
absence of the occurrence and continuance of a Specified Event, on any Payment
Date any amounts in the Concentration Account shall be applied from the Bank
Account (upon instructions of the Lender) in the following order:

 

(i)                                     first,
to the applicable payee under each Master Lease for payment of all scheduled
payments for rent, utilities and other charges;

 

(ii)                                  second,
to the Lender, for payment of all interest, fees and expenses due and payable
pursuant to the Fee Letter and Sections 2.06(b), 3.04, 3.05,
11.03 of this Agreement and other applicable provisions of the Agreement
and the other Loan Documents;

 

(iii)                               third, to the
Operating Account for payment of all Operating Expenses projected to be payable
by the Borrowers during the period from such Payment Date to the next
succeeding Payment Date;

 

(iv)                              fourth,
to the Manager for payment of all applicable fees under the Management
Agreement, in an amount not to exceed five percent (5%) of the Combined
Revenues;

 

(v)                                 fifth,
to the Operating Account for payment of all Capital Expenditures (other than
Capital Expenditures which constitute Operating Expenses) projected to be
payable by the Borrowers during the period from such Payment Date to the next
succeeding Payment Date and approved by the Lender, pursuant to a budgetary
plan approved by the Lender; and

 

(vi)                              sixth,
to the Lender for payment of all outstanding Obligations in an amount equal to
the greater of (x) the balance remaining in the ARC Concentration Account
following application of the amounts paid pursuant to this Section 6.10(c)(i)
through (v) or (y) an amount equal to the aggregate Loans outstanding as
of the date of the Accelerated Amortization Event, divided by 72.

 

(d)                                 Upon
any Borrower’s failure to deliver a Borrowing Base Report, any amounts in the
Concentration Account shall be applied by the Lender in the following order:

 

(i)                                     in
the case of a failure to deliver a Weekly Borrowing Base Report and such
failure to deliver shall continue for a period of at least two (2) Business
Days, (A) first, to the Lender for payment of all outstanding
Obligations on the next succeeding Business Day; and (B) second, the
balance, if any, to the Operating Account; and

 

(ii)                                  in
the case of a failure to deliver a Monthly Borrowing Base Report, (A) first,
to the Lender for payment of all due and payable interest on such Business Day,
(B) second, to the Lender for payment of all outstanding
Obligations on the next succeeding Business Day, and (C) third, the
balance, if any, to the Operating Account; provided that, to the extent
sufficient funds are on deposit following application of the amounts in the
Concentration Account on a Payment Date pursuant to subsection (b)(i)
of this Section an amount equal to the anticipated amount of interest due
and payable on the following Payment Date shall be reserved; provided  further,
that any amounts reserved pursuant to the first proviso shall be applied on
account of interest for such next 

 

51

 

following Payment
Date to the extent the amounts deposited in the Concentration Account (prior to
the application of the amounts held in reserve pursuant to the first proviso
hereto) are sufficient to pay interest due and payable on such succeeding
Payment Date.

 

(e)                                  Upon
the occurrence of any of the mandatory prepayment events under Section 2.07(a)
through (d) of this Agreement, any amounts in the Concentration Account
shall be applied by the Lender, on the next succeeding Business Day following
the date such mandatory prepayment event has occurred, for payment to the
Lender in the manner set forth in Section 2.07 of this Agreement; provided,
that, prior to the occurrence and continuance of a Specified Event, an
Accelerated Amortization Event or any failure to deliver a Borrowing Base
Report, in respect of mandatory prepayments constituting Permitted Net
Disposition Proceeds pursuant to Section 2.07(d) of this Agreement,
any amounts in excess of 65% of such Permitted Net Disposition Proceeds shall
be applied for payment to each Borrower as directed by Housing LLC.

 

Section 6.11                                Notices.  The Borrowers shall promptly give notice to
the Lender of:

 

(a)                                  the occurrence of any Default or Event of
Default;

 

(b)                                 as
soon as possible and in any event within three days after any Borrower or any
other Obligor obtains knowledge of (i) the occurrence of any material
adverse development with respect to any litigation, action, proceeding or labor
controversy or (ii) the commencement of any litigation, action, proceeding
or labor controversy of the type and materiality described in Section 5.06
of this Agreement, notice thereof and, to the extent the Lender reasonably
requests, copies of all documentation relating thereto;

 

(c)                                  promptly
after the sending or filing thereof, notice of all reports, notices,
prospectuses and registration statements which any Obligor files with the SEC
or any national securities exchange;

 

(d)                                 the
following events, as soon as possible and in any event within 30 days after any
Borrower knows thereof:  (i) the
occurrence of any Reportable Event with respect to any Plan, a failure to make
any required contribution to a Plan, the creation of any Lien in favor of the
PBGC or a Plan or any withdrawal from, or the termination, reorganization or
insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or
the taking of any other action by the PBGC or the Borrowers or any ERISA
Affiliate or any Multiemployer Plan with respect to the withdrawal from, or the
terminating, Reorganization or Insolvency of, any Plan;

 

(e)                                  the
addition of any ARC Communities beyond those set forth on Schedule 5
of this Agreement; and

 

(f)                                    any
material adverse change in the business, operations, property, condition
(financial or otherwise) or prospects of the Borrowers and their Subsidiaries
taken as a whole.

 

Each notice pursuant to this Section shall be
accompanied by a statement of a Responsible Officer setting forth details of
the occurrence referred to therein and stating what action each Borrower
proposes to take with respect thereto.

 

52

 

ARTICLE VII

NEGATIVE COVENANTS.

 

The Borrowers covenant and agree with the Lender that
until the Termination Date has occurred, the Borrowers shall, and shall cause
their Subsidiaries to, perform or cause to be performed the obligations set
forth below.

 

Section 7.01                                Business
Activities.  The Borrowers shall not,
and shall not permit any of their Subsidiaries to, engage in any business
activity except those business activities engaged in on the Closing Date of
this Agreement and activities reasonably incidental thereto.

 

Section 7.02                                Indebtedness.  The Borrowers shall not, and shall not permit
any of their Subsidiaries to, create, incur, assume or permit to exist any
Indebtedness, other than Permitted Indebtedness.

