Document:

ex10-72

EXHIBIT 10.72

PROMISSORY NOTE

	 	 	 
	$2,653,701	 	
College Park, Maryland
	
	
	
	

	 	 	
as of April 30, 2001

             FOR VALUE RECEIVED, Neuralstem, Inc., a Delaware corporation (hereinafter
called the “Maker”), promises to pay to the order of Gene Logic, Inc.
(hereinafter, together with all subsequent holders of this Note, called the
“Payee”) the principal sum of Two Million Six Hundred and Fifty Three Thousand
Seven Hundred and One Dollars ($2,653,701), together with interest on the
unpaid principal balance hereof from time to time outstanding, at a fixed rate
of interest equal to six percent (6%) per annum, said principal and interest
being due and payable in the following manner:

             This Note will mature and the entire unpaid balance of principal hereof,
together with all accrued and unpaid interest hereon, shall become due and
payable on the earlier to occur of (i) three (3) business days after the
closing of an equity financing by the Maker of at least Ten Million
($10,000,000) or (ii) April 30, 2005, if not earlier paid.

             The Maker shall pay, promptly upon demand, all costs of collection,
including reasonable attorneys’ fees if this Note is referred to an attorney
for collection after default, whether or not any action shall be instituted to
enforce or collect this Note. Time is of the essence hereof for all purposes.

             All payments on this Note shall be applied first to the payment of accrued
but unpaid interest, and any remainder shall be applied to reduction of the
principal balance hereof. The rate of interest hereon shall be calculated on
the basis of a 360-day year factor applied to actual days elapsed. All
payments hereunder shall be payable in lawful money of the United States of
America and shall be made to the Payee in immediately available funds at such
address as the Payee may from time to time designate in writing to the Maker.

             The Maker shall have the right and privilege to prepay this Note, in whole
or in part, at any time provided that each prepayment shall include all accrued
and unpaid interest on or with respect to the principal amount to be prepaid.
Such prepayment shall not be subject to any premium for prepayment.

             The Maker and any endorsers or guarantors hereof severally waive
presentment and demand for payment, notice of intent to accelerate maturity,
notice of acceleration of maturity, protest or notice of protest and
nonpayment, bringing of suit and diligence in taking any action to collect any
sums owing hereunder or in proceeding against any of the rights and properties
securing payment hereof. From time to time, without affecting the obligation
of the Maker to pay the outstanding principal balance of this Note and to
observe the covenants of the Maker contained herein, without affecting the
duties and obligations of any endorser hereto, without affecting the duties and
obligations of any guarantor hereof, without giving notice to or obtaining the
consent of the Maker or any endorser hereto or guarantor hereof, and without

1.

liability on the part of the Payee, the Payee may, at the option of the Payee,
extend the time for payment of interest hereon and/or principal hereof, reduce
the payments hereunder, release anyone liable on this Note, accept a renewal of
this Note, modify the terms and time of payment of this Note, join in any
extension or subordination or exercise any option or election hereunder, modify
the rate of interest or period of principal repayment or principal due date of
this Note or exercise any option or election hereunder. No one or more of such
actions shall constitute a novation.

             The indebtedness evidenced by this Note is hereby expressly subordinated,
to the extent and in the manner hereinafter set forth, in right of payment to
the prior payment in full of the Senior Indebtedness.

             “Senior Indebtedness” shall mean, unless expressly subordinated to or made
on a parity with the amounts due under this Note, the principal of, unpaid
interest on and amounts reimbursable, fees, expenses, costs of enforcement and
other amounts due in connection with (a) indebtedness of the Maker to banks or
commercial finance or other lending institutions regularly engaged in the
business of lending money (including venture capital, investment banking or
similar institutions and their affiliates which sometimes engage in lending
activities but which are primarily engaged in investments in equity
securities), whether or not secured, and (b) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for such
Senior Indebtedness, or any indebtedness arising from the satisfaction of such
Senior Indebtedness by a guarantor. “Senior Indebtedness” shall not include
any form of equity securities of the Maker.

             By acceptance of this Note, the Payee agrees to execute and deliver
customary forms of subordination agreement requested from time to time by the
holders of Senior Indebtedness and, as a condition to the Payee’s rights
hereunder, the Maker may require that the Payee execute such forms of
subordination agreement, provided that such forms shall not impose on the Payee
terms less favorable than those provided herein.

             Any of the following shall constitute an event of default hereunder (each
an “Event of Default”): (a) default in the payment of the principal and unpaid
accrued interest of this Note when due and payable; (b) a breach of any
representations and warranties contained in this Note; (c) any petition in
bankruptcy being filed by or against the Maker or any proceedings in
bankruptcy, insolvency or under any other laws relating to the relief of
debtors being commenced for the relief or readjustment of any indebtedness of
the Maker, either through reorganization, composition, extension or otherwise
and which, in the case of any involuntary proceedings shall be acquiesced to by
the Maker or shall continue for a period of 30 days undismissed, undischarged
or unbonded; (d) the making by the Maker of an assignment for the benefit of
creditors; or (e) the appointment of a receiver of any property of the Maker
which shall not be vacated or removed within thirty (30) days after
appointment.

             When any Event of Default has occurred and is continuing, at any time
after the occurrence of any such Event of Default, the entire outstanding
amount of principal and interest of this Note may, at the option of the Payee,
be declared to be immediately due and payable, without presentment, demand
protest or together notice of any kind, all of which are hereby

2.

expressly waived. When any Event of Default under (c), (d) or (e) hereof
has occurred and is continuing, then the entire outstanding amount of principal
and interest of this Note shall immediately become due and payable, together
with all other amounts payable under this Note, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived.
Failure to exercise any of the foregoing options upon the happening of one or
more of the foregoing events shall not constitute a waiver of the right to
exercise the same or any other option at any subsequent time in respect to the
same or any other event, and no single or partial exercise of any right or
remedy shall preclude other or further exercise of the same or any other right
or remedy. Upon an Event of Default, Payee may pursue any and all other
rights, remedies and recourses available to the Payee, or pursue any
combination of the foregoing, all remedies hereunder being cumulative. The
Payee shall have the right to rescind any acceleration in payment of this Note
for default as aforesaid, if the Payee so elects, in which event this Note
shall be construed, interpreted and enforced in the same manner as if the Payee
had not elected to declare the unpaid principal balance and accrued interest of
this Note at once due and payable. The Payee shall have no duty to exercise
any or all of the rights and remedies herein provided or contemplated. The
acceptance by the Payee of any payment hereunder that is less than payment in
full of all amounts due and payable at the time of such payment shall not
constitute a waiver of the right to exercise any of the foregoing options at
that time or at any subsequent time, or nullify any prior exercise of any such
option without the express written consent of the Payee.

             The terms and conditions of this Note shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties.
Notwithstanding the foregoing, the Maker may not assign this Note. The Payee
may not assign, pledge, or otherwise transfer this Note without the prior
written consent of the Maker, except (a) for transfers to its affiliates or (b)
upon (i) a sale, lease or other disposition of all or substantially all of the
assets of the Payee, (ii) a merger or consolidation in which the Payee is not
the surviving corporation; (iii) a consolidation, merger, reorganization of the
Payee in which the stockholders of the Payee immediately prior to such
transaction own less than 50% of the Payee’s voting power immediately after
such transaction, or any transaction or series of related transactions in which
in excess of 50% of the Payee’s voting power is transferred, or (iv) a reverse
merger in which the Payee is the surviving corporation but the shares of common
stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise. Subject to the preceding sentence, this Note may be transferred
only upon surrender of the original Note for registration of transfer, duly
endorsed, or accompanied by a duly executed written instrument of transfer in a
form satisfactory to the Maker. Thereupon, a new note for the same principal
amount and interest will be issued to, and registered in the name of, the
transferee. Interest and principal are payable only to the registered Payee of
this Note.

             Maker hereby represents and warrants that the execution and delivery of,
and compliance with the terms of, this Note will not, with or without the
passage of time, or giving of notice, result in a violation, or be in conflict
with or constitute a default or require prior written consent of any third
party under any term or provision of any mortgage, indenture, contract,
agreement or instrument or of the charter or by-laws of the Maker as of the
date hereof.

             This Note shall be governed by and construed according to the laws of the
State of Maryland, without regard to principles of conflict of laws.

3.

             Any attorney at law may appear in any court of record in the State of
Maryland or in the United States, after demand on this Note following an Event
of Default, and waive the issuing of service of process and confess a judgment
against the Maker in favor of the Payee for the amount then appearing due
hereunder, together with interest, costs of suit and reasonable attorneys’
fees, and thereupon release all errors and waive all right of appeal.

             It is expressly stipulated and agreed that the loan evidenced by this Note
is a “commercial loan” as defined in the Commercial Law Article of the
Annotated Code of Maryland.

             In any case where the date of maturity of interest on, or principal of,
this Note shall be a Sunday or legal holiday, or a day on which banking
institutions in the city of payment are authorized by law or executive order to
close (any other day being herein referred to as a “Banking Day”), then payment
of interest or principal need not be made on such date, but may be made on the
next succeeding Banking Day; provided, however, that interest shall continue to
accrue through the actual date of payment.

[Signature page follows]

4.

             Executed under seal in College Park, Maryland, and intending this Note to
be a sealed instrument, as of the date and year first above written.

	 	 	 
	ATTEST:	 	
Neuralstem, Inc.
	 
	/s/ Kathy Mattis     	 	
By:  /s/ I. Richard Garr     (SEAL)

Name:    I. Richard Garr

Title:   President

 
 
 
 
 
 
[Promissory Note Signature Page]<PAGE>   1

                                                                    EXHIBIT 10.1

                           LOAN AND SECURITY AGREEMENT

      THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made this 8th day of
May, 2001, by and among SUNRISE FAIRFAX ASSISTED LIVING, L.L.C., a limited
liability company organized and existing under the laws of the Commonwealth of
Virginia (the "Borrower") and CHEVY CHASE BANK, F.S.B., a federally chartered
savings bank (the "Lender").

                                    RECITALS

      A. The Borrower has applied to the Lender for an interim loan in the
maximum principal amount of Eight Million One Hundred Thousand Dollars
($8,100,000) (the "Loan"), the proceeds of which shall be used as follows: (i)
the proceeds of Note A (as hereinafter defined) shall be used to refinance
existing indebtedness secured by the Property and (b) the proceeds of Note B (as
hereinafter defined) shall be used to make a loan to the Foundation (the
"Foundation Loan"), which will in turn repay an existing loan owed by the
Foundation to the Lender for the benefit of Merritt Academy

      B.    The Lender is willing to make the Loan to the Borrower upon the
terms and subject to the conditions hereinafter set forth.

                                   AGREEMENTS

      NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree as follows:

ARTICLE I
                                   DEFINITIONS

Section 1.1 Certain Defined Terms.

      As used herein, the terms defined in the Preamble and Recitals hereto
shall have the respective meanings specified therein, and the following terms
shall have the following meanings:

      "Account," individually, and, "Accounts," collectively, mean with respect
to the Borrower, all presently existing or hereafter acquired or created
accounts, accounts receivable, contract rights, notes, drafts, instruments,
acceptances, chattel paper, leases and writings evidencing a monetary obligation
or a security interest in or a lease of goods, all rights to receive the payment
of money or other consideration under present or future contracts arising out of
or relating to the Facility (including, without limitation, all rights to
receive the payment of money or other consideration from, or on behalf of, any
private pay patient), or by virtue of services rendered, loans and advances made
or other considerations given, by or set forth in, or arising
<PAGE>   2
out of, any present or future chattel paper, note, draft, lease, acceptance,
writing, bond, insurance policy, instrument, document or general intangible, and
all extensions and renewals of any thereof, all rights under or arising out of
present or future contracts, agreements which gave rise to any or all of the
foregoing insofar as they pertain to the Facility, including all claims or
causes of action now existing or hereafter arising in connection with or under
any agreement or document or by operation of law or otherwise, all collateral
security of any kind (including real property mortgages) given by any person
with respect to any of the foregoing, including, without limitation, all rights
to receive payment of money or other consideration from, or on behalf of, any
private pay patient, all rights to receive payments under all Resident
Agreements, and all third-party payor contracts (including Medicare and Medicaid
to the extent permitted by Law), including, but not limited to, the Veterans
Administration, Participation Agreements, and any and all depository accounts
(other than resident trust accounts) into which the proceeds of all or any
portion of such accounts may be now or hereafter deposited, and all proceeds
(cash and non-cash) of the foregoing.

      "Account Debtor" means any Person who is obligated on a Receivable and
"Account Debtors" mean all Persons who are obligated on the Receivables.

      "Act of Bankruptcy" means the filing of a petition in bankruptcy under the
Bankruptcy Code or the other commencement of a proceeding under any other
applicable law concerning insolvency, reorganization or bankruptcy, now or
hereafter in effect.

      "Affiliate" means an entity with either revenues or assets in excess of
$750,000 in which an entity has an ownership interest equal to or greater than
twenty-five percent (25%).

      "Agreement" means this Loan and Security Agreement and all amendments,
modifications and supplements hereto which may from time to time become
effective in accordance with the provisions of Section 11.10 (Modifications).

      "Banking Day" shall mean any day that is not a Saturday, Sunday or banking
holiday in the State of Maryland and must also be a day in which dealings are
carried on in the applicable interbank Eurodollar market.

      "Bankruptcy Code" Title 11 of the United States Code, as amended from time
to time, and any successor Laws.

      "Chattel Paper" means a writing or writings which evidence both a monetary
obligation and a security interest in or lease of specific goods, any returned,
rejected or repossessed goods covered by any such writing or writings and all
proceeds (in any form including, without limitation, accounts, contract rights,
documents, chattel paper, instruments and general intangibles) of such returned,
rejected or repossessed goods, and all proceeds (cash and non-cash) of the
foregoing but only to the extent that any of the foregoing relates to the
Facility.

      "Closing Date" means the date of the closing of the Loan.

      "Collateral" shall mean all of the Borrower's Accounts, Chattel Paper,
Equipment, General Intangibles, documents, Instruments and Inventory, all right,
title and interest of the Borrower in and to the Operating Agreements and
Management Contracts (including, without

                                       2
<PAGE>   3
limitation, the Management Agreement), Resident Agreements, Physician Contracts,
Participation Agreements, the Licenses (whether or not designated with initial
capital letters), as those terms are defined herein and in the Uniform
Commercial Code as presently adopted and in effect in the State of Maryland, and
shall also cover, without limitation, (a) any and all property specifically
included in those respective terms in this Agreement or in the Financing
Documents, (b) all right, title and interest of the Borrower in and to Leases or
subleases, rents, royalties, issues, profits, revenues, earnings, income or
other benefits of the Property, or arising from the use or enjoyment of the
Property, or from any lease or other use and occupancy agreement pertaining to
the Property, (c) any and all property and/or collateral described in any of the
Security Documents, and (d) all proceeds (cash and non-cash, including, without
limitation, insurance proceeds), of the foregoing.

