Document:

<PAGE>   1
                                                                    EXHIBIT 10.2

                                MULTIFAMILY NOTE

US $11,209,000.00     June 30, 2000

      FOR VALUE RECEIVED, the undersigned ("BORROWER") jointly and severally (if
more than one) promises to pay to the order of BANC ONE CAPITAL FUNDING
CORPORATION, an Ohio corporation, the principal sum of Eleven Million Two
Hundred Nine Thousand and 00/100 Dollars (US $11,209,000.00), with interest on
the unpaid principal balance at the annual rate of Eight and fifty-three
hundredths percent (8.53%).

      1.    DEFINED TERMS. As used in this Note, (i) the term "LENDER" means the
holder of this Note, and (ii) the term "INDEBTEDNESS" means the principal of,
interest on, or any other amounts due at any time under, this Note, the Security
Instrument or any other Loan Document, including prepayment premiums, late
charges, default interest, and advances to protect the security of the Security
Instrument under Section 12 of the Security Instrument. Event of Default, Key
Principal and other capitalized terms used but not defined in this Note shall
have the meanings given to such terms in the Security Instrument (as defined in
Paragraph 5).

      2.    ADDRESS FOR PAYMENT. All payments due under this Note shall be
payable at 150 E. Gay Street, 22nd Floor, Columbus, Ohio 43215, or such other
place as may be designated by written notice to Borrower from or on behalf of
Lender.

      3.    PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be
paid as follows:

      (a)   Unless disbursement of principal is made by Lender to Borrower on
the first day of the month, interest for the period beginning on the date of
disbursement and ending on and including the last day of the month in which such
disbursement is made shall be payable simultaneously with the execution of this
Note. Interest under this Note shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.

      (b)   Consecutive monthly installments of principal and interest, each in
the amount of Ninety Thousand Four Hundred Eighty Four and 63/100 Dollars (US
$90,484.63), shall be payable on the first day of each month beginning on August
1, 2000, until the entire unpaid principal balance evidenced by this Note is
fully paid. Any accrued interest remaining past due for 30 days or more shall be
added to and become part of the unpaid principal balance and shall bear interest
at the rate or rates specified in this Note, and any reference below to "accrued
interest" shall refer to accrued interest which has not become part of the
unpaid principal balance. Any remaining principal and interest shall be due and
payable on July 1, 2010 or on any earlier date on which the unpaid principal
balance of this Note becomes due and payable, by acceleration or otherwise (the
"MATURITY DATE"). The unpaid principal balance shall continue to bear interest
after the Maturity Date at the Default Rate set forth in this Note until and
including the date on which it is paid in full.

      (c)   Any regularly scheduled monthly installment of principal and
interest that is received by Lender before the date it is due shall be deemed to
have been received on the due date solely for the purpose of calculating
interest due.

      4.    APPLICATION OF PAYMENTS. If at any time Lender receives, from
Borrower or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, Lender may apply that payment to
amounts then due and payable in any manner and in any order determined by
Lender, in Lender's discretion. Borrower agrees that neither Lender's acceptance
of a payment from Borrower in an amount that is less than all amounts then due
and payable nor Lender's application of such payment shall constitute or be
deemed to constitute either a waiver of the unpaid

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amounts or an accord and satisfaction. If Lender accepts a guaranty of only a
portion of the Indebtedness, Borrower hereby waives its right under California
Civil Code Section 2822(a) to designate the portion of the Indebtedness which
shall be satisfied by any guarantor's partial payment.

      5.    SECURITY. The Indebtedness is secured, among other things, by a
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing (California) dated as of the date of this Note (the "SECURITY
INSTRUMENT"), and reference is made to the Security Instrument for other rights
of Lender concerning the collateral for the Indebtedness.

      6.    ACCELERATION. If an Event of Default has occurred and is continuing,
the entire unpaid principal balance, any accrued interest, the prepayment
premium payable under Paragraph 10, if any, and all other amounts payable under
this Note and any other Loan Document shall at once become due and payable, at
the option of Lender, without any prior notice to Borrower. Lender may exercise
this option to accelerate regardless of any prior forbearance.