 

Section 7.03                                Limitation
on Liens.  The Borrowers shall not,
and shall not permit any of their Subsidiaries to, create, incur, assume or
permit to exist any Lien, other than Permitted Liens.

 

Section 7.04                                Limitation
on Distributions.  The Borrowers
shall not make any payment on account of, or set apart assets for, a sinking or
other analogous fund for the purchase, redemption, defeasance, retirement or
other acquisition of any equity interest of the Borrowers, whether now or
hereafter outstanding, or make any other distribution in respect of any of the
foregoing or to any shareholder or equity owner of the Borrowers, either
directly or indirectly, whether in cash or property or in obligations of the
Borrowers or any of each of the Borrower’s consolidated Subsidiaries at any
time following the occurrence and during the continuation of an Event of
Default; provided that at any time following the occurrence and
continuation of an Event of Default, the Borrowers may make distributions in
cash or other property but only to the extent of ARC’s distributable share of
each of the Borrower’s net taxable income and gain (as determined for federal
income tax purposes) with respect to such taxable year, and only to the extent
reasonably necessary for ARC to satisfy its ARC Distribution Requirement with
respect to such taxable year.

 

Section 7.05                                Investments.  The Borrowers shall not, and shall not permit
any of their Subsidiaries to, purchase, make, incur, assume or permit to exist
any Investment in any other Person other than Permitted Investments.

 

Section 7.06                                Issuance
of Capital Stock.  The Borrowers
shall not, and shall not permit any of their Subsidiaries to, (i) issue
any Capital Stock (whether for value or otherwise) to any Person other than (in
the case of Subsidiaries) a Borrower or a Parent Guarantor or another wholly
owned Subsidiary or (ii) become liable in respect of any obligation
(contingent or otherwise) to purchase, redeem, retire, acquire or make any
other payment in respect of any Capital Stock of the Borrowers or any
Subsidiary or any option, warrant or other right to acquire any such Capital
Stock.

 

Section 7.07                                Prohibition
of Fundamental Changes.  No Borrower
shall enter into any transaction of merger or consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or
dissolution) or sell all or substantially all of its assets other than a
Permitted Consolidation.

 

53

 

Section 7.08                                Permitted
Dispositions.  The Borrowers shall
not, and shall not permit any of its Subsidiaries to, dispose of any of the
Borrowers’ or such Subsidiaries’ assets (including accounts receivable and
Capital Stock of Subsidiaries) to any Person in one transaction or series of
transactions unless such Disposition is a Permitted Disposition.

 

Section 7.09                                Transactions
with Affiliates.  The Borrowers shall
not, and shall not permit any of their Subsidiaries to, enter into or cause or
permit to exist any arrangement, transaction or contract (including for the
purchase, lease or exchange of property or the rendering of services) with any
of its other Affiliates, unless such arrangement, transaction or contract
(i) is on fair and reasonable terms no less favorable to the Borrowers or
such Subsidiary than it could obtain in an arm’s-length transaction with a
Person that is not an Affiliate or (ii) is a Permitted Affiliate
Transaction.

 

Section 7.10                                Restrictive
Agreements, etc.  The Borrowers shall
not, and shall not permit any of their Subsidiaries to, enter into any
agreement prohibiting

 

(a)                                  the
creation or assumption of any Lien upon its properties, revenues or assets,
whether now owned or hereafter acquired;

 

(b)                                 the
ability of any Obligor to amend or otherwise modify any Loan Document; or

 

(c)                                  the
ability of any Subsidiary to make any payments, directly or indirectly, to the
Borrowers, including by way of dividends, advances, repayments of loans,
reimbursements of management and other intercompany charges, expenses and
accruals or other returns on investments;

 

provided, that the foregoing
prohibitions shall not apply to restrictions imposed by law or contained in any
Loan Document.

 

Section 7.11                                Sale
and Leaseback.  The Borrowers shall
not, and shall not permit any of their Subsidiaries to, directly or indirectly
enter into any agreement or arrangement providing for the sale or transfer by
it of any property (now owned or hereafter acquired) to a Person and the
subsequent lease or rental of such property or other similar property from such
Person.

 

Section 7.12                                Manager.  The Borrowers shall not cause the Units or
the Unit Leases to be managed by any manager other than a manager expressly approved
in writing by the Lender.

 

Section 7.13                                Anti-Terrorism
Law; Anti-Money Laundering.  The
Borrowers shall not:

 

(a)                                  directly
or indirectly, (i) knowingly conduct any business or engage in making or
receiving any contribution of funds, goods or services to or for the benefit of
any person described in Section 5.15 of this Agreement,
(ii) knowingly deal in, or otherwise engage in any transaction relating
to, any property or interests in property blocked pursuant to the Executive
Order or any other Prescribed Law, or (iii) knowingly engage in or
conspire to engage in any transaction that evades or avoids, or has the purpose
of evading or avoiding, or attempts to violate, any of the prohibitions set
forth in any Prescribed Law (and the Borrowers shall deliver 

 

54

 

to the Lender any
certification or other evidence requested from time to time by the Lender in
its reasonable discretion, confirming the Borrowers’ compliance with this
Section.

 

(b)                                 knowingly
cause or permit any of the funds of the Borrowers that are used to repay the
Loans to be derived from any unlawful activity with the result that the making
of the Loans would be in violation of Prescribed Law.

 

ARTICLE VIII

EVENTS OF DEFAULT.

 

Each of the following events or occurrences described
in this Article shall constitute an event of default (an “Event of
Default”):

 

(a)                                  Any
Borrower shall default in the payment of any principal or interest on any Loan
when due (whether scheduled, at stated maturity, upon acceleration or upon
mandatory prepayment).

 

(b)                                 Any
Borrower shall default in the payment of any other amount payable by it
hereunder or under any other Loan Document after notification by the Lender of
such default, and such default shall have continued unremedied for three (3)
Business Days.

 

(c)                                  Any
representation, warranty or certification made or deemed made herein or in any
other Loan Document by any Borrower or Master Lessor, as applicable, or any
certificate furnished to the Lender pursuant to the provisions of this
Agreement shall prove to have been false or misleading in any material respect
as of the time made or furnished.

 

(d)                                 Any
Borrower shall default in the due performance or observance of any of its
obligations under Sections 6.01(d), 6.02(a)(i), 6.02(d),
6.07(b) or Article VII of this Agreement.