      "Commonly Controlled Entity" shall mean an entity, whether or not
incorporated, which is under common control with the Borrower within the meaning
of Section 414(b) or (c) of the Internal Revenue Code of 1986, as amended and
the regulations promulgated or issued thereunder.

      "Deed of Trust" means the Deed of Trust, Assignment, Security Agreement
and Fixture Filing of even date herewith, covering the Property, executed by the
Borrower in favor of the Lender as collateral for the Loan, as the same may from
time to time be amended, restated, supplemented or otherwise modified.

      "Default" means, with respect to each Loan Document, a default which, with
the giving of notice or the passage of time, or both, would constitute an Event
of Default.

      "Enforcement Costs" means all expenses, charges, costs and fees whatsoever
(including, without limitation, attorney's fees and expenses) of any nature
whatsoever paid or incurred by or on behalf of the Lender in connection with (a)
the collection or enforcement of any or all of the Obligations, (b) the
preparation of or changes to this Agreement, the Note, the Security Documents
and/or any of the other Financing Documents, (c) the creation, perfection,
collection, maintenance, preservation, defense, protection, realization upon,
disposition, sale or enforcement of all or any part of the Collateral,
including, without limitation, those sums paid or advanced, and costs and
expenses, more specifically described in Section 10.3 (Performance by Lender)
and Section 11.7 (Expenses), and (d) the monitoring, administration, processing,
servicing of any or all of the Obligations and/or the Collateral.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

      "Equipment" shall mean all equipment, machinery, furniture and fixtures
and supplies of every nature pertaining to the Facility, presently existing or
hereafter acquired or created and wherever located, together with all
accessions, additions, fittings, accessories, special tools, and improvements
thereto and substitutions therefor and all parts and equipment which may be
attached to or which are necessary for the operation and use of such personal
property, whether or not the same shall be deemed to be affixed to real
property, and all rights under or arising out of present or future contracts
relating to the foregoing and all proceeds (cash and non-cash) of the foregoing.

                                       3
<PAGE>   4
      "Event(s) of Default" shall mean the occurrence of any one or more of the
events specified in ARTICLE IX (Events of Default) or in the Deed of Trust and
the continuance of such event beyond the applicable grace and/or cure periods
therefor, if any, set forth in ARTICLE IX.

      "Facility" means the 47 unit, assisted living facility located at 9207
Arlington Boulevard, Fairfax County, Virginia which is known as "Sunrise
Fairfax."

      "Financing Documents" means at any time collectively this Agreement, the
Note, the Deed of Trust, the Security Documents, and any other instrument,
agreement or document previously, simultaneously or hereafter executed and
delivered by the Borrower and/or any other Person, singly or jointly with
another Person or Persons, evidencing, securing, guarantying or in connection
with any of the Obligations and/or in connection with this Agreement, the Note
and/or any of the Security Documents, as the same may from time to time be
amended, restated, supplemented or otherwise modified.

      "Foundation" means Sunrise Assisted Living Foundation.

      "Foundation Loan"' has the meaning described in Section 2.2 (Use of
Proceeds).

      "Foundation Loan Documents" means any and all documents evidencing and
securing the Foundation Loan from time to time, as the same may be amended,
restated, substituted, extended, renewed and otherwise modified from time to
time.

      "GAAP" shall mean generally accepted accounting principles in effect in
the United States of America in effect from time to time.

      "General Intangibles" shall mean any and all general intangibles of every
nature, whether presently existing or hereafter acquired or created arising out
of or relating to the Facility, including without limitation all books,
correspondence, credit files, records, computer programs, computer tapes, cards
and other papers and documents in the possession or control of the Borrower,
claims (including without limitation all claims for income tax and other
refunds), choses in action, judgments, patents, patent licenses, trademarks
(excluding the "Sunrise" trademark or tradename), trademark licenses, licensing
agreements, rights in intellectual property, goodwill, as that term is defined
in accordance with GAAP (including all goodwill of the Borrower's business
symbolized by, and associated with, any and all trademarks, trademark licenses,
copyrights and/or service marks), royalty payments, contractual rights, rights
as lessee under any lease of real or personal property, literary rights,
copyrights, service names, service marks, logos, trade secrets, all amounts
received as an award in or settlement of a suit in damages, deposit accounts,
interests in joint ventures or general or limited partnerships, all Licenses,
construction permits, Operating Agreements and Management Contracts,
Participation Agreements and Resident Agreements, and all proceeds (cash and
non-cash) of the foregoing.

      "Governmental Authority or Authorities" shall mean any nation or
government, any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

                                       4
<PAGE>   5
      "Guaranty" means the Guaranty of Payment dated of even date herewith
executed by SALI in favor of the Lender, as amended, modified, substituted,
extended, and renewed from time to time.

      "Guarantor" means SALI and its successors and assigns.

      "Hazardous Materials" means any flammable explosives, radioactive
materials, hazardous waste, toxic substances or related materials, including,
without limitation, asbestos, polychlorinated biphenyls, urea-formaldehyde,
radon, and any substance defined as or included in the definition of (a) any
"hazardous waste" as defined by the Resource Conservation Recovery Act of 1976,
as amended from time to time, and regulations promulgated thereunder; (b) any
"hazardous substance" as defined by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended from time to time, and
regulations promulgated thereunder; (c) any "toxic substance" as defined by the
Toxic Substances Control Act, as amended from time to time, and regulations
promulgated thereunder; (d) any hazardous or infectious medical waste including,
but not limited to, cultures and stocks of infectious agents and associated
biological, pathological wastes, human and animal blood specimens and blood
products, anatomical materials, blood, blood-soiled articles, contaminated
materials, microbiological laboratory wastes, sharps, chemical wastes,
infectious wastes, chemo-therapeutic wastes, and radioactive wastes; (e) any
substance, the presence of which on any property now or hereafter owned,
operated or acquired by any Borrower is prohibited or regulated under any
applicable Federal or state laws or regulations; and (f) any other substance,
pollutant, contaminant, chemical, or industrial toxic hazardous substance or
waste, including without limitation hazardous materials, which by law is
prohibited or is otherwise regulated as a hazardous material.

      "Hazardous Materials Contamination" means the contamination (whether
presently existing or occurring after the date of the Deed of Trust) of the
Improvements, facilities, soil, ground water, air or other elements on, in or
constituting a part of, the Property by Hazardous Materials, or the
contamination of the buildings, facilities, soil, ground water, air or other
elements on, in or constituting a part of, any other property as a result of
Hazardous Materials at any time (whether before or after the date of the Deed of
Trust) emanating from the Property.

      "Improvements" shall have the meaning given to that term in the Deed of
Trust.

      "Instruments" means any and all notes, notes receivable, drafts,
acceptances, and similar instruments or documents, both now owned or hereafter
created or acquired arising out of or relating to the Facility (or any part
thereof).

      "Inventory" means any and all inventory of the Borrower and all right,
title and interest of the Borrower in, and to, all of its now owned and
hereafter acquired goods, merchandise and other personal property furnished
under any contract of service or intended for sale or lease arising out of or
relating to the Facility, including, without limitation, all supplies of any
kind, nature or description which are used or consumed in the Borrower's
business and all documents of title or documents representing the same and all
proceeds (cash and non-cash) and products of the foregoing.

                                       5
<PAGE>   6
      "Klaassens" means Paul and Teresa Klaassen and their respective heirs,
personal representatives, successors and assigns.

      "Laws" means all ordinances, statutes, rules, regulations, orders,
injunctions, writs or decrees of any Governmental Authority or any court or
similar entity established by any thereof.

      "Lease" has the meaning set forth in the Deed of Trust.

      "Licenses" means any and all licenses, certificates of need, operating
permits, franchises, and other licenses, authorizations, certifications,
permits, or approvals, other than construction permits, issued by, or on behalf
of, any Governmental Authority now existing or at any time hereafter issued,
with respect to the acquisition, construction, renovation, expansion, leasing,
ownership management and/or operation of the Facility, accreditation of the
Facility, and/or the participation or eligibility for participation in any third
party payment or reimbursement programs (but specifically excluding any and all
third-party payor participation or reimbursement agreements now or at any time
hereafter existing for the benefit of the Borrower to the extent required by
Law), any and all operating licenses issued by any state Governmental Authority,
any and all pharmaceutical licenses and other licenses related to the purchase,
dispensing, storage, prescription or use of drugs, medications, and other
"controlled substances," any and all licenses relating to the operation of food
or beverage facilities or amenities, if any, and any and all certifications and
eligibility for participation in Medicare, Medicaid, Blue Cross and/or Blue
Shield, or any of the Managed Care Plans, private insurer, employee assistance
programs or other third party payment or reimbursement programs as the same may
from time to time be amended, renewed, restated, reissued, restricted,
supplemented or otherwise modified.

      "Lien" means any mortgage, deed of trust, deed to secure debt, grant,
pledge, security interest, assignment, encumbrance, judgment, lien or charge of
any kind, whether perfected or unperfected, avoidable or unavoidable, consensual
or non-consensual, including, without limitation, any conditional sale or other
title retention agreement, filed or unfiled tax liens, any lease in the nature
thereof, and the filing of or agreement to give any financing statement under
the Uniform Commercial Code of any jurisdiction.

      "Managed Care Plans" shall mean any health maintenance organization,
preferred provider organization, individual practice association, competitive
medical plan, or similar arrangement, entity, organization, or Person.

      "Management Agreement" shall mean the Management Agreement dated May __,
2001, by and between Borrower and the Management Company relating to the
management of the Facility, as the same may from time to time be amended,
restated, supplemented or otherwise modified.

      "Management Company" means SALMI, its successors and assigns and any other
Person which may become the manager of the Facility.

      "Material Adverse Change" means a significant adverse change in a Person's
financial position or capacity including but not limited to significant adverse
changes in (a) liquidity (b) gross revenues (c) total expenses (d) such Person's
net worth or (e) ability to meet payment

                                       6
<PAGE>   7
obligations under such Person's existing funded debt, existing Indebtedness, the
Obligations and/or existing contingent liabilities.

      "Multi-employer Plan" shall mean a Plan which is a multi-employer plan as
defined in Section 4001(a)(3) of ERISA.

      "Note" shall have the meaning set forth in Section 2.1 (The Loan).

      "Obligations" means all present and future debts, obligations, and
liabilities, whether now existing or contemplated or hereafter arising, of the
Borrower to the Lender under, arising pursuant to, in connection with and/or on
account of the provisions of this Agreement, the Note, each Security Document,
and any of the other Financing Documents, or the Loan, including, without
limitation, the principal of, and interest on, the Note, late charges,
Enforcement Costs, and other prepayment penalties (if any), letter of credit
fees or fees charged with respect to any guaranty of any letter of credit, any
and all recording, transfer or other taxes and costs of any kind required or
incurred in connection with the recordation of a ground lease of the Property
(as defined in the Deed of Trust) and also means all other present and future
indebtedness, liabilities and obligations, whether now existing or contemplated
or hereafter arising, of the Borrower to the Lender of any nature whatsoever
regardless of whether such debts, obligations and liabilities be direct,
indirect, primary, secondary, joint, several, joint and several, fixed or
contingent, and any and all renewals, extensions and rearrangements of any such
debts, obligations and liabilities.

      "Operating Agreements and Management Contracts" means any and all
contracts and agreements previously, now or at any time hereafter entered into
by the Borrower and/or the Manager other than Resident Agreements with respect
to the acquisition, construction, renovation, expansion, ownership, operation,
maintenance, use or management of the Property or otherwise concerning the
operations and business of the Property, any and all service and maintenance
contracts, any employment contracts, any and all management agreements, any and
all consulting agreements, laboratory servicing agreements, pharmaceutical
contracts, physician, other clinician or other professional services provider
contracts, patient admission agreements, Resident Agreements, food and beverage
service contracts, and other contracts for the operation and maintenance of, or
provision of services to, the Property, as the same may from time to time be
amended, restated or substituted from time to time.

      "Participation Agreements" means any and all third party payor
participation or reimbursement agreements now or at any time hereafter existing
for the benefit of the Borrower relating to rights to payment or reimbursement
from, and claims against, private insurers, Managed Care Plans, material
employee assistance programs, Blue Cross and/or Blue Shield, federal, state and
local Governmental Authorities, including without limitation, Medicare and
Medicaid, and other third party payors, as the same may from time to time be
amended, restated, extended, supplemented or modified.

      "Permitted Liens" means: (a) Liens for Taxes which are not delinquent or
which the Lender has determined in the good faith exercise of its sole and
absolute discretion (i) are being diligently contested in good faith and by
appropriate proceedings, (ii) the Borrower has the financial ability to pay,
with all penalties and interest, at all times without materially and

                                       7
<PAGE>   8
adversely affecting the Borrower, and (iii) are not, and will not be with
appropriate filing, the giving of notice and/or the passage of time, entitled to
priority over any Lien of the Lender; (b) deposits or pledges to secure
obligations under workers' compensation, social security or similar laws, or
under unemployment insurance in the ordinary course of business; (c) Liens in
favor of the Lender; (d) judgment Liens to the extent the entry of such judgment
does not constitute an Event of Default under the terms of this Agreement or
result in the sale of, or levy of execution on, any of the Collateral; and (e)
Liens approved by the Lender which have been created to secure permitted
subordinated debt on a junior lien basis; and (f) such other Liens, if any, as
are identified as Permitted Encumbrances as defined in the Deed of Trust.

      "Person" shall mean and include an individual, a corporation, a
partnership, a limited liability company, a joint venture, a trust, an
unincorporated association, any Governmental Authority or any other entity.

      "Pledge Assignment and Security Agreement" means the Pledge, Assignment
and Security Agreement of even date herewith executed by SALII, managing member
of Borrower in favor of the Lender, pursuant to which SALII has pledged and
assigned all of its interests in Borrower to the Lender as additional security
for the Obligations.

      "Post Default Rate" means the default interest rate stated in the Note.

      "Property" shall have the meaning given to that term in the Deed of Trust.

      "Receivables" means all of the Borrower's now or hereafter owned, acquired
or created Accounts, Chattel Paper, Contract Rights, General Intangibles and
Instruments, and all cash and non-cash proceeds and products thereof.