      7.    LATE CHARGE. If any monthly amount payable under this Note or under
the Security Instrument or any other Loan Document is not received by Lender
within 10 days after the amount is due, Borrower shall pay to Lender,
immediately and without demand by Lender, a late charge equal to 5 percent of
such amount. Borrower acknowledges that its failure to make timely payments will
cause Lender to incur additional expenses in servicing and processing the loan
evidenced by this Note (the "LOAN"), and that it is extremely difficult and
impractical to determine those additional expenses. Borrower agrees that the
late charge payable pursuant to this Paragraph represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional expenses Lender will incur by reason of such late
payment. The late charge is payable in addition to, and not in lieu of, any
interest payable at the Default Rate pursuant to Paragraph 8.

      8.    DEFAULT RATE. So long as any monthly installment or any other
payment due under this Note remains past due for 30 days or more, interest under
this Note shall accrue on the unpaid principal balance from the earlier of the
due date of the first unpaid monthly installment or other payment due, as
applicable, at a rate (the "DEFAULT RATE") equal to the lesser of 4 percentage
points above the rate stated in the first paragraph of this Note or the maximum
interest rate which may be collected from Borrower under applicable law. If the
unpaid principal balance and all accrued interest are not paid in full on the
Maturity Date, the unpaid principal balance and all accrued interest shall bear
interest from the Maturity Date at the Default Rate. Borrower also acknowledges
that its failure to make timely payments will cause Lender to incur additional
expenses in servicing and processing the Loan, that, during the time that any
monthly installment or other payment under this Note is delinquent for more than
30 days, Lender will incur additional costs and expenses arising from its loss
of the use of the money due and from the adverse impact on Lender's ability to
meet its other obligations and to take advantage of other investment
opportunities, and that it is extremely difficult and impractical to determine
those additional costs and expenses. Borrower also acknowledges that, during the
time that any monthly installment or other payment due under this Note is
delinquent for more than 30 days, Lender's risk of nonpayment of this Note will
be materially increased and Lender is entitled to be compensated for such
increased risk. Borrower agrees that the increase in the rate of interest
payable under this Note to the Default Rate represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional costs and expenses Lender will incur by reason of the
Borrower's delinquent payment and the additional compensation Lender is entitled
to receive for the increased risks of nonpayment associated with a delinquent
loan.

      9.    LIMITS ON PERSONAL LIABILITY.

      (a)   Except as otherwise provided in this Paragraph 9, Borrower shall
have no personal liability under this Note, the Security Instrument or any other
Loan Document for the repayment of the

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Indebtedness or for the performance of any other obligations of Borrower under
the Loan Documents, and Lender's only recourse for the satisfaction of the
Indebtedness and the performance of such obligations shall be Lender's exercise
of its rights and remedies with respect to the Mortgaged Property and any other
collateral held by Lender as security for the Indebtedness. This limitation on
Borrower's liability shall not limit or impair Lender's enforcement of its
rights against any guarantor of the Indebtedness or any guarantor of any
obligations of Borrower.

      (b)   Borrower shall be personally liable to Lender for the repayment of a
portion of the Indebtedness equal to any loss or damage suffered by Lender as a
result of (1) failure of Borrower to pay to Lender upon demand after an Event of
Default, all Rents to which Lender is entitled under Section 3(a) of the
Security Instrument and the amount of all security deposits collected by
Borrower from tenants then in residence; (2) failure of Borrower to apply all
insurance proceeds and condemnation proceeds as required by the Security
Instrument; (3) failure of Borrower to comply with Section 14(d) or (e) of the
Security Instrument relating to the delivery of books and records, statements,
schedules and reports; (4) fraud or written material misrepresentation by
Borrower, Key Principal or any officer, director, partner, member or employee of
Borrower in connection with the application for or creation of the Indebtedness
or any request for any action or consent by Lender; or (5) failure to apply
Rents, first, to the payment of reasonable operating expenses (other than
Property management fees that are not currently payable pursuant to the terms of
an Assignment of Management Agreement or any other agreement with Lender
executed in connection with the Loan) and then to amounts ("DEBT SERVICE
AMOUNTS") payable under this Note, the Security Instrument or any other Loan
Document (except that Borrower will not be personally liable (i) to the extent
that Borrower lacks the legal right to direct the disbursement of such sums
because of a bankruptcy, receivership or similar judicial proceeding, or (ii)
with respect to Rents that are distributed in any calendar year if Borrower has
paid all operating expenses and Debt Service Amounts for that calendar year).