 

(e)                                  Any
Borrower shall default in the due performance or observance of any of its
obligations under (i) Sections 6.09 and 6.10 of this
Agreement, and such default shall continue unremedied for a period of one (1)
Business Day, (ii) Section 6.01(e) of this Agreement, and such
Default shall continue for a period of two (2) Business Days (after notice of
such Default by the Lender) (iii) Sections 6.01(f), 6.01(g)
and 6.01(h) of this Agreement, and such default shall continue
unremedied for a period of five (5) Business Days and (iv) Sections 6.01(a),
6.01(b), and 6.01(c) of this Agreement, and such default shall
continue unremedied for a period of ten (10) Business Days.

 

(f)                                    any “event of default” or any other default which
permits a demand for, or requires, the early repayment of obligations due by the
Borrowers or any of their Subsidiaries, any other Obligor or any Subsidiary of ARC LP (other than any
Non-Master Lessor Subsidiary)  and (y)
under (i) any agreement (after the expiration of any applicable grace period
under any such agreement) relating to any Indebtedness (other than
Indebtedness described in the provisos to clause (c) of the definition
of “Indebtedness”) of the Borrowers
or any of their Subsidiaries, any other Obligor or any Subsidiary of ARC LP, as applicable, to which the Lender or any
Affiliate thereof is a party; or (ii) any agreement (after the expiration of
any applicable grace period under any such agreement) relating to any Indebtedness
of the Borrowers or any of their 

 

55

 

Subsidiaries, any
other Obligor or any Subsidiary of ARC LP,
for $15,000,000 or more in the aggregate.

 

(g)                                 Any
judgment or judgments for the payment of money in excess of $10,000,000 in the
aggregate shall be rendered against ARC LP or any of its Affiliates by one or
more courts, administrative tribunals or other bodies having jurisdiction and
the same shall not be satisfied, discharged (or provision shall not be made for
such discharge) or bonded, or a stay of execution thereof shall not be
procured, within thirty (30) days from the date of entry thereof, and ARC
LP or any such Affiliate shall not, within said period of thirty
(30) days, or such longer period during which execution of the same shall
have been stayed or bonded, appeal therefrom and cause the execution thereof to
be stayed during such appeal; provided,
however, that any such judgment or judgments shall not give rise to an Event of
Default under this Section if and so long as (A) the amount of such
judgment or order which remains unsatisfied is covered by a valid and binding
policy of insurance between ARC LP or Affiliate in respect of such judgment or
judgments and the insurer covering full payment of such unsatisfied amount and
(B) such insurer, which shall be rated at least “A” by A.M. Best Company, has
been notified, and has not disputed the claim made for payment, of the amount
of such judgment or judgments.

 

(h)                                 (i) any
Person shall engage in any “prohibited transaction” (as defined in Section 406
of ERISA or Section 4975 of the Internal Revenue Code) involving any Plan,
(ii) any “accumulated funding deficiency” (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan,
(iii) a Reportable Event shall occur with respect to, or proceedings shall
commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any Single Employer Plan, which Reportable Event or
institution of proceedings is, in the reasonable opinion of the Lender, likely
to result in the termination of such Plan for purposes of Title IV of ERISA,
and, in the case of a Reportable Event, the continuance of such Reportable
Event unremedied for ten (10) days after notice of such Reportable Event
pursuant to Section 4043(a), (c) or (d) of ERISA is given or the
continuance of such proceedings for ten (10) days after commencement thereof,
as the case may be, (iv) any Single Employer Plan shall terminate for
purposes of Title IV of ERISA, or (v) any withdrawal liability to a
Multiemployer Plan shall be incurred by any Borrower or any of its
Subsidiaries; and in each case in clauses (i) through (v) above, such
event of condition, together with all other such events or conditions arising
from a Plan or Plans, if any, is reasonably likely to subject such Borrower or
any of its Subsidiaries to any tax, penalty or other liabilities in the
aggregate material in relation to the business, operations, property or
financial or other condition of such Borrower or any of its Subsidiaries.

 

(i)                                     Any
Change in Control shall occur.

 

(j)                                     Any
Borrower shall admit in writing its inability to pay its debts as such debts
become due.

 

(k)                                  Any
Borrower or any of its Affiliates shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
examiner or liquidator or the like of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the Bankruptcy Code, (iv) file
a petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, liquidation, dissolution, arrangement or
winding-up, or composition or readjustment of debts, (v) fail to
controvert in a timely and appropriate manner, or acquiesce 

 

56

 

in writing to, any
petition filed against it in an involuntary case under the Bankruptcy Code or
(vi) take any corporate or other action for the purpose of effecting any
of the foregoing.

 

(l)                                     A
proceeding or case shall be commenced, without the application or consent of
any Borrower or any of its Affiliates, in any court of competent jurisdiction,
seeking (i) its reorganization, liquidation, dissolution, arrangement or
winding-up, or the composition or readjustment of its debts, (ii) the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
examiner, liquidator or the like of any Borrower or any such Affiliate or of
all or any substantial part of its property, or (iii) similar relief in
respect of any Borrower or any such Affiliate under any law relating to
bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement
or winding-up, or composition or adjustment of debts, and such proceeding or
case shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of thirty (30) or more days; or an order for relief
against any Borrower or any such Affiliate shall be entered in an involuntary
case under the Bankruptcy Code.

 

(m)                               Any
Loan Document, any Master Lease Estoppel Certificate and Agreement which
relates to a Borrowing Base ARC Community or any Lien granted thereunder shall
(except in accordance with its terms), in whole or in part, terminate, cease to
be effective or cease to be the legally valid, binding and enforceable
obligation of any Obligor, or, in respect of any Master Lease Estoppel
Certificate and Agreement which relates to a Borrowing Base ARC Community, any
Obligor or Master Lessor, in each case party thereto; any Obligor, Master
Lessor or any other party shall, directly or indirectly, contest in any manner
such effectiveness, validity, binding nature or enforceability; or, except as
permitted under any Loan Document or any Master Lease Estoppel Certificate and
Agreement which relates to a Borrowing Base ARC Community, as applicable, any
Lien securing any Obligation shall, in whole or in part, cease to be a
perfected first priority Lien.