      "Reportable Event" shall mean any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder.

      "Resident Agreements" means any and all contracts, authorizations,
agreements and/or consents executed by or on behalf of any resident or other
person seeking services from the management company, owner or operator of the
Facility pursuant to which the management company, owner or operator of the
Facility provides or furnishes health or assisted living care and related
services at the Property, including the consent to treatment, assignment of
payment of benefits by third party, as amended, restated or substituted from
time to time.

      "SALI" , means Sunrise Assisted Living, Inc., a Delaware corporation,
its successors and assigns.

      "SALII" means Sunrise Assisted Living Investments, Inc., a Virginia
corporation, its successors and assigns.

      "SALMI" means Sunrise Assisted Living Management, Inc., a Virginia
corporation, its successors and assigns.

      "Security Documents" shall mean, collectively, any assignment, including,
without limitation, the Pledge, Assignment and Security Agreement, the Guaranty
and any assignment,

                                       8
<PAGE>   9
pledge agreement, security agreement, mortgage, deed of trust, leasehold
mortgage, leasehold deed of trust, deed to secure debt, financing statement and
any similar instrument, document or agreement under or pursuant to which a Lien
is now or hereafter granted to, or for the benefit of, the Lender on any
collateral to secure the Obligations, as the same may from time to time be
amended, restated, supplemented or otherwise modified.

      "Taxes" means all taxes and assessments whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, of every character
(including all penalties or interest thereon), which at any time may be
assessed, levied, confirmed or imposed by any Governmental Authority on the
Borrower or any of its properties or assets or any part thereof or in respect of
any of its franchises, businesses, income or profits.

Section 1.2 Accounting Terms and Other Definitional Provisions.

      Unless otherwise defined in this Agreement, as used in this Agreement and
in any certificate, report or other document made or delivered pursuant hereto,
accounting terms not otherwise defined in this Agreement, and accounting terms
only partly defined in this Agreement, to the extent not defined, shall have the
respective meanings given to them under GAAP. Unless otherwise defined in this
Agreement, all terms used in this Agreement which are defined by the Maryland
Uniform Commercial Code shall have the same meanings as assigned to them by the
Maryland Uniform Commercial Code unless and to the extent varied by this
Agreement. 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, section, subsection, schedule
and exhibit references are references to sections or subsections of, or
schedules or exhibits to, as the case may be, this Agreement unless otherwise
specified. As used in this Agreement, the singular number shall include the
plural, the plural the singular and the use of the masculine, feminine or
neutered gender shall include all genders, as the context may require. Reference
to any one or more of the Financing Documents and any of the Financing Documents
shall mean the same as the foregoing may from time to time be amended, restated,
substituted, extended, renewed, supplemented or otherwise modified.

                                   ARTICLE II
                                    BORROWING

Section 2.1 The Loan.

      The Lender agrees to lend to the Borrower, and the Borrower agrees to
borrow from the Lender, the maximum principal sum of $8,100,000. The obligation
of the Borrower to repay the Loan shall be evidenced by the Borrower's Deed of
Trust Notes in the principal amounts of $4,000,000 and $4,100,000, respectively,
each of even date herewith ("Note A" and "Note B", respectively; as amended,
restated, substituted, extended, renewed and otherwise modified from time to
time, Note A and Note B are hereinafter referred to collectively as the "Note")
payable to the Lender in the form attached hereto as EXHIBIT A-1 and EXHIBIT
A-2. The Note shall bear interest and shall be repaid by the Borrower in the
manner and at the times set forth in the Note.

                                       9
<PAGE>   10
Section 2.2 Use of Proceeds.

      The proceeds of the Loan shall be used by the Borrower for the following
purpose and, unless prior written consent of the Lender is obtained, for no
other purpose: (a) the proceeds of Note A shall be used to refinance existing
indebtedness secured by the Property and (b) the proceeds of Note B shall be
used to make a loan to the Foundation (the "Foundation Loan"), which will in
turn repay an existing loan owed by the Foundation to the Lender for the benefit
of Merritt Academy.

Section 2.3 Prepayment.

      The Borrower may voluntarily prepay the principal sum outstanding only in
accordance with the terms of the Note. Sums borrowed and repaid may not be
readvanced.

                                  ARTICLE III
                                   COLLATERAL

Section 3.1 Collateral.

      As security for the payment of all of the Obligations and for the
Borrower's performance of, and compliance with, all of the terms, covenants,
conditions, stipulations and agreements contained in the Financing Documents,
the Borrower hereby assigns, grants and conveys to the Lender, and agrees that
the Lender shall have, to the extent permitted by law a perfected, continuing
security interest in, all of the Collateral. The Borrower further agrees that
the Lender shall have in respect of the Collateral all of the rights and
remedies of a secured party under the Maryland Uniform Commercial Code and under
other applicable Laws as well as those provided in this Agreement. The Borrower
covenants and agrees to execute and deliver such financing statements and other
instruments and filings as are necessary in the opinion of the Lender to perfect
such security interest. Notwithstanding the fact that the proceeds of the
Collateral constitute a part of the Collateral, the Borrower may not dispose of
the Collateral, or any part thereof, other than in the ordinary course of its
business or as otherwise may be permitted by this Agreement.

Section 3.2 Assignment of Ownership Interests.

      The Obligations are further secured by the Pledge, Assignment and Security
Agreement, pursuant to which SALII has assigned to the Lender one hundred
percent (100%) of its ownership interests in the Borrower.

Section 3.3 Guaranty.

      The Obligations are the subject of the Guaranty.

Section 3.4 Collateral for Obligations.

      The Borrower acknowledges that it is the intention of the Borrower that
the Collateral be security for all of the Obligations, both those now existing
and those hereafter created or incurred by future loans, advances, extensions of
credit or otherwise and whether or not currently contemplated by the Borrower
and/or the Lender on or about the date hereof.

                                       10
<PAGE>   11
Section 3.5 Costs.

      The Borrower agrees to pay on demand, to the fullest extent permitted by
applicable laws, all reasonable fees, commissions, costs, charges, travel
expenses and other expenses incurred by the Lender in connection with the
taking, perfection, preservation, protection and/or release of any security
interest or lien on any of the Collateral.

Section 3.6 Updated Appraisals.

      The Lender shall have the right but not the obligation to require an
updated appraisal of the Property and the Facility during the term of the Loan.
All appraisals shall be prepared by an appraiser or appraisers designated by the
Lender and shall be in all respects acceptable to the Lender which appraisals
shall include, if deemed necessary by the Lender, in its sole discretion,
updated discounted cash flow analysis, inspections of and commentary on the
physical status of the Facility and an engineering review. Each of such
appraisals, when reviewed by the Lender, must indicate a value in the Property
such that the sum of then current outstanding principal balance of the Loan does
not exceed seventy five percent (75%) of the actual appraised value of the
Property, as determined by the Lender. The basis of the appraisal calculations
shown on such appraisal reports and all other aspects of the appraisal reports
must be satisfactory to the Lender in all respects. The release of such
appraisal reports by the Lender to the Borrower shall be at the Lender's sole
option if the Borrower has not paid the cost of such appraisal. If the Borrower
has paid the cost of the appraisal, a copy of the appraisal will be provided to
the Borrower upon its signing of the Lender's standard appraisal release letter.
The Borrower shall reimburse the Lender upon demand for all costs and expenses
incurred by the Lender with respect to the preparation and review of all future
appraisals required pursuant to the terms hereof; provided, however, the Grantor
shall not be obligated to reimburse the Beneficiary for more than one (1)
appraisal during the initial term of the Loan.

                                   ARTICLE IV
                          GENERAL FINANCING PROVISIONS

Section 4.1 Computation of Interest and Fees.

      All applicable fees and interest shall be calculated on the basis of a
year of 365 days for the actual number of days elapsed pursuant to the terms of
the Note and the Borrower's election of interest rate options thereunder and
interest shall be payable in arrears.

Section 4.2 Liens; Setoff.

      The Borrower hereby grants to the Lender a continuing lien and security
interest for all the Obligations upon any and all monies, securities, and other
property of the Borrower and the proceeds thereof, now or hereafter held or
received by or in transit to, the Lender, or any affiliate of the Lender, from
or for the Borrower, and also upon any and all deposits (general or special) and
credits of the Borrower with the Lender, if any, at any time existing. During
the continuance of any Event of Default under this Agreement, the Lender is
hereby authorized by the Borrower at any time and from time to time, without
notice to the Borrower, to set off, appropriate and apply any or all items
hereinabove referred to against all Obligations then outstanding.

                                       11
<PAGE>   12
Section 4.3 Payment and Performance of Obligations.

      The payment and performance by the Borrower of the Obligations shall be
absolute and unconditional, irrespective of any defense or any rights of
set-off, recoupment or counterclaim it might otherwise have against the Lender,
and the Borrower shall pay absolutely net all of the Obligations, free of any
deductions and without abatement, diminution or set-off; and until payment in
full of all of the Obligations, the Borrower: (a) will not suspend or
discontinue any payments provided for in the Note and (b) will perform and
observe all of its other agreements contained in this Agreement, including
(without limitation) all payments required to be made to the Lender, and (c)
will not terminate or attempt to terminate this Agreement or any of the other
Financing Documents to which the Borrower is a party for any cause.

Section 4.4 Payments to Others for the Account of the Borrower.

      At the option of the Lender and without any request from the Borrower, and
without waiving any of its rights hereunder, the Lender may elect to cure or
avoid any default by the Borrower under the Financing Documents by applying
amounts due hereunder or advancing the Lender's own funds to the satisfaction of
the conditions of the Financing Documents and any amounts so applied shall be
part of the Loan and shall be secured by the Deed of Trust. The Lender agrees to
endeavor to give the Borrower notice of any such payment or performing such act
and the amount of any payment whether prior to or contemporaneously with its
making such payment or performing such act; provided, however, that failure to
give such notice shall not constitute a waiver by the Lender of, or constitute a
defense to, any of the rights of the Lender under this Agreement or the Deed of
Trust, including (without limitation) the right of the Lender to repayment of
the amount of such payment.

                                   ARTICLE V
                         REPRESENTATIONS AND WARRANTIES

      To induce the Lender to make the Loan, the Borrower represents and
warrants to the Lender that:

Section 5.1 Good Standing.

      The Borrower (a) is duly organized, existing and in good standing under
the laws of the Commonwealth of Virginia, (b) has the power to own its property
and to carry on its business as now being conducted, and (c) is duly qualified
to do business and is in good standing in each jurisdiction in which the
character of the properties owned by it therein or in which the transaction of
its business makes such qualification necessary.

Section 5.2 Power and Authority.

      The Borrower has full power and authority to execute and deliver this
Agreement and each of the other Financing Documents executed and delivered by it
and to incur the Obligations, all of which have been duly authorized by all
proper and necessary action. No consent or approval of owners of, or lenders to,
the Borrower, and no consent or approval of any Governmental Authority or any
third party payor on the part of the Borrower, is required as a condition to the
validity or enforceability of this Agreement or any of the other Financing

                                       12
<PAGE>   13
Documents executed and delivered by the Borrower or to the payment or
performance by the Borrower of the Obligations.

Section 5.3 Binding Agreements.

      This Agreement and each of the other Financing Documents executed and
delivered by the Borrower has been properly executed by the Borrower, constitute
valid and legally binding obligations of the Borrower, and are fully enforceable
against the Borrower in accordance with their respective terms.

Section 5.4 Litigation.

      There are no proceedings pending before any court or arbitrator or before
or by any Governmental Authority which, in any one case or in the aggregate,
will materially adversely affect the financial condition or operations of the
Borrower or the authority of the Borrower to enter into this Agreement or any of
the other Financing Documents executed and delivered by the Borrower. There is
no pending revocation, suspension, termination, probation, restriction,
limitation or non-renewal of any License, Participation Agreement or any similar
accreditation or approval from any organization or Governmental Authority
regulating healthcare providers, including, without limitation, the issuance of
any provisional License or other License with a term of less than twelve (12)
months, as a consequence of any sanctions imposed by any Governmental Authority,
nor is there any pending assessment of any civil or criminal penalties by any
Governmental Authority, the outcome of which, if determined adversely to the
Borrower, could materially impair the Borrower's ability to pay the Obligations.
The Borrower has not made any appeals regarding rates or reimbursements
currently pending or contemplated before any Governmental Authority or any
administrator of any third party payor or preferred provider program or referral
source, the outcome of which, if determined adversely to the Borrower, could
materially impair the Borrower's ability to pay the Obligations. There are no
Medicare or Medicaid recoupments or recoupments of any other third party payor
being sought, requested or claimed, against the Borrower, the outcome of which,
if determined adversely to the Borrower could materially impair the Borrower's
ability to pay the Obligations, except as otherwise disclosed in writing to, and
approved by, the Lender.

Section 5.5 No Conflicting Agreements.

      There is (a) no provision of the organizational or governing documents of
the Borrower and no provision of any existing mortgage, indenture, contract or
agreement binding on the Borrower or affecting its property, and (b) to the
Borrower's knowledge no provision of law or order of court binding upon it,
which would conflict with or in any way prevent the execution, delivery, or
performance of the terms of this Agreement or of any of the other Financing
Documents executed and delivered by the Borrower, or which would be violated as
a result of such execution, delivery or performance, or, if so, all necessary
consents have been obtained.

Section 5.6 Financial Information.

      All financial statements or information hereto furnished to the Lender
with respect to the Borrower and the Facility is complete and correct in all
material respects and fairly presents the financial position of the Borrower and
the financial condition of the Facility. There are no liabilities, direct or
indirect, fixed or contingent, of the Borrower which are not reflected in the

                                       13
<PAGE>   14
Borrower's financial statements or in the notes thereto. There has been no
Material Adverse Change in the financial condition or operations of the Borrower
or the Facility since the date of such financial statements and information (and
to the Borrower's knowledge, no such adverse change is pending), and the
Borrower has not guaranteed the obligations of, or made any investments in or
advances to, any company, individual or other entity, except as disclosed in
such information.

Section 5.7 No Default.

      The Borrower is not in default under or with respect to any obligation
under any agreement to which the Borrower is a party in any respect which could
materially adversely affect the ability of the Borrower to perform the
Obligations. There is no Event of Default hereunder.

Section 5.8 Taxes.