      (c)   Borrower shall become personally liable to Lender for the repayment
of all of the Indebtedness upon the occurrence of any of the following Events of
Default: (1) Borrower's acquisition of any property or operation of any business
not permitted by Section 33 of the Security Instrument; or (2) a Transfer that
is an Event of Default under Section 21 of the Security Instrument.

      (d)   To the extent that Borrower has personal liability under this
Paragraph 9, Lender may exercise its rights against Borrower personally without
regard to whether Lender has exercised any rights against the Mortgaged Property
or any other security, or pursued any rights against any guarantor, or pursued
any other rights available to Lender under this Note, the Security Instrument,
any other Loan Document or applicable law. If Borrower is a married person, then
Borrower agrees that Lender may look to all of Borrower's community property and
separate property to satisfy Borrower's recourse obligations under this
Paragraph 9. For purposes of this Paragraph 9, the term "MORTGAGED PROPERTY"
shall not include any funds that (1) have been applied by Borrower as required
or permitted by the Security Instrument prior to the occurrence of an Event of
Default, or (2) Borrower was unable to apply as required or permitted by the
Security Instrument because of a bankruptcy, receivership, or similar judicial
proceeding.

      10.   VOLUNTARY AND INVOLUNTARY PREPAYMENTS.

      (a)   A prepayment premium shall be payable in connection with any
prepayment made under this Note as provided below:

            (1)   Borrower may voluntarily prepay all (but not less than all) of
      the unpaid principal balance of this Note on the last Business Day of a
      calendar month if Borrower has given Lender at least 30 days prior notice
      of its intention to make such prepayment. Such prepayment shall be made by
      paying (A) the amount of principal being prepaid, (B) all accrued

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      interest, (C) all other sums due Lender at the time of such prepayment,
      and (D) the prepayment premium calculated pursuant to Schedule A. For all
      purposes, including the accrual of interest, any prepayment received by
      Lender on any day other than the last calendar day of the month shall be
      deemed to have been received on the last calendar day of such month. For
      purposes of this Note, a "BUSINESS DAY" means any day other than a
      Saturday, Sunday or any other day on which Lender is not open for
      business.

            (2)   Upon Lender's exercise of any right of acceleration under this
      Note, Borrower shall pay to Lender, in addition to the entire unpaid
      principal balance of this Note outstanding at the time of the
      acceleration, (A) all accrued interest and all other sums due Lender under
      this Note and the other Loan Documents, and (B) the prepayment premium
      calculated pursuant to Schedule A.

            (3)   Any application by Lender of any collateral or other security
      to the repayment of any portion of the unpaid principal balance of this
      Note prior to the Maturity Date and in the absence of acceleration shall
      be deemed to be a partial prepayment by Borrower, requiring the payment to
      Lender by Borrower of a prepayment premium. The amount of any such partial
      prepayment shall be computed so as to provide to Lender a prepayment
      premium computed pursuant to Schedule A without Borrower having to pay
      out-of-pocket any additional amounts.

      (b)   Notwithstanding the provisions of Paragraph 10(a), no prepayment
premium shall be payable with respect to (A) any prepayment made no more than 90
days before the Maturity Date, or (B) any prepayment occurring as a result of
the application of any insurance proceeds or condemnation award under the
Security Instrument.

      (c)   Schedule A is hereby incorporated by reference into this Note.

      (d)   Any required prepayment of less than the unpaid principal balance of
this Note shall not extend or postpone the due date of any subsequent monthly
installments or change the amount of such installments, unless Lender agrees
otherwise in writing.