 

(n)                                 Any
Borrower shall grant, or suffer to exist, any Lien (other than Permitted Liens)
on any Collateral except the Liens contemplated hereby, or Permitted Liens or
the Liens contemplated hereby shall cease to be first priority perfected Liens
on the Collateral in favor of the Lender or shall be Liens in favor of any
Person other than the Lender.

 

(o)                                 Any
Loan Document, any Master Lease which relates to a Borrowing Base ARC Community,
or any Master Lease Estoppel Certificate and Agreement which relates to a
Borrowing Base ARC Community shall cease to be in full force and effect, or the
enforceability thereof shall be contested by any Borrower or Master Lessor, as
applicable, or the Custodian shall resign and, with respect to the resignation
of such Custodian, such Custodian shall not have been replaced with a Custodian
reasonably acceptable to the Lender within sixty (60) calendar days.

 

(p)                                 Without
duplication of clause (f) hereof, any Borrower or any of their
Subsidiaries, any other Obligor or any
Subsidiary of ARC LP (other than any Non-Master Lessor Subsidiary) shall
be in default under any ML Indebtedness (including the Chattel Paper Facility),
which default (i) involves the failure to pay an obligation due and
payable under its terms, or (ii) permits the acceleration of the maturity
of obligations by any other party to or beneficiary of such note, indenture,
loan agreement, guarantee, swap agreement or other contract.

 

(q)                                 A
Material Adverse Effect shall occur.

 

57

 

(r)                                    Any
Guarantor shall default in the due performance or observation of any of its
obligations under the Guarantee to which it is a party.

 

(s)                                  Any
Master Lessor shall default in the due performance or observation of any of its
obligations under the Master Lease Estoppel Certificate and Agreement to which
it is a party.

 

ARTICLE IX

REMEDIES UPON DEFAULT.

 

(a)                                  An
Event of Default shall be deemed to be continuing unless expressly waived by
the Lender in writing.  Upon the
occurrence and during the continuance of one or more Events of Default
hereunder, the Lender’s obligation to make additional Loans to the Borrowers
shall automatically terminate without further action by any Person.  Upon the occurrence and during the
continuance of one or more Events of Default other than those referred to in Article VIII(k)
or (l) of this Agreement, the Lender may immediately declare the
principal amount of the Loans then outstanding under the Note to be immediately
due and payable, together with all interest thereon and fees and expenses
accruing under this Agreement; provided that the principal amount then
outstanding under the Note (together with all interest thereon and fees and expenses)
shall not be immediately due and payable during the continuance of an
Accelerated Amortization Event in the event the aggregate amount of proceeds in
the Concentration Account is deemed sufficient in the sole discretion of the
Lender.  Upon the occurrence and during
the continuance of an Event of Default referred to in Article VIII(k)
or (l) of this Agreement, such amounts shall immediately and
automatically become due and payable without any further action by any
Person.  Upon such declaration or such
automatic acceleration, the balance then outstanding on the Note shall become
immediately due and payable, without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Borrowers.

 

(b)                                 Upon
the occurrence and during the continuance of one or more Events of Default, the
Lender shall have the right to obtain physical possession of the Management
Records and all other files of the Borrowers relating to the Collateral and all
documents relating to the Collateral which are then or may thereafter come in
to the possession of the Borrowers or any third party acting for the Borrowers
and the Borrowers shall deliver to the Lender such assignments as the Lender
shall request.  The Lender shall be
entitled to specific performance of all agreements of the Borrowers contained
in this Agreement.

 

ARTICLE X

NO DUTY OF LENDER.

 

The powers conferred on the Lender hereunder are
solely to protect the Lender’s interests in the Collateral and shall not impose
any duty upon it to exercise any such powers. 
The Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers, and neither it nor any of
its officers, directors, employees or agents shall be responsible to the
Borrowers for any act or failure to act hereunder, except for its or their own
gross negligence or willful misconduct.

 

58

 

ARTICLE XI

 

MISCELLANEOUS.

 

Section 11.01                          Waiver.  No failure on the part of the Lender to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under any Loan Document or the Master Lease
Estoppel Certificate and Agreement shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power or privilege under any Loan
Document or the Master Lease Estoppel Certificate and Agreement preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.  The remedies provided herein
are cumulative and not exclusive of any remedies provided by law.

 

Section 11.02                          Notices.  Except as otherwise expressly permitted by
this Agreement, all notices, requests and other communications provided for
herein and under the Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Agreement) shall
be given or made in writing (including without limitation by electronic mail
(together with a confirmatory telecopy) or telecopy) delivered to the intended
recipient at the “Address for Notices” specified below its name on the
signature pages to this Agreement); or, as to any party, at such other address
as shall be designated by such party in a written notice to each other party
provided, that a copy of all notices given under Section 6.11 of
this Agreement shall simultaneously be delivered to Merrill Lynch Mortgage
Capital Inc., 4 World Financial Center, 10th Floor, New York, New York
10080; Attention:  Josh Green via
facsimile at (212) 449-6673 and via email at
gabfoperations@exchange.ml.com.  Except
as otherwise provided in this Agreement and except for notices given under Article II
of this Agreement (which shall be effective only on receipt), all such
communications shall be deemed to have been duly given when transmitted by
telex or telecopy or personally delivered or, in the case of a mailed notice,
upon receipt, in each case given or addressed as aforesaid.

 

Section 11.03                          Indemnification
and Expenses.