      The Borrower has filed or has caused to have been filed all federal, state
and local tax or informational returns which are required by law to be filed,
and have paid or caused to have been paid all Taxes as shown on such returns or
on any assessment received by them, to the extent that such Taxes have become
due, or which are required by law to be paid, unless and to the extent only that
such Taxes, assessments and governmental charges are currently contested in good
faith and by appropriate proceedings by the Borrower and adequate reserves
therefor have been established as required under GAAP.

Section 5.9 Place(s) of Business and Location of Collateral.

      The Borrower warrants that the address of its chief executive office is as
specified in EXHIBIT B attached hereto and made a part hereof and that the
address of each of its other places of business, if any, is as disclosed to the
Lender in EXHIBIT B. The Collateral and all books and records pertaining to the
Collateral are and will be located at the addresses indicated on EXHIBIT B. The
Borrower will immediately advise the Lender in writing of the opening of any new
place of business or the closing of any existing place of business, and of any
change in the location of the places where the Collateral, or any part thereof,
or the books and records concerning the Collateral, or any part thereof, are
kept.

Section 5.10      Title to Properties.

      The Borrower has good and marketable title to all of its properties,
including, without limitation, the Collateral owned by it, and the Collateral is
free and clear of mortgages, pledges, liens, charges and other encumbrances
other than the Permitted Liens.

Section 5.11      Margin Stock.

      None of the Loan proceeds will be used, directly or indirectly, by the
Borrower for the purpose of purchasing or carrying, or for the purpose of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry, any "margin security" within the meaning of Regulation G (12 CFR Part
207), or "margin stock" within the meaning of Regulation U (12 CFR Part 221), of
the Board of Governors of the Federal Reserve System (herein called "margin
security" and "margin stock") or for any other purpose which might make the
transactions contemplated herein a "purpose credit" within the meaning of said
Regulation G or Regulation

                                       14
<PAGE>   15
U, or cause this Agreement to violate any other regulation of the Board of
Governors of the Federal Reserve System or the Securities Exchange Act of 1934
or the Small Business Investment Act of 1958, as amended, or any rules or
regulations promulgated under any of such statutes.

Section 5.12      ERISA.

      With respect to any "pension plan", as defined in Section 3(2) of ERISA,
which plan is now or previously has been maintained or contributed to by the
Borrower and/or by any Commonly Controlled Entity: (a) no "accumulated funding
deficiency" as defined in Code Section 412 or ERISA Section 302 has occurred,
whether or not that accumulated funding deficiency has been waived, that would
materially adversely affect the ability of the Borrower to pay the Obligations;
(b) no "reportable event" as defined in ERISA Section 4043 has occurred with
respect to which notice has not been waived under 29 C.F.R. Section 4043; (c) no
termination of any plan subject to Title IV of ERISA has occurred that would
materially adversely affect the ability of the Borrower to pay the Obligations;
(d) neither the Borrower nor any Commonly Controlled Entity has incurred a
"complete withdrawal" within the meaning of ERISA Section 4203 from any
multi-employer plan; (e) neither of the Borrower nor any Commonly Controlled
Entity has incurred a "partial withdrawal" within the meaning of ERISA Section
4205 with respect to any multi-employer plan; (f) no multi-employer plan to
which the Borrower or any Commonly Controlled Entity has an obligation to
contribute is in "reorganization" within the meaning of ERISA Section 4241 nor
has notice been received by the Borrower or any Commonly Controlled Entity that
such a multi-employer plan will be placed in "reorganization".

Section 5.13      Governmental Consent.

      Neither the nature of the Borrower or of its business or properties, nor
any relationship between the Borrower and any other Person, nor any circumstance
in connection with the making of the Loan, or the offer, issue, sale or delivery
of the Note is such as to require a consent, approval or authorization of, or
filing, registration or qualification with, any Governmental Authority, on the
part of the Borrower, as a condition to the execution and delivery of this
Agreement or any of the other Financing Documents, the borrowing of the
principal amount of the Loan or the offer, issue, sale or delivery of the Note.

Section 5.14      Full Disclosure.

      The financial statements referred to in this ARTICLE V do not, nor does
this Agreement, nor do any written statements furnished by the Borrower to the
Lender in connection with the making of the Loan, contain any untrue statement
of fact or knowingly omit a material fact necessary to make the statements
contained therein or herein not materially misleading. The Borrower has not, to
the best of its knowledge, failed to disclose any fact to the Lender in writing
which materially adversely affects or, will or could prove to materially
adversely affect the properties, business, prospects, profits or condition
(financial or otherwise) of the Borrower or the ability of the Borrower to
perform this Agreement.

Section 5.15      Business Names and Addresses.

      The Borrower has not conducted business under any name other than its
current name, and has not conducted its business in any jurisdiction other than
Virginia. The Borrower intends

                                       15
<PAGE>   16
to operate the Facility under the name "Sunrise of Fairfax". The Borrower shall
promptly notify the Lender of any change in the name of the Facility.

Section 5.16      Licenses.

      The Borrower further represents and warrants to the Lender that, with
respect to any License it possesses or has applied for, (a) no Default or Event
of Default has occurred or is continuing under the terms of any of the Licenses,
or any condition to the issuance, maintenance, renewal and/or continuance of any
License, (b) the Borrower has paid all fees, charges and other expenses to the
extent due and payable with respect to, and have provided all information and
otherwise complied with all material conditions precedent to, the issuance,
maintenance, renewal, and continuance of all Licenses, (c) the Borrower has not
received any notice from any Governmental Authority relating to any actual or
pending suspension, revocation, restriction, or imposition of any probationary
use, of any License, nor has any License been materially amended, supplemented,
rescinded, terminated, or otherwise modified except as otherwise disclosed in
writing to, and approved by, the Lender, (d) the Borrower has not made any
previous assignment of any of the Licenses to any Person, and (e) no financing
statement covering any of the Licenses is on file in any public office except
financing statements in favor of the Lender. Without implying any limitation to
the other representations and warranties contained in this Agreement, the
Borrower or SALMI has obtained or has otherwise been authorized to operate the
Facility pursuant to a License issued by the Department of Social Services,
Division of Licensing Programs (the "Department") dated April 26, 2000, as an
assisted living facility which expired April 25, 2001; however, renewal was
applied for on April 10, 2001 and the Department has assured SALMI that the
Facility may continue to operate under the expired license pending review of the
application. Without implying any limitation to the other representations and
warranties contained in this Agreement, the Borrower is not required by any
applicable Law of the Commonwealth of Virginia or Fairfax County to obtain a
certificate of need to operate the Facility as an assisted living facility.

Section 5.17      Operating Agreements and Management Contracts.

      The Borrower has furnished or caused SALMI to furnish to the Lender
photocopies of all material Operating Agreements and Management Contracts
entered into with respect to the Facility, and all amendments, supplements and
modifications thereto including, without limitation, the Management Agreement.
The Borrower further represents and warrants to the Lender that (a) all of the
material Operating Agreements and Management Contracts are or will be at the
time of execution and delivery thereof valid and binding on the parties thereto
and in full force and effect, (b) no Default or Event of Default has occurred or
is continuing under the terms of any of the material Operating Agreements and
Management Contracts, and no party thereto has attempted or threatened to
terminate any Operating Agreement and Management Contract, (c) the Borrower has
not made any previous assignment of the Operating Agreements and Management
Contracts to any Person, and (d) no financing statement covering any of the
Operating Agreements and Management Contracts is on file in any public office
except financing statements in favor of the Lender.

                                       16
<PAGE>   17
Section 5.18      Participation Agreements and Resident Agreements.

      The Borrower has furnished or caused SALMI to furnish to the Lender, on or
before the Closing Date, the form of Resident Agreement used with respect to the
Facility and, if requested by the Lender, copies of all current, executed
Resident Agreements.

      The Borrower further covenants to the Lender that

            (a) With respect to the Participation Agreements, if any, (i) to the
best of its knowledge, all Participation Agreements will be at the time of
execution and delivery thereof valid and binding on the parties thereto and in
full force and effect, and (ii) all Participation Agreements will provide for
payment to or for the benefit of the Borrower or the Management Company for
services rendered to residents of the Facility. The Borrower represents and
warrants that as of the date hereof it has not entered any Participation
Agreement for the Facility.

            (b) To the extent the Borrower participates or will participate in
Medicare or Medicaid payment and reimbursement programs, the Borrower has
complied and will comply with all notice and other requirements under Title
XVIII and Title XIX of the Social Security Act to enable the Borrower to
participate in the Medicare and Medicaid payment and reimbursement programs.

Section 5.19      Compliance with Laws.

      The Borrower is not in violation of any applicable laws of any
Governmental Authority pertaining to employment practices, health standards or
controls, environmental and occupational standards or controls or order of any
court or arbitrator, the violation of which, considered in the aggregate, would
materially adversely affect the ability of the Borrower to pay the Obligations.
The Borrower is in compliance with all accreditation standards and requirements
to which it is subject. The Borrower has obtained all Licenses necessary to the
ownership of its property or to the conduct of its activities which, if not
obtained, would materially adversely affect the ability of the Borrower to
conduct its activities of operating the Facility as an assisted living facility,
including, without limitation if and as required by any Governmental Authorities
for the dispensing, storage, prescription, disposal, and use of drugs,
medications and other "controlled substances" and for the maintenance of
cafeteria and other food and beverage facilities or services or the condition
(financial or otherwise) of the Borrower.

Section 5.20      Presence of Hazardous Materials or Hazardous Materials
                  Contamination.

      The Borrower has not placed Hazardous Materials on the Property. To the
best of the Borrower's knowledge, no Hazardous Materials are located on the
Property, except for reasonable quantities of necessary supplies for use by the
Borrower or SALMI in the ordinary course of its current line of business and
stored, used and disposed of in accordance with applicable Laws, and, to the
best of the Borrower's knowledge, the Property has never been used as a
manufacturing, storage, or dump site for Hazardous Materials nor is the Property
affected in any materially adverse way by Hazardous Materials Contamination.

Section 5.21      Nature of Loan; Usury; Disclosures.

      The Borrower is a business or commercial organization, and the Loan is
being made solely for the purpose of carrying on or acquiring a business or
commercial enterprise. The rates
<PAGE>   18
of interest charged on the Loan do not, and will not, violate any usury Law or
interest rate limitation. The Loan is not subject to the federal Consumer Credit
Protection Act (15 U.S.C. Section 1601 et. seq.) nor any other federal or state
disclosure or consumer protection laws. The Loan is being transacted solely for
business or commercial purposes and not for personal, family or household
purposes.

Section 5.22      Accounts.

      With respect to all of the Borrower's Accounts and to the best of the
Borrower's knowledge (a) they are genuine, and in all respects what they purport
to be, and are not evidenced by a judgment, an instrument, or chattel paper
(unless such judgment has been assigned and such instrument or chattel paper has
been endorsed and delivered to the Lender); (b) they represent undisputed, bona
fide transactions completed in accordance with the terms and provisions
contained in the invoices relating thereto; (c) the services rendered which
resulted in the creation of the Accounts have been delivered or rendered to and
accepted by the Account Debtor; (d) the amounts shown on the Borrower's books
and records, with respect thereto are actually and absolutely owing to the
Borrower and are not contingent for any reason; (e) there are no set-offs,
counterclaims or disputes known by the Borrower or asserted with respect
thereto, and the Borrower has made no agreement with any Account Debtor thereof
for any deduction or discount of the sum payable thereunder except regular
discounts allowed by the Borrower in the ordinary course of its business for
prompt payment; (f) there are no facts, events or occurrences known to the
Borrower which in any way impair the validity or enforcement thereof or tend to
reduce the amount payable thereunder; (g) all Account Debtors thereof, to the
best of the Borrower's knowledge, have the capacity to contract; (h) the
services furnished giving rise thereto are not subject to any Liens other than
Permitted Liens; (i) the Borrower has no knowledge of any fact or circumstance
which would impair the validity or collectibility thereof; and (j) there are no
proceedings or actions known to the Borrower which are pending against any
Account Debtor which might result in any material adverse change in its
financial condition.

Section 5.23      Survival; Updates of Representations and Warranties.

      All representations and warranties contained in or made under or in
connection with this Agreement and the other Financing Documents shall survive
the date of this Agreement and the Loan made hereunder. The Lender acknowledges
and agrees that any and all representations and warranties contained in, or made
under, or in connection with, this Agreement may be amended, changed or
otherwise modified by the Borrower at any time and from time to time after the
date of this Agreement so as to accurately reflect the matters represented and
warranted therein; provided, that such amendments, changes and/or modifications
are disclosed in writing to the Lender. The Lender shall have no obligation to
waive any Event of Default due to any present or future inaccuracy of such
representation or warranty or to agree to any amendment, change or modification
of any such representation or warranty.

Section 5.24      Single Purpose Entity.

      The Borrower is a single purpose entity and owns no assets other than the
Facility and the other Collateral.

                                       18
<PAGE>   19
                                   ARTICLE VI
                              CONDITIONS OF LENDING

      The making of the Loan is subject to the following conditions precedent:

Section 6.1 Opinion of Counsel for the Borrower.

      On the date hereof, the Lender shall receive one or more written opinions
of counsel for the Borrower and SALI satisfactory in all respects to the Lender.
Such opinions shall include an opinion that the Facility holds all necessary
Licenses for its operation.

Section 6.2 Approval of Counsel for the Lender.

      All legal matters incident to the Loan and all documents necessary in the
opinion of the Lender to make the Loan shall be satisfactory in all material
respects to counsel for the Lender.

Section 6.3 Supporting Documents.

      The Lender shall receive on the date hereof: (a) a certificate of the
managing member of the Borrower in a form acceptable to the Lender in all
respects, dated as of the date hereof and certifying (i) that attached thereto
is a true, complete and correct copy of resolutions duly adopted by the members
of the Borrower and the board of directors of SALI authorizing the execution and
delivery of the Financing Documents to which it is a party, the borrowing
thereunder, and the performance of the Obligations, and (ii) as to the
incumbency and specimen signature of the authorized officer of the managing
member of the Borrower or officer of SALI executing the Financing Documents to
which it is a party; (b) such other documents as the Lender may reasonably
require the Borrower, SALI, the managing member of the Borrower or the board of
directors of SALI to execute, in form and substance acceptable to the Lender;
and (c) such additional information, instruments, opinions, documents,
certificates and reports as the Lender may reasonably deem necessary.

Section 6.4 Financing Documents.

      All of the Financing Documents required by the Lender shall be executed
and delivered to the Lender. The Deed of Trust and financing statements shall be
recorded at the sole expense of the Borrower.

Section 6.5 Insurance.

      The Lender shall have received all policies of insurance required by the
terms hereof and by the other Financing Documents to be in effect from a company
or companies and in form and amount reasonably satisfactory to the Lender,
including without limitation, flood insurance (in the amount of the Loan or the
maximum limit of coverage available on the Property, whichever is less or
evidence that flood insurance is not available or otherwise required with
respect to the Property), together with written evidence, in form and substance
satisfactory to the Lender, that all fees and premiums due on account thereof
have been paid in full.

Section 6.6 Security Documents.

      In order to perfect the lien and security interest created by this
Agreement, the Borrower shall have executed and delivered to the Lender all
Security Documents (in form and substance
<PAGE>   20
acceptable to the Lender in its sole discretion) deemed necessary by the Lender,
in a sufficient number of counterparts for recordation, and, at the Borrower's
sole expense, shall record all such financing statements and Security Documents,
or cause them to be recorded, in all public offices deemed necessary by the
Lender.

Section 6.7 Commitment Fee.

      In consideration for the making of the Loan, the Borrower shall pay to the
Lender on or prior to the Closing Date, a commitment fee in the amount of
$40,500.

Section 6.8 Management Agreement.

      The Borrower shall have delivered to the Lender an executed management
agreement for the Facility by and between the Borrower and SALMI, in all
respects satisfactory to the Lender and its counsel.

Section 6.9 Ground Lessor Estoppel Certificate.

      The Lender shall have received an estoppel certificate from the ground
lessor of the Property in all respects satisfactory to the Lender and its
counsel.

Section 6.10      Title and Survey Matters.

      The Lender shall have received a paid policy of title insurance (American
Land Title Association Standard Form "B" Loan Policy - Current Edition) or a
valid and enforceable commitment to issue the same from a company satisfactory
to the Lender in the amount of the Loan and which may be endorsed or assigned to
the successors and assigns of the Lender without additional cost, insuring the
lien of the Deed of Trust to be a valid first lien on the Property, free and
clear of all defects, exceptions and encumbrances except Permitted Liens. The
Lender shall also have received and approved a copy of a current as-built survey
of the Property certified to the Lender and to the title insurance company and
any recorded subdivision plat of the Property.

Section 6.11      Appraisal.

      The Lender shall have received and approved an appraisal of the Property
in all respects satisfactory to the Lender.

Section 6.12      Environmental Reports.

      The Lender shall have received evidence satisfactory to it regarding the
current and past pollution control practices at the Property in connection with
the discharge, emission, handling, disposal or existence of materials and
substances controlled by federal, state or local laws and regulations.

Section 6.13      Engineer's Report.

      The Lender shall have received and approved an engineer's report from an
engineer acceptable to Lender and in form in all respects satisfactory to
Lender.

                                       20
<PAGE>   21
Section 6.14      Subordination Agreement.

      The Borrower shall have received a fully executed Subordination Agreement
from the Klaassens in form and content acceptable to the Lender . The Lender
shall have received and approved copies of the fully executed documents
evidencing and securing the subordinated indebtedness, all of which must be in
form and content acceptable to the Lender.

Section 6.15      Foundation Loan.

      The Lender shall have reviewed and approved a fully executed copy of all
of the documents evidencing and securing the Foundation Loan and the Borrower
shall have executed and delivered to the Lender an Assignment of Loan and Loan
Documents and an Estoppel Certificate of Lender, each in all respects
satisfactory to the Lender, assigning all of the Borrower's right, title and
interest in and to the Foundation Loan Documents to the Lender as security for
the Obligations.

                                  ARTICLE VII
                              AFFIRMATIVE COVENANTS

      Until payment in full and the performance of all of the Obligations
hereunder, the Borrower shall:

Section 7.1 Financial Statements.

      Furnish or cause to be furnished to the Lender:

            (a) As soon as available, but in no event more than ninety (90) days
after the close of each of the Borrower's fiscal years, a copy of the annual
financial statement in reasonable detail satisfactory to the Lender, internally
prepared in accordance with generally accepted accounting principles,
consistently applied, and certified as to accuracy by the chief financial
officer of the Borrower, which financial statements shall include a balance
sheet as of the end of such fiscal year, a profit and loss statement and a cash
flow statement (both past and projected for the coming year).

            (b) As soon as available, but in no event more than forty-five (45)
days after the end of each fiscal quarter, internally prepared financial
statements of the Borrower as of the close of such period and income and expense
statements for the Borrower for such period, certified as to accuracy by the
chief financial officer of the Borrower.

            (c) As soon as available but in no event more than thirty (30) days
after the date of filing, the federal and state income tax returns for the
Borrower for the year in question as well as any requests for extensions filed
in connection therewith.

            (d) As soon as available, but in no event more than ninety (90) days
after the close of each fiscal year, a copy of the annual financial statement of
Foundation and the Merritt Academy in reasonable detail satisfactory to the
Lender, prepared in accordance with generally accepted accounting principles,
consistently applied, and certified as to accuracy by the chief financial
officer of Foundation.

                                       21
<PAGE>   22
            (e) Such additional information, reports or statements as the Lender
may from time to time reasonably request.

Section 7.2 Taxes and Claims.

      Pay and discharge all taxes, assessments and governmental charges or
levies imposed upon it or any of its income or properties prior to the date on
which penalties attach thereto, and all lawful claims which, if unpaid, might
become a lien or charge upon any of its properties; provided, however, the
Borrower shall not be required to pay any such tax, assessment, charge, levy or
claim, the payment of which is being contested in good faith and by proper
proceedings.

Section 7.3 Legal Existence.

      Maintain its existence in good standing in the state in which it is
currently organized and in each jurisdiction where it is required to register or
qualify to do business.

Section 7.4 Conduct of Business and Compliance with Laws.

            (a) Do or cause to be done all things necessary to obtain, enter
into, preserve and to keep in full force and effect its material rights and any
trade names, patents, trademarks and Licenses, Participation Agreements, and
Operating Agreements and Management Contracts which are necessary for the
operation of the Facility as an adult assisted living facility as contemplated
by the Borrower, (b) with respect to Borrower only, engage in and continue to
engage substantially only in the business of owning and operating an adult
assisted living facility and related services in compliance with all applicable
laws of the Commonwealth of Virginia or any other Governmental Authority having
jurisdiction over the facility, and (c) comply with all applicable Laws,
including, without limitation, regulations issued under the Omnibus Budget
Reconciliation Act of 1987 (OBRA'87) (Pub. No. 100-203), as amended, and observe
the valid requirements of Governmental Authorities, and perform the terms of all
Participation Agreements to which it is a party, the non-compliance with or the
non-observance of which might materially interfere with the performance of its
Obligations or the proper or prudent conduct of its business or the Property. In
addition, the Borrower covenants and agrees that it will:

                        (i) obtain and maintain in full force and effect all
            Licenses necessary to the acquisition and/or ownership and/or
            operation of the Facility including, without limitation, Licenses
            and other approvals related to the storage, dispensation, use,
            prescription and disposal of drugs, medications and other
            "controlled substances" and, to the extent offered by the Borrower,
            the maintenance of cafeteria and other food and beverage facilities
            or services;

                        (ii) administer, maintain and operate (or will cause to
            be administered, maintained and operated) the Facility as a
            revenue-producing assisted living facility;

                        (iii) to the extent the Borrower participates in any
            such programs, maintain and operate the Facility to meet the
            standards and requirements and to provide healthcare of such quality
            and in such manner as
<PAGE>   23
            would enable the Borrower to participate in, and provide services in
            connection with, recognized medical and healthcare insurance
            programs;

                        (iv) obtain, maintain and comply with all conditions for
            the continuance of, all Licenses, including without limitation,
            Licenses which may at any time be required by the Commonwealth of
            Virginia or other appropriate governmental entity, necessary or
            desirable for the operation of the Facility as an adult assisted
            living facility; and

                        (v) to the extent the Borrower presently participates or
            in the future will participate in such programs, obtain, maintain
            and comply with all conditions for the continuance of certification
            from each applicable Governmental Authority that the Borrower meet
            all conditions for participation in the Medicare and Medicaid
            programs.

Section 7.5 Use of Proceeds.

      Use the proceeds of the Loan for the purpose or purposes set forth in
Recital A above and Section 2.1 (The Loan) and, without the prior written
consent of the Lender for no other purpose or purposes.

Section 7.6 Insurance.

      Provide or cause to be provided to the Lender and maintain in full force
and effect at all times during the term of the Loan, such policies of insurance
as may be required by the terms of the Financing Documents from a company or
companies, and in form and amounts satisfactory to the Lender including, by way
of example and not by way of limitation, at least the following:

            (a) During any period of construction in or on the Property,
"builder's risk" insurance, including vandalism and malicious mischief and
collapse endorsements in amounts not less than the replacement cost of the
Improvements being constructed or of the Property and naming the Lender as a
loss payee in the mortgagee clause thereof;

            (b) Casualty or physical damage insurance coverage for the Property
affording protection against loss or damage by fire or other hazards covered by
the standard all-risk fire and hazard insurance policy with "extended coverage"
endorsement and such other risks as shall be customarily covered with respect to
projects similar in construction, location and use as the Property, or as the
Lender may from time to time otherwise require in amounts necessary to prevent
the application of any co-insurance provisions of any applicable policies up to
an amount not less than the greater of the full insurable value of the
Improvements (as defined in the Deed of Trust) or the aggregate principal amount
of the Obligations; no policy of insurance shall be written such that the
proceeds thereof will produce less than the minimum coverage required by this
Section by reason of co-insurance provisions or otherwise; the term "full
insurable value" means the actual replacement cost of the Property (as defined
in the Deed of Trust) (excluding foundation and excavation costs and costs of
underground flues, pipes, drains and other uninsurable items);

            (c) General public liability insurance in amounts usually carried by
similar operations against claims for bodily injury or death and property damage
insurance for claims for

                                       23
<PAGE>   24
damage to property (including loss of use) occurring upon, in or about the
Property, with such insurance to afford protection to the limit of not less than
$5,000,000 for the aggregate of all occurrences during any given annual policy
period;

            (d) Workers' compensation insurance in accordance with the
requirements of applicable law or regulation;

            (e) Business interruption insurance with respect to the Facility in
an amount equal to at least twelve (12) months' debt service on the Loan; and

            (f) To the extent that healthcare professionals are employed by the
Borrower, medical liability, malpractice and other healthcare professional
liability insurance protecting the Borrower and its employees against claims
arising from the professional services performed by the Borrower and its
employees with limits of (i) not less than One Million Dollars ($1,000,000.00)
with respect to injury or death for each person or occurrence, and (ii) not less
than Three Million Dollars ($3,000,000.00) in the aggregate for claims made for
injury or death in any one year, and an umbrella policy insuring against such
liability in an aggregate amount of Five Million Dollars ($5,000,000). In
addition, the Borrower shall ensure that all healthcare providers with whom the
Borrower contract to provide services at the Facility are insured against claims
arising from such services with limits as set forth in clauses (i) and (ii)
above.

      The Borrower shall cause SALMI to file with the Lender, upon its request,
a detailed list of the insurance then in effect and stating the names of the
insurance companies, the amounts and rates of the insurance, dates of the
expiration thereof and the properties and risks covered thereby. Each policy of
insurance shall (A) be issued by one or more recognized, financially sound and
responsible insurance companies approved by the Lender and which are qualified
or authorized by the laws of the State of Maryland to assume the risk covered by
such policy, (B) with respect to the insurance described under the preceding
subsections (a), (b) and (e) have attached thereto standard noncontributing,
non-reporting mortgagee clauses in favor of and entitling the Lender without
contribution to collect any and all proceeds payable under such insurance, (C)
provide that such policy shall not be canceled or modified without at least
thirty (30) days prior written notice to the Lender, and (D) provide that any
loss otherwise payable thereunder shall be payable notwithstanding any act or
negligence of the Borrower which might, absent such agreement, result in a
forfeiture of all or a part of such insurance payment. Unless an escrow account
has been established for insurance premiums pursuant to the provisions of the
Deed of Trust, the Borrower shall promptly pay all premiums when due on such
insurance and, not less than ten (10) days prior to the expiration date of each
such policy, the Borrower will deliver to the Lender a renewal policy or
policies marked "premium paid" or other evidence of payment satisfactory to the
Lender. The Borrower will immediately give the Lender notice of any cancellation
of, or change in, any insurance policy. The Lender shall not, because of
accepting, rejecting, approving or obtaining insurance, incur any liability for
(i) the existence, nonexistence, form or legal sufficiency thereof, (ii) the
solvency of any insurer, or (iii) the payment of losses.

Section 7.7 Flood Insurance.

      If required by applicable law or regulation, provide or cause to be
provided to the Lender a separate policy of flood insurance in the aggregate
amount of the Loan or the maximum limit

                                       24
<PAGE>   25
of coverage available with respect to the Property, whichever is the lesser,
from a company or companies satisfactory to the Lender and written in strict
conformity with the Flood Disaster Protection Act of 1973, as amended, and all
applicable regulations adopted pursuant thereto. In the event that flood
insurance is not required by applicable law or regulation to be provided in
connection with the Loan or is not otherwise available with respect to the
Property, the Borrower shall supply the Lender with written evidence, in form
and substance satisfactory to the Lender, to that effect. Lender acknowledges
receipt of such written evidence by the Borrower. Any such policy shall provide
that the policy may not be surrendered, canceled or substantially modified
(including, without limitation, cancellation for nonpayment of premiums) without
at least thirty (30) days' prior written notice to any and all insureds named
therein, including the Lender.

Section 7.8 Maintenance of Properties.

      Keep its properties, whether owned in fee or otherwise, or leased,
including, without limitation, the Property, in good operating condition; make
all proper repairs, renewals, replacements, additions and improvements thereto
needed to maintain such properties in good operating condition; comply with the
provisions of all leases to which it is a party or under which it occupies
property so as to prevent any loss or forfeiture thereof or thereunder; and
comply with all laws, rules, regulations and orders applicable to its properties
or business or any part thereof.

Section 7.9 Maintenance of the Collateral.

      Not permit anything to be done to the Collateral which may impair the
value thereof. Upon notice thereof, the Lender or an agent designated by the
Lender, shall be permitted to enter the premises of the Borrower and examine,
audit and inspect the Collateral at any reasonable time and from time to time.
The Lender shall not have any duty to, and the Borrower hereby releases the
Lender from, all claims of loss or damage caused by the delay or failure to
collect or enforce any of the Accounts or Receivables or to preserve any rights
against any other party with an interest in the Collateral.

Section 7.10      Other Liens, Security Interests, etc.