 

(a)                                  Each
Borrower agrees to hold the Lender, and its Affiliates and their officers,
directors, employees, agents and advisors (each an “Indemnified Party”)
harmless from and indemnify any Indemnified Party against all liabilities,
losses, damages, judgments, costs and expenses of any kind which may be imposed
on, incurred by or asserted against such Indemnified Party (collectively, the “Costs”)
relating to or arising out of this Agreement, the Note, any other Loan
Document, the Master Lease Estoppel Certificate and Agreement (subject to the
limitations contained in Section 20 thereof) or any transaction
contemplated hereby or thereby, or any amendment, supplement or modification
of, or any waiver or consent under or in respect of, this Agreement, the Note,
any other Loan Document, the Master Lease Estoppel Certificate and Agreement or
any transaction contemplated hereby or thereby, other than to the extent, in
each case, any such Cost results from any Indemnified Party’s gross negligence
or willful misconduct.  Without limiting
the generality of the foregoing, each Borrower agrees to hold any Indemnified
Party harmless from and indemnify such Indemnified Party against all Costs with
respect to all Units and Unit Leases relating to or arising out of any
violation or alleged violation of any Environmental Law, rule or regulation or
any consumer protection, other than to the extent, in each case, any such Cost
results from Indemnified Party’s gross negligence or willful misconduct.  Each Indemnified Party agrees that it
(i) shall promptly notify the Borrowers of any claim, action or suit
asserted or commenced against them, and (ii) that the Borrowers, with the
written consent of the Lender, may assume the defense thereof with counsel 

 

59

 

reasonably satisfactory
to such Indemnified Party at the Borrowers’ sole expense, (iii) that such
Indemnified Party shall cooperate with the Borrowers on such defense, and
(iv) that such Indemnified Party shall not settle any such claim, action
or suit without the consent of the Borrowers; provided, however, that in
the event such Indemnified Party is not reasonably satisfied with such defense,
such Indemnified Party may assume such defense with counsel satisfactory to
such Indemnified Party at the Borrowers’ sole expense.

 

(b)                                 The
Borrowers, jointly and severally, agree to reimburse an Indemnified Party for
all such Indemnified Party’s reasonable (in the case of preservation) costs and
expenses incurred in connection with the enforcement or the preservation of
such Indemnified Party’s rights under this Agreement, any Note, any other Loan
Document, the Master Lease Estoppel Certificate and Agreement, or any
transaction contemplated hereby or thereby, including without limitation the
fees and disbursements of its counsel as and when billed by such Indemnified
Party.  The Borrowers hereby acknowledge
that, notwithstanding the fact that the Note is secured by the Collateral, the
obligation of the Borrowers under the Note is a recourse obligation of the
Borrowers.

 

(c)                                  The
Borrowers, jointly and severally, agree to pay as and when billed by the Lender
all of the reasonable out-of-pocket costs and expenses incurred by the Lender
in connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Agreement, any Note, any other
Loan Document, the Master Lease Estoppel Certificate and Agreement (subject to
the limitations contained in Section 20 thereof) or any other documents
prepared in connection herewith or therewith. 
The Borrowers, jointly and severally, agree to pay as and when billed by
the Lender all of the reasonable out-of-pocket costs and expenses incurred in
connection with the consummation and administration of the transactions
contemplated hereby and thereby including without limitation (i) all the
reasonable fees, disbursements and expenses of counsel to the Lender and
(ii) subject to an annual limit of $100,000, all the due diligence,
inspection, testing and review costs and expenses incurred by the Lender with
respect to Collateral under this Agreement, including, but not limited to,
those costs and expenses incurred by the Lender pursuant to Section 11.15
of this Agreement.

 

Section 11.04                          Amendments.  Except as otherwise expressly provided in
this Agreement, any provision of this Agreement may be modified or supplemented
only by an instrument in writing signed by the Borrowers and the Lender and any
provision of this Agreement may be waived by the Lender.

 

Section 11.05                          Assignments
and Participations.

 

(a)                                  The
Lender may from time to time assign all or a portion of its rights and
obligations under this Agreement and the Loan Documents to (i) any Affiliate of
the Lender which has shareholder equity of at least $50,000,000; or (ii)
another Person, in each case, in respect of clause (i) of this Section,
prior to the continuance of Default, and in respect of clause (ii), prior to
the continuance of an Event of Default, with the prior consent of the Borrowers
which shall not be unreasonably withheld or delayed; provided, further,
that the parties to each such assignment shall execute and deliver a completed
Assignment and Acceptance, along with replacement Note executed and delivered
by the Borrowers.

 

(b)                                 Subject
to acceptance and recording thereof pursuant to Section 11.05(e),
upon such execution and delivery, from and after the effective date specified
in such Assignment 

 

60

 

and Acceptance,
(i) the assignee thereunder shall be a party hereto and, to the extent
that rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, have the rights and obligations of the Lender
hereunder, and (ii) the Lender assignor thereunder shall, to the extent
that any rights and obligations hereunder have been assigned by it pursuant to
such Assignment and Acceptance, relinquish its rights and be released from its
obligations under this Agreement.

 

(c)                                  Any
assignment or transfer by the Lender of rights or obligations under this
Agreement that does not comply with this Section shall be treated for
purposes of this Agreement as a sale by the Lender of a participation in such
rights and obligations in accordance with the following paragraph of this
Section.

 

(d)                                 The
Lender may sell participations to one or more Persons in or to all or a portion
of its rights and obligations under this Agreement; provided, however,
that (i) the Lender’s obligations under this Agreement shall remain
unchanged, (ii) the Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) the Lender
shall remain the holder of any such Note for all purposes of this Agreement,
and (iv) the Borrowers shall continue to deal solely and directly with the
Lender in connection with the Lender’s rights and obligations under and in
respect of this Agreement and the other Loan Documents.  Notwithstanding the terms of Section 3.03
of this Agreement, each participant of the Lender shall be entitled to the
additional compensation and other rights and protections afforded the Lender
under Section 3.03 of this Agreement to the same extent as the
Lender would have been entitled to receive them with respect to the
participation sold to such participant.

 

(e)                                  The
Borrowers shall maintain a register (the “Register”) on which they will
record the Lender’s rights hereunder, and each assignment and acceptance and
participation.  The
Register shall include the names and addresses of the Lender (including all
assignees and successors); provided, however, that a Borrower
shall not be required to record any transfer on the Register of which it has
not received notice, or does not have knowledge.  Failure to make any such recordation, or any
error in such recordation shall not affect the Borrower’s obligations in respect
of such rights.  If the Lender sells a
participation in its rights hereunder, it shall provide the Borrowers, or
maintain as agent of the Borrowers, the information described in this paragraph
and permit the Borrowers to review such information as reasonably needed for
the Borrowers to comply with its obligations under this Agreement or under any
applicable law or governmental regulation or procedure.

 

(f)                                    Subject
to Section 11.19 of this Agreement, the Lender may, in connection
with any assignment or participation or proposed assignment or participation
pursuant to this Section, disclose to the assignee or participant or proposed
assignee or participant, as the case may be, any information relating to any
Borrower or any of its Subsidiaries or to any aspect of the Loans that has been
furnished to the Lender by or on behalf of any Borrower or any of its
Subsidiaries.

 

(g)                                 The
Lender may at any time create a security interest in all or any portion of its
rights under this Agreement (including, without limitation, the Loans owing to
it and any Note held by it) (i) in favor of any Federal Reserve Bank in
accordance with Regulation A of the Board of Governors of the Federal Reserve
System and any operating circular issued by such 

 

61

 

Federal Reserve
Bank or (ii)  in favor of any trustee in connection with loan
collateralized debt arrangements.

 

(h)                                 No
such assignment shall release the assigning Lender from its obligations
hereunder.

 

Section 11.06                          Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.

 

Section 11.07                          Survival.  The obligations of the Borrowers under Sections
3.03 and 11.03 of this Agreement shall survive the repayment of the
Loans and the termination of this Agreement. 
In addition, each representation and warranty made or deemed to be made
by a request for a borrowing, herein or pursuant hereto shall survive the
making of such representation and warranty, and the Lender shall not be deemed
to have waived, by reason of making any Loan, any Default that may arise
because any such representation or warranty shall have proved to be false or
misleading, notwithstanding that the Lender may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Loan was made.

 

Section 11.08                          Captions.  The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Agreement.

 

Section 11.09                          Execution
in Counterparts, Effectiveness, etc. 
This Agreement may be executed by the parties hereto in any number of
counterparts, each of which shall be deemed to be an original (whether such
counterpart is originally executed or an electronic copy of an original) and
all of which shall constitute together but one and the same agreement.  This Agreement shall become effective when
counterparts hereof executed on behalf of each Borrowers and the Lender shall
have been received by the Lender and notice thereof shall have been given by
the Lender to the Borrowers.

 

Section 11.10                          Governing
Law.  EACH LOAN
DOCUMENT (EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN A LOAN DOCUMENT) WILL EACH
BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).

 

Section 11.11                          Submission
To Jurisdiction; Waivers.  Each
Borrower hereby irrevocably and unconditionally:

 

(A)                              SUBMITS
FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS
AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE
UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS
FROM ANY THEREOF;

 

62

 

(B)                                CONSENTS
THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE
EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE
TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH
ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO
PLEAD OR CLAIM THE SAME;

 

(C)                                AGREES
THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY
MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY
SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS
SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN
NOTIFIED; AND

 

(D)                               AGREES
THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER
JURISDICTION.

 

Section 11.12                          WAIVER OF JURY TRIAL.  EACH BORROWER AND THE LENDER HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT AND ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.

 

Section 11.13                          Acknowledgments.  Each Borrower hereby acknowledges that:

 

(a)                                  it
has been advised by counsel in the negotiation, execution and delivery of this
Agreement, the Note and the other Loan Documents;

 

(b)                                 the
Lender has no fiduciary relationship to any Borrower, and the relationship
between the Borrowers and the Lender is solely that of debtor and creditor; and

 

(c)                                  no
joint venture exists between the Lender and any Borrower.

 

Section 11.14                          Management
of Units and Unit Leases.

 

(a)                                  Each
Borrower covenants to maintain or cause the management of the Units and the
Unit Leases to be maintained in conformity with standard industry practices for
the same type of units and leases as the Units and Unit Leases, respectively,
and in a manner at least equal in quality to the management each Borrower
provides for its Units and Unit Leases.

 

(b)                                 The
Units and the Unit Leases shall initially be managed by ARCMS, (together with
any replacement manager approved by the Lender, the “Manager”).

 

(c)                                  In
the event a Borrower or its Affiliate is managing the Units and the Unit
Leases, such Borrower shall permit the Lender from time to time to inspect such
Borrower’s or 

 

63

 

its Affiliate’s
managing facilities, as the case may be, for the purpose of satisfying the
Lender that such Borrower or its Affiliate, as the case may be, has the ability
to manage the Units and the Unit Leases as provided in this Agreement.

 

Section 11.15                          Periodic
Due Diligence Review.  The Borrowers
acknowledge that the Lender has the right to perform continuing due diligence
reviews with respect to the Units and Unit Leases and the manner in which the
are managed, for purposes of verifying compliance with the representations,
warranties and specifications made hereunder, or otherwise, and the Borrowers
agree that, unless a Default has occurred (in which case no notice is
required), upon reasonable (but no less than one (1) Business Day’s) prior
notice to the Borrowers, the Lender or its authorized representatives shall be
permitted during normal business hours to examine, inspect, and make copies and
extracts of, the Transmittal Package and any and all documents, records,
agreements, instruments or information relating to such Units and Unit Leases
in the possession or under the control of the Borrowers and/or the
Custodian.  The Borrowers also shall make
available to the Lender a knowledgeable financial or accounting officer for the
purpose of answering questions respecting the Transmittal Package and the Units
and Unit Leases.  The Borrowers further
agree that the Borrowers shall reimburse the Lender for any and all
out-of-pocket costs and expenses incurred by the Lender in connection with the
Lender’s activities pursuant to this Section as and when billed by the
Lender.

 

Section 11.16                          Set-Off.  In addition to any rights and remedies of the
Lender provided by this Agreement and by law, the Lender shall have the right,
without prior notice to the Borrowers, any such notice being expressly waived
by the Borrowers to the extent permitted by applicable law, upon any amount
becoming due and payable by the Borrowers hereunder (whether at the stated
maturity, by acceleration or otherwise) to set-off and appropriate and apply
against such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by the Lender or
any Affiliate thereof to or for the credit or the account of the
Borrowers.  The Lender agrees promptly to
notify the Borrowers after any such set-off and application made by the Lender;
provided that the failure to give such notice shall not affect the validity of
such set-off and application.