      Keep the Collateral and the Property free from all liens, security
interests and claims of every kind and nature, other than Permitted Liens.

Section 7.11      Defense of Title and Further Assurances.

      At its expense, defend the title to the Collateral (or any part thereof),
and promptly upon request execute, acknowledge and deliver any financing
statement, renewal, affidavit, deed, assignment, continuation statement,
security agreement, certificate or other document the Lender may reasonably
require in order to perfect, preserve, maintain, protect, continue and/or extend
the lien or security interest granted to the Lender under this Agreement and its
priority. The Borrower shall pay to the Lender, on demand all taxes, costs and
expenses incurred by the Lender, in connection with the preparation, execution,
recording and filing of any such document or instrument.

Section 7.12      Subsequent Opinion of Counsel as to Recording Requirements.

      Provide to the Lender a subsequent opinion of counsel as to the filing,
recording and other requirements with which the Borrower has complied to
maintain the lien and security

                                       25
<PAGE>   26
interest in favor of the Lender in the Collateral in the event that the Borrower
shall transfer its principal place of business or the office where it keep its
records pertaining to the Accounts and Receivables.

Section 7.13      Books and Records.

      (a) Keep and maintain accurate books and records, (b) make entries on such
books and records in form reasonably satisfactory to the Lender disclosing the
Lender's assignment of, and security interest in and lien on, the Collateral and
all collections received by the Borrower on its Accounts, (c) furnish to the
Lender promptly upon request such information, reports, contracts, invoices,
lists of purchases of Inventory (showing names, addresses and amount owing) and
other data concerning Account Debtors and the Borrower's Accounts and Inventory
and all contracts and collection(s) relating thereto as the Lender may from time
to time specify, (d) unless the Lender shall otherwise consent in writing, keep
and maintain all such books and records mentioned in (a) above only at the
addresses listed in EXHIBIT B, and (e) upon notice thereof, permit any person
designated by the Lender to enter the premises of the Borrower and examine,
audit and inspect the books and records at any reasonable time and from time to
time.

Section 7.14      Collections.

      Until such time as the Lender shall notify the Borrower of the revocation
of such privilege following an Event of Default, (a) at its own expense have the
privilege for the account of and in trust for the Lender of collecting its
Accounts and receiving in respect thereto all items of payment and shall
otherwise completely service all of the Accounts including (i) the billing,
posting and maintaining of complete records applicable thereto, and (ii) the
taking of such action with respect to such Accounts as the Lender may reasonably
request or in the absence of such request, as the Borrower may deem advisable;
and (b) in its discretion, grant, in the ordinary course of business, to any
Account Debtor, any rebate, refund or adjustment to which the Account Debtor may
be lawfully entitled, and may accept, in connection therewith, the return of
goods, the sale or lease of which shall have given rise to an Account. The
Lender may, at its option but solely in accordance with applicable law, at any
time or from time to time after the occurrence of an Event of Default hereunder,
revoke the collection privilege given to the Borrower herein by either giving
notice of its assignment of, and lien on the Collateral, subject to the
provisions of Section 3.1 (Collateral), to the Account Debtors or giving notice
of such revocation to the Borrower.

Section 7.15      Notice to Account Debtors and Escrow Account.

      In the event that (a) a Default or an Event of Default exists, or (b)
demand has been made for any or all of the Obligations, promptly upon the
request of the Lender in such form and at such times as reasonably specified by
the Lender, give notice of the Lender's lien on the Accounts to the Account
Debtors requiring those Account Debtors which are permitted by applicable law to
make payments thereon directly to the Lender.

Section 7.16      Business Names.

      Immediately notify the Lender of any change in the name under which the
Borrower conduct its business.

                                       26
<PAGE>   27
Section 7.17      ERISA.

      With respect to any pension plan which the Borrower and/or any Commonly
Controlled Entity maintains or contributes to, either now or in the future,
that: (a) such bonding as is required under ERISA Section 412 will be
maintained; (b) as soon as practicable and in any event within 15 days after the
Borrower or any Commonly Controlled Entity knows or has reason to know that a
"reportable event," with respect to which notice has not been waived under 29
C.F.R. Section 4043, has occurred or is likely to occur, the Borrower will
deliver to the Lender a certificate signed by its chief financial officer
setting forth the details of such "reportable event"; (c) neither of the
Borrower nor any Commonly Controlled Entity will: (i) knowlingly engage in or
permit any "prohibited transaction" (as defined in ERISA Section 406 or Code
Section 4975) to occur; (ii) cause any "accumulated funding deficiency" as
defined in ERISA Section 302 and/or Code Section 412 if such deficiency would
materially adversely affect the ability of the Borrower to pay the Obligations;
(iii) terminate any pension plan in a manner which could result in the
imposition of a lien on the property of the Borrower pursuant to ERISA Section
4068 if such termination would materially adversely affect the ability of the
Borrower to pay the Obligations; (iv) terminate or consent to the termination of
any multi-employer plan; (v) incur a complete or partial withdrawal with respect
to any multi-employer plan within the meaning of ERISA Sections 4203 and 4205;
and (d) within 15 days after notice is received by the Borrower or any Commonly
Controlled Entity that any multi-employer plan has been or will be placed in
"reorganization" within the meaning of ERISA Section 4241, the Borrower will
notify the Lender to that effect. Upon the Lender's request, the Borrower will
deliver to the Lender a copy of the most recent actuarial report, financial
statements and annual report completed with respect to any "defined benefit
plan", as defined in ERISA Section 3(35).

Section 7.18      Change in Management.

      Notify the Lender of any change of the Management Company for the
Facility.

Section 7.19      Management.

      Subject to the terms of that certain Management Fee Subordination
Agreement by and among the Borrower, SALMI and the Lender of even date herewith,
subordinate payment of any and all management fees under, or in connection with,
the Management Agreement (the "Management Fees") to payment of the Obligations,
in accordance with the terms and conditions of one or more subordination
agreements in form and content acceptable to the Lender in its reasonable
discretion, and not amend, restate, supplement, terminate, cancel or otherwise
modify any of the terms or conditions of such Management Agreement, in any
material respect, without the prior written consent of the Lender, and (b)
terminate the Management Agreement upon receipt of notice from the Lender
directing the Borrower to terminate the Management Agreement after the
occurrence of an Event of Default, and, if requested to do so by the Lender,
enter into a management agreement for the management of the Facility with an
independent manager.

Section 7.20      Fees and Expenses; Indemnity.

      Pay all reasonable fees, charges, costs and expenses required to satisfy
the conditions of the Financing Documents. The Borrower shall hold the Lender
harmless and indemnify the

                                       27
<PAGE>   28
Lender against all claims of brokers and "finders" arising by reason of the
execution and delivery of the Financing Documents or the consummation of the
transaction contemplated hereby.

Section 7.21      Surveys.

      Furnish or cause SALMI to furnish to the Lender, within thirty (30) days
of receipt thereof, copies of any and all annual surveys or inspections
performed by any Governmental Authority or accreditation or certification
organization with respect to the Facility.

Section 7.22      Cost Reports.

      Prepare and file or cause SALMI to prepare and file all applicable cost
reports to all third-party payors, if any, to the extent required by any such
third-party payor and, within thirty (30) days thereafter, notify the Lender of
any settlement of any cost report disclosed to the Lender as being open or
unsettled as of the Closing Date to the extent any such cost report would have a
materially adverse effect on the Borrower. Copies of any such cost reports shall
be furnished to the Lender.

Section 7.23      Notification of Certain Events, Events of Default and
                  Adverse Developments.

      Promptly notify the Lender upon obtaining knowledge of the occurrence of
any of the following:

            (a) any Event of Default under the Financing Documents;

            (b) any event, development or circumstance whereby the financial
      statements furnished under the Financing Documents fail in any material
      respect to present fairly, in accordance with GAAP, the financial
      condition and operational results of the Borrower;

            (c) any judicial, administrative or arbitral proceeding commenced or
      pending against the Borrower which, if adversely decided, could cause a
      Material Adverse Change in the Borrower;

            (d) (i) the revocation, suspension, probation, restriction,
      limitation or refusal to renew, or the pending, revocation, suspension,
      probation, restriction, limitation, or refusal to renew, of any License,
      or (ii) the decertification, revocation, suspension, probation,
      restriction, limitation, or refusal to renew, or the pending,
      decertification, revocation, suspension, probation, restriction,
      limitation, or refusal to renew any participation or eligibility in any
      third party payor program in which the Borrower elects to participate,
      including, without limitation, Medicare, Medicaid or any accreditation of
      the Borrower, or (iii) the issuance or pending issuance of any License for
      a period of less than twelve (12) months, as a consequence of sanctions
      imposed by any Governmental Authority, or (iv) the assessment or pending
      assessment, of any civil or criminal penalties by any Government
      Authority, any third party payor or any accreditation organization or
      Person, which could materially adversely affect the financial

                                       28
<PAGE>   29
      condition or operations of the Borrower or an Affiliate (present or
      prospective) as determined by the Lender, in its sole but reasonable
      discretion;

            (e) any other development in the business or affairs of the Borrower
      results in a Material Adverse Change; and

            (f) any action, including, but not limited to, the filing of any
      certificate of need application if required by law, the amendment of any
      facility license or certification, or the issuance of any new license or
      certification for the Facility, under which the Borrower proposes (i) to
      develop a new facility or service and/or (ii) eliminate, materially expand
      or materially reduce any service;

in each case listed in clauses (a) through (f), inclusive, of this Section 7.23
describing in detail satisfactory to the Lender the nature thereof and, in the
case, if any, of notification under clause (a), the action the Borrower propose
to take with respect thereto or a statement that the Borrower intend to take no
action and an explanation of the reasons for such inaction. In addition, the
Borrower will furnish to the Lender immediately after receipt thereof copies of
all administrative notices material to Borrower's business and operation of the
Facility and all responses by or on behalf of the Borrower with respect to such
administrative notices.

Section 7.24      Compliance with Environmental Laws.

      If any Hazardous Materials are used, present or generated on the Property,
use, process, distribute, handle, maintain, treat, store, dispose of and
transport such substance in compliance with all applicable laws, including, but
not limited to, those regulating PCBs, underground storage tanks, radon and
medical waste tracking, as well as any laws that are enacted after the date of
this Agreement.

Section 7.25      Hazardous Materials; Contamination.

      (a) Give notice to the Lender within five (5) business days of the
Borrower acquiring actual knowledge of the presence of any Hazardous Materials
on the Property or of any Hazardous Materials Contamination with a full
description thereof, except for reasonable quantities of necessary supplies for
use by the Borrower in the ordinary course of its current line of business and
stored, used and disposed of in accordance with applicable Laws; (b) promptly
comply with any laws requiring special handling, maintenance, servicing,
removal, treatment or disposal of Hazardous Materials or Hazardous Materials
Contamination and provide the Lender upon request with satisfactory evidence of
such compliance; (c) provide the Lender, within thirty (30) days after a demand
by the Lender, with a bond, letter of credit or similar financial assurance
evidencing to the Lender's satisfaction that funds are available to pay the cost
of removing, treating, and disposing of such Hazardous Materials or Hazardous
Materials Contamination and discharging any lien which may be established as a
result thereof on any property owned, operated or controlled by the Borrower or
for which the Borrower is responsible; and (d) defend, indemnify and hold
harmless the Lender and each of its agents, employees, trustees, successors and
assigns from any and all claims which may now or in the future (whether before
or after the termination of this Agreement) be asserted as a result of the
presence of any Hazardous Materials on the Property.

                                       29
<PAGE>   30
Section 7.26      Participation in Reimbursement Programs.

      In the event the Borrower elects to participate in any or all plans and/or
programs for third party payment and/or reimbursement, and the revenues derived
from a single plan or program exceed ten percent (10%) of the gross revenues of
the Facility, continue its participation in any and all such plans and/or
programs for third party payment and/or reimbursement from, and claims against,
private insurers or programs for payment and/or reimbursement from federal,
state and local governmental agencies and/or private or quasi-public insurers,
including, without limitation, Managed Care Plans, Medicaid and Medicare and the
Veterans Administration (as determined by the Borrower in the good faith
exercise of its prudent and commercially reasonable business judgment). While
participating in such plans, the Borrower shall comply with any and all rules,
regulations, standards, procedures and decrees necessary to maintain the
Borrower's participation in any such third party payment or reimbursement
program or plan.

Section 7.27      Inspection and Other Reports and Notices; License.

      Furnish, or cause SALMI to furnish, to the Lender copies of any and all
annual inspections performed by any Governmental Authority or accreditation or
certification organization with respect to the Facility. The Borrower will also
furnish to the Lender copies of all reports or notices from any Governmental
Authority or other organization pertaining to the licensure of or Participation
Agreements or Operating Agreements for the Facility which (a) cite any
deficiency, (b) indicate that a penalty will be imposed unless a corrective
action is taken, (c) impose a penalty (including, but not limited to, a monetary
penalty, a ban on admissions or a suspension of a license) or (d) would be
otherwise materially adverse to the business or operations of the Facility,
together with Borrower's written response to any such report or notice. SALMI
will deliver the renewed License within sixty (60) days of the date hereof.

Section 7.28      Subordination of Distributions and Management Fees.

      Subordinate, and cause the members of the Borrower to subordinate:

            (a) all distributions of the Borrower to principal and interest
payments on the Loan; provided, however, that the Borrower may pay distributions
to its members prior to the occurrence of an uncured Event of Default and so
long as the payment of any such distributions will not result in the occurrence
of an Event of Default, if the ratio of (i) net operating income less
distributions to (ii) debt service is not less than 1.0 to 1.0 (the
"Distribution Test"). The Distribution Test shall be measured on the most recent
twelve (12) month period; and

            (b) the payment of management fees with respect to the Facility
pursuant to the terms of that certain Management Fee Subordination Agreement of
even date herewith (as the same may be modified from time to time) by and among
the Borrower, the Lender and the Management Company.

Section 7.29      Financial Covenants.

            (a) Maintain, tested as of the last day of each of the Borrower's
fiscal quarters for the four (4) quarter period ending on that date, a ratio of
(i) net earnings before deduction for taxes, depreciation and amortization
expense to (ii) aggregate amount of all payments of

                                       30
<PAGE>   31
principal and interest with respect to Note A scheduled to be due and payable
during such period of not less than 1.4 to 1.0.

            (b) Maintain, or cause to be maintained, minimum occupancy at the
Facility equal to or greater than eighty five percent (85%).