 

Section 11.17                          Guarantee
Provisions; Joint and Several Liability.
Each Borrower acknowledges and agrees that, whether or not specifically
indicated as such in a Loan Document, all Obligations shall be joint and several
Obligations of each individual Borrower, and in furtherance of such joint and
several Obligations, each Borrower hereby irrevocably guarantees the payment of
all Obligations of each other Borrower as set forth below:

 

(a)                                  Guarantee.  Each Borrower hereby jointly and severally,
absolutely, unconditionally and irrevocably guarantees the full and punctual
payment when due, whether at stated maturity, by required prepayment,
declaration, acceleration, demand or otherwise, of all Obligations; provided,
however, that each Borrower shall only be liable under this Agreement
for the maximum amount of such liability that can be hereby incurred without
rendering this Agreement, as it relates to such Borrower, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer, and
not for any greater amount.  This
guarantee constitutes a guaranty of payment when due and not of collection, and
each Borrower specifically agrees that it shall not be necessary or required
that the Lender exercise any right, assert any claim or

 

64

 

demand or enforce
any remedy whatsoever against any Obligor or any other Person before or as a
condition to the obligations of such Borrower hereunder.

 

(b)                                 Guarantee
Absolute, etc.  The guarantee agreed
to above shall in all respects be a continuing, absolute, unconditional and
irrevocable guarantee of payment, and shall remain in full force and effect
until the Termination Date.  Each
Borrower jointly and severally guarantees that the Obligations shall be paid
strictly in accordance with the terms of each Loan Document under which such
Obligations arise, regardless of any law, regulation or order now or hereafter
in effect in any jurisdiction affecting any of such terms or the rights of the
Lender with respect thereto.  The
liability of each Borrower under this Agreement shall be joint and several,
absolute, unconditional and irrevocable irrespective of (i) any lack of
validity, legality or enforceability of any Loan Document; (ii) the
failure of the Lender (A) to assert any claim or demand or to enforce any
right or remedy against any Obligor or any other Person (including any other
guarantor) under the provisions of any Loan Document or otherwise, or
(B) to exercise any right or remedy against any other guarantor (including
any Obligor) of, or collateral securing, any Obligations; (iii) any change
in the time, manner or place of payment of, or in any other term of, all or any
part of the Obligations, or any other extension, compromise or renewal of any
Obligation; (iv) any reduction, limitation, impairment or termination of
any Obligations for any reason, including any claim of waiver, release,
surrender, alteration or compromise, and shall not be subject to (and each Borrower
hereby waives any right to or claim of) any defense or setoff, counterclaim,
recoupment or termination whatsoever by reason of the invalidity, illegality,
irregularity, compromise, unenforceability of, or any other event or occurrence
affecting, any Obligations or otherwise; (v) any amendment to, rescission,
waiver, or other modification of, or any consent to or departure from, any of
the terms of any Loan Document; (vi)  any addition, exchange, release,
surrender or non-perfection of any collateral, or any amendment to or waiver or
release or addition of, or consent to or departure from, any other guarantee
held by the Lender securing any of the Obligations; or (vii) any other
circumstance which might otherwise constitute a defense available to, or a
legal or equitable discharge of, any Obligor, any surety or any guarantor.

 

(c)                                  Reinstatement,
etc.  Each Borrower agrees that its
guarantee shall continue to be effective or be reinstated, as the case may be,
if at any time any payment (in whole or in part) of any of the Obligations is
rescinded or must otherwise be restored by the Lender, upon the insolvency,
bankruptcy or reorganization of any other Borrower, any other Obligor or
otherwise, all as though such payment had not been made.

 

(d)                                 Waiver,
etc.  Each Borrower hereby waives
promptness, diligence, notice of acceptance and any other notice with respect
to any of the Obligations and this Agreement and any requirement that the
Lender protect, secure, perfect or insure any Lien, or any property subject thereto,
or exhaust any right or take any action against any other Obligor or any other
Person (including any other guarantor) or entity or any collateral securing the
Obligations, as the case may be.

 

(e)                                  Postponement
of Subrogation, etc.  Each Borrower
agrees that it shall not exercise any rights which it may acquire by way of
rights of subrogation under any Loan Document to which it is a party, nor shall
any Borrower seek or be entitled to seek any contribution or reimbursement from
any Obligor, in respect of any payment made hereunder, under any other Loan
Document or otherwise, until following the Termination Date.  Any amount paid to any Borrower on account of
any such subrogation rights prior to the Termination 

 

65

 

Date shall be held
in trust for the benefit of the Lender and shall immediately be paid and turned
over to the Lender in the exact form received by such Borrower (duly endorsed
in favor of the Lender, if required), to be credited and applied against the
Obligations, whether matured or unmatured; provided, however,
that if (i)  any Borrower has made payment to the Lender of all or any
part of the Obligations; and (ii)  the Termination Date has occurred; then
at such Borrower’s request, the Lender shall, at the expense of such Borrower,
execute and deliver to such Borrower appropriate documents (without recourse
and without representation or warranty) necessary to evidence the transfer by
subrogation to such Borrower of an interest in the Obligations resulting from
such payment.  In furtherance of the
foregoing, at all times prior to the Termination Date, each Borrower shall
refrain from taking any action or commencing any proceeding against any Obligor
(or its successors or assigns, whether in connection with a bankruptcy
proceeding or otherwise) to recover any amounts in the respect of payments made
under any Loan Document to the Lender.

 

(f)                                    Right of Contribution.  Each
Borrower hereby agrees that, to the extent that a Borrower shall have paid more
than its proportionate share of any payment made hereunder or in respect of the
Obligations, such Borrower shall be entitled to seek and receive contribution
from and against the other Borrower hereunder which has not paid its
proportionate share of such payment.  The
provisions of this Section shall in no respect limit the obligations and
liabilities of any Borrower to the Lender, and each Borrower shall remain
liable to the Lender for the full amount guaranteed by it hereunder.

 

Each Borrower hereby acknowledges
and agrees that such Borrower shall be jointly and severally liable to the
Lender for all representations, warranties, covenants, obligations and
indemnities of the Borrowers hereunder

 

Section 11.18                          Treatment
of Certain Information. 
Notwithstanding anything to the contrary contained herein or in any
other Loan Document, all Persons may disclose to any and all Persons, without
limitation of any kind, the U.S. federal, state and local tax treatment of the
Loans or any of the transactions contemplated by this Agreement, any other Loan
Document (collectively, the “Transactions”), any fact that may be
relevant to understanding the U.S. federal, state and local tax treatment of
the Transactions and all materials of any kind (including opinions or other tax
analyses) relating to such U.S. federal, state and local income tax treatment.

 

Section 11.19                          Confidentiality.  The Lender agrees that it will not use,
either directly or indirectly, any of the Confidential Information except in
connection with this Agreement and the transactions contemplated hereby.  The Lender shall not disclose to any Person
the Confidential Information, except

 

(a)                                  to
its and its Affiliates’ directors, officers, employees and agents, including
accountants, legal counsel and other professional advisors who need to know the
Confidential Information for purposes related to this Agreement, any other Loan
Document, the Master Lease Estoppel Certificate and Agreement or any
transactions contemplated thereby or reasonably incidental to the administration
of this Agreement, other Loan Documents or the Master Lease Estoppel
Certificate and Agreement (it being understood that the Persons to whom such
disclosure is made will be informed of the confidential nature of such
Confidential Information and agree to keep such Confidential Information
confidential in accordance with the provisions of this Section),

 

66

 

(b)                                 to
the extent requested by any regulatory authority having jurisdiction over it or
its Affiliates,

 

(c)                                  to
the extent required by Applicable Law, regulations or by any subpoena or
similar legal process, provided that the Lender shall request
confidential treatment of such Confidential Information to the extent permitted
by Applicable Law and the Lender shall, to the extent permitted by Applicable
Law, promptly inform the Borrowers with respect thereto so that the Borrowers
may seek appropriate protective relief to the extent permitted by Applicable
Law, provided  further that in the event that such protective
remedy or other remedy is not obtained, the Lender, as the case may be, shall
furnish only that portion of the Confidential Information that is legally
required and shall disclose the Confidential Information in a manner reasonably
designed to preserve its confidential nature;

 

(d)                                 in
connection with the exercise of any remedies hereunder or any suit, action or
proceeding relating to this Agreement or the enforcement of rights hereunder,

 

(e)                                  subject
to an agreement containing provisions substantially the same as those of this
Section, to (i) any assignee of or participant in, or any prospective assignee
of or participant in, any of its rights and obligations under this Agreement or
(ii) any actual or prospective counterparty (or its advisors) to any swap or
derivative transaction relating to the Borrowers and their obligations,

 

(f)                                    with
the prior written consent of the Borrowers or

 

(g)                                 to
the extent such Confidential Information (i) becomes publicly available other
than as a result of a breach of this Section or (ii) becomes available to
the Lender on a nonconfidential basis from a source other than the Borrowers or
their Affiliates, which source, to the reasonable knowledge of the Lender, as
may be appropriate, is not prohibited from disclosing such Confidential
Information to the Lender by a contractual, legal or fiduciary obligation, to
the Borrowers or the Lender.

 

The Lender shall not make any public announcement,
advertisement, statement or communication regarding the Borrowers, their Affiliates
or this Agreement or the transactions contemplated hereby without the prior
written consent of the Borrowers.  The
obligations of the Lender under this Section shall survive the termination
or expiration of this Agreement.

 

Section 11.20                          Prescribed
Laws.  The Lender hereby notifies the
Borrowers that pursuant to the requirements of the Prescribed Laws, it is
required to obtain, verify and record information that identifies the
Borrowers, which information includes the name and address of the Borrowers and
other information that will allow the Lender to identify the Borrowers in
accordance with the Prescribed Laws.  The
Borrowers shall promptly provide such information upon request by the Lender.  In connection therewith, the Lender hereby
agrees that the confidentiality provisions set forth in Section 11.19
of this Agreement shall apply to any non-public information provided to it by
the Borrowers and their Subsidiaries pursuant to this Section.

 

[SIGNATURE PAGE FOLLOWS]

 

67

 

IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed and delivered as of the day and year first
above written.

 

 

	
   

  	
  BORROWER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ARC HOUSING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John Sprengle

  	
   

  
	
   

  	
   

  	
  Name: John Sprengle

  
	
   

  	
   

  	
  Title: President

  
	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
  Affordable Residential
  Communities Inc.

  
	
   

  	
  Attention: Alan
  Kessock, Treasurer

  
	
   

  	
  600 Grant Street, Suite
  900

  
	
   

  	
  Denver, CO 80203

  
	
   

  	
  Telecopier No.: (303)
  749-2172

  
	
   

  	
  Telephone No.: (303)
  383-7523

  
	
   

  	
   

  
	
   

  	
  with a copy to:

  
	
   

  	
   

  
	
   

  	
  Affordable Residential
  Communities Inc.

  
	
   

  	
  Attention: Scott
  Gesell, General Counsel

  
	
   

  	
  600 Grant Street, Suite
  900

  
	
   

  	
  Denver, CO 80203

  
	
   

  	
  Telecopier No.: (303)
  749-2073

  
	
   

  	
  Telephone No.: (303)
  383-7506

  

 

 

CREDIT AGREEMNT

 

 

	
   

  	
  BORROWER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ARC HOUSINGTX LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John Sprengle

  	
   

  
	
   

  	
   

  	
  Name: John Sprengle

  
	
   

  	
   

  	
  Title: President

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
  Affordable Residential
  Communities Inc.

  
	
   

  	
  Attention: Alan
  Kessock, Treasurer

  
	
   

  	
  600 Grant Street, Suite
  900

  
	
   

  	
  Denver, CO 80203

  
	
   

  	
  Telecopier No.: (303)
  749-2172

  
	
   

  	
  Telephone No.: (303)
  383-7523

  
	
   

  	
   

  
	
   

  	
  with a copy to:

  
	
   

  	
   

  
	
   

  	
  Affordable Residential
  Communities Inc.

  
	
   

  	
  Attention: Scott
  Gesell, General Counsel

  
	
   

  	
  600 Grant Street, Suite
  900

  
	
   

  	
  Denver, CO 80203

  
	
   

  	
  Telecopier No.: (303)
  749-2073

  
	
   

  	
  Telephone No.: (303)
  383-7506

  

 

 

	
   

  	
  LENDER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MERRILL LYNCH MORTGAGE

  CAPITAL INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joshua A. Green

  	
   

  
	
   

  	
   

  	
  Name: Joshua A. Green

  
	
   

  	
   

  	
  Title: Vice President

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
  4 World Financial Center, 10th Floor

  
	
   

  	
  New York, New York 10080

  
	
   

  	
  Attention: Josh Green

  
	
   

  	
  Telecopier No.: (212) 449-6673

  
	
   

  	
  Telephone No.: (212) 449-7330

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