                                  ARTICLE VIII
                               NEGATIVE COVENANTS

      Until payment in full and the performance of all of the Obligations,
without the prior written consent of the Lender, the Borrower will not directly
or indirectly:

Section 8.1 Borrowings.

      Create, incur, assume or suffer to exist any liability for borrowed money
other than unsecured loans from Affiliates bearing interest at a rate no higher
than that then applicable to the Loan which are fully subordinated to the Loan
under the terms of subordination agreements acceptable to the Lender. The
proceeds of any loans obtained by the Borrower from Affiliates shall be used
only to cover operating deficits, capital improvement or working capital for the
Facility and may be repaid only if no Event of Default exists or would result
from such payment.

Section 8.2 Merger or Acquisition.

      Enter into any merger or consolidation or amalgamation, windup or dissolve
itself (or suffer any liquidation or dissolution) or acquire all or
substantially all the assets of any Person.

Section 8.3 Deeds of Trust and Pledges.

      Create, incur, assume or suffer to exist any deed of trust, mortgage,
pledge, lien or other encumbrance of any kind upon, or any security interest in,
any of its property or assets, whether now owned or hereafter acquired. The
Lender agrees to review requests for such encumbrances but shall not be bound to
formally consider them.

Section 8.4 Sale or Transfer of Assets.

      Other than cash distributions to its members, enter into any arrangement
whereby it shall sell, lease, transfer, or otherwise dispose of more than
$25,000 worth of its assets in any one year or $100,000 in the aggregate during
the term of the Loan, unless replaced with assets of equivalent or greater
value.

Section 8.5 Advances and Loans.

      Other than the Foundation Loan, make loans or advances to any Person,
including, without limitation, partners and employees of the Borrower. The
Borrower shall disclose in writing to the Lender any advances of loans described
in this section which are outstanding as of the date hereof.

Section 8.6 Contingent Liabilities.

      Assume, guarantee, endorse, contingently agree to purchase or otherwise
become liable upon the obligation of any Person, except by the endorsement of
negotiable instruments for
<PAGE>   32
deposit and collection or similar transactions in the ordinary course of
business and contingent obligations in the aggregate not exceeding $25,000 at
any time.

Section 8.7 Licenses.

      Allow any Licenses, permit, right, franchise or privilege necessary for
the ownership or operation of the Facility for the purposes for which the
Facility is intended to be used to lapse, be suspended, be revoked, be denied
renewal, be forfeited or be placed on probation.

Section 8.8 ERISA Compliance.

      (a) Restate or amend any pension plan established and maintained by the
Borrower or any Commonly Controlled Entity and subject to the requirements of
ERISA, in a manner designed to disqualify such plan and its related trusts under
the applicable requirements of the Code; (b) permit any officers of the Borrower
or any Commonly Controlled Entity to materially adversely affect the qualified
tax-exempt status of any pension plan or related trusts of the Borrower or any
Commonly Controlled Entity under the Code; (c) knowingly engage in or permit any
Commonly Controlled Entity to engage in any "prohibited transaction" (as defined
in ERISA Section 406 or Code Section 4975) with respect to any pension plan
established and maintained by the Borrower or any Commonly Controlled Entity;
(d) incur or permit any Commonly Controlled Entity to incur any "accumulated
funding deficiency" (as defined in ERISA Section 302 or Code Section 412),
whether or not waived, in connection with any pension plan, if such deficiency
would materially adversely affect the ability of the Borrower to pay the
Obligations; (e) take or permit any Commonly Controlled Entity to take any
action or fail to take any action which causes a termination of any Plan in a
manner which could result in the imposition of a lien on the property of the
Borrower or any Commonly Controlled Entity pursuant to Section 4068 of ERISA if
such termination would materially adversely affect the ability of the Borrower
to pay the Obligations; (f) fail to notify the Lender that notice has been
received of a "termination" (as defined in ERISA) of any Multi-employer Plan to
which the Borrower or any Commonly Controlled Entity has an obligation to
contribute; (g) incur or permit any Commonly Controlled Entity to incur a
"complete withdrawal" or "partial withdrawal" (as defined in ERISA) from any
Multi-employer Plan to which the Borrower or any Commonly Controlled Entity has
an obligation to contribute; or (h) fail to notify the Lender that notice has
been received from the administrator of any Multi-employer Plan to which the
Borrower or any Commonly Controlled Entity has an obligation to contribute that
any such Plan will be placed in "reorganization" (as defined in ERISA).

Section 8.9 Transfer of Collateral.

      Transfer, or permit the transfer, to another location of any of the
Collateral or the books and records related to any of the Collateral; provided,
however, that the Borrower may transfer the Collateral or the books and records
related thereto to another location if the Borrower has provided to the Lender
prior to such transfer an opinion of counsel addressed to the Lender to the
effect that the Lender's perfected security interest shall not be affected by
such move or if it shall be affected, setting forth the steps necessary to
continue the Lender's perfected security interest together with the commencement
of such steps by the Borrower at its expense.

                                       32
<PAGE>   33
Section 8.10      Sale of Accounts or Receivables.

      Sell, discount, transfer, assign or otherwise dispose of any of its
Accounts or Receivables, such as accounts receivable, notes receivable,
installment or conditional sales agreements or any other rights to receive
income, revenues or moneys, however evidenced.

Section 8.11      Amendments; Terminations.

      Amend or terminate or agree to amend or terminate any License, the
Management Agreement or, except in the ordinary course of business or as
otherwise agreed to herein, any participation agreement, or any other Management
Contracts and Operating Agreements, or consent to or waive any material
provisions thereof.

Section 8.12      Prohibition on Hazardous Materials.

      Place, manufacture or store or permit to be placed, manufactured or
stored, any Hazardous Materials on the Property, except for reasonable
quantities of necessary supplies for use by the Borrower in the ordinary course
of its current line of business and stored, used and disposed of in accordance
with applicable Laws.

Section 8.13      Subsidiaries.

      Create or otherwise acquire any subsidiaries if such creation or
acquisition would result in a Material Adverse Change.

Section 8.14      Single Purpose Entity.

      Engage in any activity which would cause the Borrower to be other than a
single purpose entity for the purpose of the Loan.

                                   ARTICLE IX
                                EVENTS OF DEFAULT

      The occurrence of one or more of the following events shall be "Events of
Default" under this Agreement, and the terms "Event of Default" shall mean,
whenever they are used in this Agreement, any one or more of the following
events:

Section 9.1 Failure to Pay and/or Perform the Obligations.

      The Borrower shall fail to pay any of the Obligations including but not
limited to the Expense Payments and Liquidation Costs when due and payable.

Section 9.2 Breach of Representations and Warranties.

      Any material representation or warranty made in this Agreement or in any
report, certificate, opinion, financial statement or other instrument furnished
in connection with the Obligations or with the execution and delivery of any of
the Financing Documents, shall prove to have been false or misleading when made
in any material respect.

                                       33
<PAGE>   34
Section 9.3 Failure to Comply with Covenants.

      Default shall be made by the Borrower in the performance, observance or
compliance with any covenant, condition or agreement contained in this
Agreement.

Section 9.4 Default Under Other Financing Documents.

      A Default shall occur under any of the other Financing Documents, and such
Default is not cured within any applicable grace period provided therein.

Section 9.5 Receiver; Bankruptcy.

      An Act of Bankruptcy occurs with respect to the Borrower or the Borrower
becomes generally unable to pay its debts as they become due; provided, however,
if a proceeding with respect to an Act of Bankruptcy is filed or commenced
against the Borrower, the same shall not constitute an Event of Default if such
proceeding is dismissed within ninety (90) days from the date of such Act of
Bankruptcy.

Section 9.6 Judgment.

      Any judgment against the Borrower of $100,000 or more or any attachment or
other levy against the property of the Borrower remains unpaid, unstayed on
appeal, undischarged, unbonded or undismissed for a period of thirty (30) days.

Section 9.7 Execution; Attachment.

      Any execution or attachment shall be levied against the Collateral, or any
part thereof, and such execution or attachment shall not be set aside,
discharged or stayed within thirty (30) days after the same shall have been
levied.

Section 9.8 Default Under Other Borrowings.

      Default shall be made by the Borrower with respect to any evidence of
indebtedness or liability for borrowed money (other than the Loan) if the effect
of such default is to accelerate the maturity of such evidence of indebtedness
or liability or to permit the holder or obligee thereof to cause any
indebtedness to become due prior to its stated maturity.

Section 9.9 Material Adverse Change.

      If the Lender in its reasonable discretion determines that a Material
Adverse Change has occurred in the financial condition of the Borrower.

Section 9.10      Impairment of Position.

      If the Lender in its reasonable discretion determines that an event has
occurred which impairs the prospect of payment of the Obligations and/or the
value of the Collateral.

Section 9.11      Change in Status or Ownership.

      The Borrower is dissolved, merged, consolidated or reorganized, or any
change occurs in the ownership or control of the Borrower, without the prior
written consent of the Lender.

                                       34
<PAGE>   35
Section 9.12      Zoning.

      Any change in any zoning ordinance or any other public restriction is
enacted, limiting or defining the uses which may be made of the Property or a
part thereof, such that the current use of the Property, as specified herein,
would be in violation of such restriction or zoning change.

Section 9.13      Change in Management.

      The Management Agreement is terminated without the prior written consent
of the Lender.

Section 9.14      Licenses.

      The involuntary, imposed or required revocation, suspension, probation,
restriction, limitation or refusal to renew, or the pending revocation,
suspension, probation, restriction, limitation, of, or refusal to renew, of any
License; other than in the ordinary course of business or to the extent that the
Borrower deems such action to be, in the exercise of prudent business judgment,
in the best interest of Borrower; the decertification, revocation, suspension,
probation, restriction, limitation, or refusal to renew, or the pending,
decertification, revocation, suspension, probation, restriction, limitation, or
refusal to renew any participation or eligibility in any third party payor
program in which the Borrower elects to participate, including, without
limitation, the Medicaid or Medicare programs; or the issuance or pending
issuance of any License for a period of less than twelve (12) months as a
consequence of any sanctions imposed by any Governmental Authority; or the
assessment or pending assessment, of any civil or criminal penalties against the
Borrower by any Governmental Authority, any third party payor or any
accreditation organization or person.

Section 9.15      Compliance with Law.

      The Borrower fails to comply with any requirement of any Governmental
Authority having jurisdiction within the time required by such Governmental
Authority; or any proceeding is commenced or action taken against the Borrower
to enforce any remedy for a violation of any requirement of a Governmental
Authority or any restrictive covenant affecting the Property or any part
thereof.

Section 9.16      Appraisal.

      If upon receipt of an updated appraisal pursuant to Section 3.6 (Updated
Appraisals), the value of the Property, as determined by the Lender based upon
its review of such appraisal, is less than that required pursuant to the terms
of Section 3.6.

Section 9.17      Foundation Covenants.

      The Foundation shall fail to (a) maintain minimum net assets (including
subordinated debt) equal to or greater than $3,200,000 or (b) maintain, or cause
Merritt Academy to maintain, a ratio of (i) net earnings before deduction for
taxes, depreciation and amortization expense to (ii) aggregate amount of all
payments of principal and interest with respect to Note B scheduled to be due
and payable during such period, of not less than 1.25 to 1.0.

                                       35
<PAGE>   36
                                   ARTICLE X
                        RIGHTS AND REMEDIES UPON DEFAULT

Section 10.1      DEMAND; ACCELERATION.

      THE OCCURRENCE OR NONOCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS
AGREEMENT SHALL IN NO WAY AFFECT OR CONDITION THE RIGHT OF THE LENDER TO DEMAND
PAYMENT AT ANY TIME OF ANY OF THE OBLIGATIONS WHICH ARE PAYABLE ON DEMAND
REGARDLESS OF WHETHER OR NOT AN EVENT OF DEFAULT HAS OCCURRED. Upon the
occurrence of an Event of Default, and in every such event and at any time
thereafter, the Lender may declare the Obligations due and payable, without
presentment, demand, protest, or any notice of any kind, all of which are hereby
expressly waived, anything contained herein or in any of the other Financing
Documents to the contrary notwithstanding.

Section 10.2      Specific Rights With Regard to Collateral.

      Following an Event of Default, in addition to all other rights and
remedies provided hereunder or as shall exist at law or in equity from time to
time, the Lender may, without notice to the Borrower:

            (a) assign any and all Operating Agreements and Management Contracts
      to any Person designated by the Lender, and/or exercise all rights and
      privileges of the Borrower under such contracts and agreements for the
      purpose of realizing on the Collateral and to the extent and for the time
      required to realize the value of the Collateral;

            (b) to the extent permitted by applicable law, assume such
      management, operation and control of the Property to the extent and for
      the time necessary to realize the value of the Collateral;

            (c) cause the Borrower to engage, contract with, and/or hire
      qualified service, billing, collection and other such agents,
      organizations and companies acceptable to the Lender to collect and/or
      realize upon any or all of the Collateral and to remit the proceeds to the
      Lender;

            (d) subject to applicable state and federal laws pertaining to
      resident confidentiality, request any Account Debtor obligated on any of
      the Accounts to make payments thereon directly to the Lender to the extent
      permitted by applicable law, with the Lender taking control of the cash
      and non-cash proceeds thereof and/or direct the Borrower to (and the
      Borrower shall) turn over to the Lender immediately following receipt all
      payments with respect to the Collateral in the form received (with the
      addition of all necessary endorsements) and not to deposit, negotiate or
      otherwise deal with those payments;

            (e) compromise, extend or renew any of the Collateral or deal with
      the same as it may deem advisable;

                                       36
<PAGE>   37
            (f) make exchanges, substitutions or surrenders of all or any part
      of the Collateral;

            (g) remove from the Borrower's place of business all books, records,
      ledger sheets, correspondence, invoices and documents, relating to or
      evidencing any of the Collateral or without cost or expense to the Lender,
      make such use of the Borrower's place of business as may be reasonably
      necessary to administer, control and collect the Collateral;

            (h) demand, collect, receipt for and give renewals, extensions,
      discharges and releases of any of the Collateral;

            (i) institute and prosecute legal and equitable proceedings to
      enforce collection of, or realize upon, any of the Collateral;

            (j) settle, renew, extend, compromise, compound, exchange or adjust
      claims in respect of any of the Collateral or any legal proceedings
      brought in respect thereof;

            (k) endorse the name of the Borrower upon any items of payment
      relating to the Collateral or on any Proof of Claim in Bankruptcy against
      an Account Debtor; and

            (l) notify the Post Office authorities to change the address for the
      delivery of mail to the Borrower to such address or Post Office Box as the
      Lender may designate and receive and open all mail addressed to the
      Borrower.

      In addition, the Borrower shall, following an Event of Default which
remains uncured beyond any applicable grace period, promptly, upon request,
execute and deliver to the Lender written assignments, to the extent permitted
by applicable law, in form and content acceptable to the Lender, of specific
Accounts or groups of Accounts; provided, however, that the lien and/or security
interest granted to the Lender under this Agreement shall not be limited in any
way to or by the inclusion or exclusion of Accounts within such assignments.
Such Accounts shall secure payment of the Obligations and are not sold to the
Lender whether or not any assignment thereof, which is separate from this
Agreement, is in form absolute.

      Following an Event of Default, the Lender may also direct the Borrower to
appoint a manager for the Facility and enter into a management agreement with a
management company approved by the Lender, the terms of which agreement shall be
approved by the Lender.

Section 10.3      Performance by Lender.

      Following an Event of Default which remains uncured, the Lender without
the necessity of prior notice to or demand upon the Borrower and without waiving
or releasing any of the Obligations or any Event of Default, may (but shall be
under no obligation to) at any time thereafter make such payment or perform such
act for the account and at the expense of the Borrower, and may enter upon the
premises of the Borrower for that purpose and take all such action thereon as
the Lender may reasonably consider necessary or appropriate for such purpose.

                                       37
<PAGE>   38
The Lender will give the Borrower notice at least subsequently of any such
performance by the Lender. All sums so paid or advanced by the Lender and all
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred in connection therewith (the "Expense Payments") together
with interest thereon from the date of payment, advance or incurring until paid
in full at the Post-Default Rate shall be paid by the Borrower to the Lender on
demand and shall constitute and become a part of the Obligations.

Section 10.4      Uniform Commercial Code and Other Remedies.

      Upon the occurrence of an Event of Default (and in addition to all of its
rights, powers and remedies under this Agreement), the Lender shall have all of
the rights and remedies of a secured party under the applicable Uniform
Commercial Code and other applicable laws, and the Lender is authorized to
offset and apply to all or any part of the Obligations all moneys, credits and
other property of any nature whatsoever of the Borrower now or at any time
hereafter in the possession of, in transit to or from, under the control or
custody of, or on deposit with, the Lender; and upon demand by the Lender, the
Borrower shall assemble the Collateral and make it available to the Lender, at a
place designated by the Lender; and the Lender or its agents may enter upon the
Borrower's premises to take possession of the Collateral, to remove it, to
render it unusable, or to sell or otherwise dispose of it.

      Any written notice of the sale, disposition or other intended action by
the Lender with respect to the Collateral which is sent by regular mail, postage
prepaid, to the Borrower at the address set forth in ARTICLE XI (Miscellaneous),
or such other address of the Borrower which may from time to time be shown on
the Lender's records, at least ten (10) days prior to such sale, disposition or
other action, shall constitute reasonable notice to the Borrower. The Borrower
shall pay on demand all costs and expenses, including, without limitation,
reasonable attorney's fees and expenses, incurred by or on behalf of the Lender,
in preparing for sale or other disposition, selling, managing, collecting or
otherwise disposing of, the Collateral. All of such costs and expenses (the
"Liquidation Costs") together with interest thereon from the date incurred until
paid in full at the Post-Default Rate, shall be paid by the Borrower to the
Lender on demand and shall constitute and become a part of the Obligations. Any
proceeds of sale or other disposition of the Collateral will be applied by the
Lender to the payment of the Liquidation Costs and Expense Payments, and any
balance of such proceeds will be applied by the Lender to the payment of the
balance of the Obligations in such order and manner of application as the Lender
may from time to time in its sole discretion determine. After such application
of the proceeds, any balance shall be paid to the Borrower or to any other party
entitled thereto.

Section 10.5      Receiver or Other Court Order.

      Following an uncured Event of Default, as a matter of right, following ten
(10) days notice and without regard to the adequacy of the security, and upon
application to a court of competent jurisdiction, the Lender shall be entitled
to the immediate appointment of a receiver for all or any part of the
Collateral, and of the payments and proceeds thereof and therefrom, whether such
receivership be incidental to a proposed sale of the Collateral or otherwise,
and the Borrower hereby consents to the appointment of such a receiver and to an
order of court directing that payments, including Medicare and Medicaid
payments, be made directly to the receiver. The Borrower will pay to the Lender,
upon demand, all expenses, including reasonable

                                       38
<PAGE>   39
receiver's fees, reasonable attorney's fees, costs and agents compensation,
advanced by the Borrower and incurred pursuant to the provisions contained in
this Section.

Section 10.6      License of Tradename.

      The Lender and its affiliates, any trustee under a Deed of Trust and their
management company shall have a license to use the name "Sunrise" or any other
additional tradename used now or in the future in connection with the Facility
during the term of the Loan and any marks associated therewith in the operation
of the Facility upon such Lender's or trustee's taking of possession or taking
over management of the Facility or acquiring title thereto at a foreclosure sale
which license shall be in effect for a period of twelve (12) months from the
date thereof but shall be extended for any period up to an additional six (6)
months if the Borrower, SALI, SALII, SALMI or any affiliate of any of them,
takes any action to delay or obstruct the Lender's exercise of its remedies
under the Financing Documents. In connection herewith, the Borrower has caused
or shall cause SALI, SALII and SALMI to grant a similar license.

                                   ARTICLE XI
                                  MISCELLANEOUS

Section 11.1      Notices.

      All notices, certificates or other communications hereunder shall be
deemed given when delivered by hand or courier, or three (3) Banking Days after
being mailed by certified mail, postage prepaid, return receipt requested,
addressed as follows:

      Lender:                  Chevy Chase Bank, F.S.B.,
                               9th Floor
                               8401 Connecticut Avenue
                               Chevy Chase, Maryland 21085
                               Attn: Richard Amador
                                    Vice President

      With a courtesy copy to: Margaret Ann Brown, Esquire
                               Troutman Sanders Mays & Valentine LLP
                               1660 International Drive, Suite 600
                               McLean, Virginia 22102

      Borrower:                Sunrise Fairfax Assisted Living, L.L.C.
                               c/o Sunrise Assisted Living Investments, Inc.
                               7902 Westpark Drive
                               McLean, Virginia 22102
                               Attention:  James S. Pope

      With a Courtesy Copy to: Wayne G. Tatusko, Esquire
                               Watt, Tieder, Hoffar & Fitzgerald
                               7929 Westpark Drive
                               McLean, Virginia 22102

                                       39
<PAGE>   40
Section 11.2      Consents and Approvals.

      If any consent, approval, or authorization of any Governmental Authority
or of any Person having any interest therein, should be necessary to effectuate
any sale or other disposition of the Collateral, the Borrower agrees to execute
all such applications and other instruments, and to take all other action, as
may be required in connection with securing any such consent, approval or
authorization.

Section 11.3      Remedies, etc. Cumulative.

      Each right, power and remedy of the Lender as provided for in this
Agreement or in any of the other Financing Documents or now or hereafter
existing at law or in equity or by statute or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power or remedy
provided for in this Agreement or in any of the other Financing Documents or now
or hereafter existing at law or in equity, by statute or otherwise, and the
exercise or beginning of the exercise by the Lender of any one or more of such
rights, powers or remedies shall not preclude the simultaneous or later exercise
by the Lender of any or all such other rights, powers or remedies. In order to
entitle the Lender to exercise any remedy reserved to it herein, it shall not be
necessary to give any notice, other than such notice as may be expressly
required in this Agreement.

Section 11.4      No Waiver of Rights by the Lender.

      No failure or delay by the Lender to insist upon the strict performance of
any term, condition, covenant or agreement of this Agreement or of any of the
other Financing Documents, or to exercise any right, power or remedy consequent
upon a breach thereof, shall constitute a waiver of any such term, condition,
covenant or agreement or of any such breach or preclude the Lender from
exercising any such right, power or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Agreement
or under any of the other Financing Documents, the Lender shall not be deemed to
waive the right either to require prompt payment when due of all other amounts
payable under this Agreement or under any of the other Financing Documents, or
to declare a default for failure to effect such prompt payment of any such other
amount.

Section 11.5      Entire Agreement.

      The Financing Documents shall completely and fully supersede all other
agreements, both written and oral, between the Lender and the Borrower relating
to the Obligations. Neither the Lender nor the Borrower shall hereafter have any
rights under such prior agreements but shall look solely to the Financing
Documents for definition and determination of all of their respective rights,
liabilities and responsibilities relating to the Obligations.

Section 11.6      Survival of Agreement; Successors and Assigns.

      All covenants, agreements, representations and warranties made by the
Borrower herein and in any certificate, in the Financing Documents and in any
other instruments or documents delivered pursuant hereto shall survive the
making by the Lender of the Loan and the execution and delivery of the Note, and
shall continue in full force and effect so long as any of the Obligations are
outstanding and unpaid. Whenever in this Agreement any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
assigns of such party;

                                       40
<PAGE>   41
and all covenants, promises and agreements by or on behalf of the Borrower,
which are contained in this Agreement shall inure to the benefit of the
successors and assigns of the Lender, and all covenants, promises and agreements
by or on behalf of the Lender which are contained in this Agreement shall inure
to the benefit of the permitted successors and permitted assigns of the
Borrower, but this Agreement may not be assigned by the Borrower without the
prior written consent of the Lender.

Section 11.7      Expenses.

      The Borrower agrees to pay all reasonable out-of-pocket expenses of the
Lender (including travel expenses and the reasonable fees and expenses of its
legal counsel) in connection with the preparation of this Agreement, the
recordation of all financing statements and such other instruments as may be
required by the Lender at the time of, or subsequent to, the execution of this
Agreement to secure the Obligations (including any and all recordation tax and
other costs and taxes incident to recording), the enforcement of any provision
of this Agreement and the collection of the Obligations. The Borrower agrees to
indemnify and save harmless the Lender from any liability resulting from the
failure to pay any required recordation tax, transfer taxes, recording costs or
any other expenses incurred by the Lender in connection with the Obligations.
The provisions of this Section shall survive the execution and delivery of this
Agreement and the repayment of the Obligations. The Borrower further agrees to
reimburse the Lender upon demand for all reasonable out-of-pocket expenses
(including reasonable attorneys' fees and legal expenses) incurred by the Lender
in enforcing any of the Obligations or any security therefor, together with
interest at the Post-Default Rate which agreement shall survive the termination
of this Agreement and the repayment of the Obligations.

Section 11.8      Counterparts.

      This Agreement may be executed in any number of counterparts all of which
together shall constitute a single instrument.

Section 11.9      Governing Law.

      This Agreement and all of the other Financing Documents shall be governed
by, and construed in accordance with, the laws of the State of Maryland.

Section 11.10     Modifications.

      No modification or waiver of any provision of this Agreement or of any of
the other Financing Documents, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice to or demand on the Borrower in
any case shall entitle the Borrower to any other or further notice or demand in
the same, similar or other circumstance.

Section 11.11     Illegality.

      If fulfillment of any provision hereof or any transaction related hereto
or to any of the other Financing Documents, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity; and if any clause or provisions herein
contained

                                       41
<PAGE>   42
other than the provisions hereof pertaining to repayment of the Obligations
operates or would prospectively operate to invalidate this Agreement in whole or
in part, then such clause or provision only shall be void, as though not herein
contained, and the remainder of this Agreement shall remain operative and in
full force and effect; and if such provision pertains to repayment of the
Obligations, then, at the option of the Lender, all of the Obligations of the
Borrower to the Lender shall become immediately due and payable.

Section 11.12     Gender, etc.

      Whenever used herein, the singular number shall include the plural, the
plural the singular and the use of the masculine, feminine or neuter gender
shall include all genders.

Section 11.13     Headings.

      The headings in this Agreement are for convenience only and shall not
limit or otherwise affect any of the terms hereof.

Section 11.14     Waiver of Trial by Jury.

      THE BORROWER AND THE LENDER HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY
JURY IN ANY ACTION OR PROCEEDING TO WHICH ANY OF THEM MAY BE PARTIES, ARISING
OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE LOAN
DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY
JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING
CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT.

      This waiver is knowingly, willingly and voluntarily made by the Borrower
and the Lender, and the Borrower and the Lender hereby represent that no
representations of fact or opinion have been made by any individual to induce
this waiver of trial by jury or to in any way modify or nullify its effect. The
Borrower and the Lender further represent that they have been represented in the
signing of this Agreement and in the making of this waiver by independent legal
counsel, selected of its own free will, and that they have had the opportunity
to discuss this waiver with counsel.

Section 11.15     Liability of the Lender.

      The Lender shall not be liable for any act or omission by the Lender
pursuant to the provisions of this Agreement in the absence of fraud or gross
negligence. The Borrower hereby agrees that the Lender shall not be chargeable
for any negligence, mistake, act or omission of any accountant, examiner, agency
or attorney employed by the Lender (except for the gross negligence or willful
misconduct of any person, corporation, partnership or other entity employed by
the Lender) in making examinations, investigations or collections, or otherwise
in perfecting, maintaining, protecting or realizing upon any lien or security
interest or any other interest in the Collateral or other security for the
Obligations.

                                       42
<PAGE>   43
      IN WITNESS WHEREOF, the parties hereto have signed and sealed this
Agreement on the day and year first above written.

WITNESS OR ATTEST:                  SUNRISE FAIRFAX ASSISTED LIVING, L.L.C.
                                    By:   Sunrise Assisted Living
                                          Investments, Inc., its Managing
                                          Member

--------------------------          By: /s/ James S. Pope       (SEAL)
                                        -----------------------
                                        James S. Pope
                                        Vice President

WITNESS:                            CHEVY CHASE BANK, F.S.B.

--------------------------          By:  /s/ Richard L. Amador    (SEAL)
                                        -----------------------
                                        Richard L. Amador
                                        Vice President

                                       43
<PAGE>   44
                                LIST OF EXHIBITS

A-1.  Form of Note A

A-2   Form of Note B

B.    Places of Business

                                       44
<PAGE>   45
                                   EXHIBIT A-1

                             FORM OF $4,000,000 NOTE

                                       45
<PAGE>   46
                                   EXHIBIT A-2

                             FORM OF $4,100,000 NOTE

                                       46
<PAGE>   47
                                    EXHIBIT B

                               PLACES OF BUSINESS

The Borrower's Chief Executive
Office is:

      7902 Westpark Drive
      McLean, Virginia 22102

Location of Borrower's Collateral:

      7902 Westpark Drive
      McLean, Virginia 22102

                                       47

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