      (e)   Borrower recognizes that any prepayment of the unpaid principal
balance of this Note, whether voluntary or involuntary or resulting from a
default by Borrower, will result in Lender's incurring loss, including
reinvestment loss, additional expense and frustration or impairment of Lender's
ability to meet its commitments to third parties. Borrower agrees to pay to
Lender upon demand damages for the detriment caused by any prepayment, and
agrees that it is extremely difficult and impractical to ascertain the extent of
such damages. Borrower therefore acknowledges and agrees that the formula for
calculating prepayment premiums set forth on Schedule A represents a reasonable
estimate of the damages Lender will incur because of a prepayment.

      (f)   Borrower further acknowledges that the prepayment premium provisions
of this Note are a material part of the consideration for the Loan, and
acknowledges that the terms of this Note are in other respects more favorable to
Borrower as a result of the Borrower's voluntary agreement to the prepayment
premium provisions.

      11.   COSTS AND EXPENSES. Borrower shall pay on demand all expenses and
costs, including fees and out-of-pocket expenses of attorneys and expert
witnesses and costs of investigation, incurred by Lender as a result of any
default under this Note or in connection with efforts to collect any amount due
under this Note, or to enforce the provisions of any of the other Loan
Documents, including those incurred in post-judgment collection efforts and in
any bankruptcy proceeding (including any action for relief from the automatic
stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure
proceeding.

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<PAGE>   5

      12.   FORBEARANCE. Any forbearance by Lender in exercising any right or
remedy under this Note, the Security Instrument, or any other Loan Document or
otherwise afforded by applicable law, shall not be a waiver of or preclude the
exercise of that or any other right or remedy. The acceptance by Lender of any
payment after the due date of such payment, or in an amount which is less than
the required payment, shall not be a waiver of Lender's right to require prompt
payment when due of all other payments or to exercise any right or remedy with
respect to any failure to make prompt payment. Enforcement by Lender of any
security for Borrower's obligations under this Note shall not constitute an
election by Lender of remedies so as to preclude the exercise of any other right
or remedy available to Lender.

      13.   WAIVERS. Presentment, demand, notice of dishonor, protest, notice of
acceleration, notice of intent to demand or accelerate payment or maturity,
presentment for payment, notice of nonpayment, grace, and diligence in
collecting the Indebtedness are waived by Borrower, Key Principal, and all
endorsers and guarantors of this Note and all other third party obligors.

      14.   LOAN CHARGES. If any applicable law limiting the amount of interest
or other charges permitted to be collected from Borrower in connection with the
Loan is interpreted so that any interest or other charge provided for in any
Loan Document, whether considered separately or together with other charges
provided for in any other Loan Document, violates that law, and Borrower is
entitled to the benefit of that law, that interest or charge is hereby reduced
to the extent necessary to eliminate that violation. The amounts, if any,
previously paid to Lender in excess of the permitted amounts shall be applied by
Lender to reduce the unpaid principal balance of this Note. For the purpose of
determining whether any applicable law limiting the amount of interest or other
charges permitted to be collected from Borrower has been violated, all
Indebtedness that constitutes interest, as well as all other charges made in
connection with the Indebtedness that constitute interest, shall be deemed to be
allocated and spread ratably over the stated term of the Note. Unless otherwise
required by applicable law, such allocation and spreading shall be effected in
such a manner that the rate of interest so computed is uniform throughout the
stated term of the Note.

      15.   COMMERCIAL PURPOSE. Borrower represents that the Indebtedness is
being incurred by Borrower solely for the purpose of carrying on a business or
commercial enterprise, and not for personal, family or household purposes.

      16.   COUNTING OF DAYS. Except where otherwise specifically provided, any
reference in this Note to a period of "days" means calendar days, not Business
Days.

      17.   GOVERNING LAW. This Note shall be governed by the law of the
jurisdiction in which the Land is located.

      18.   CAPTIONS. The captions of the paragraphs of this Note are for
convenience only and shall be disregarded in construing this Note.

      19.   NOTICES. All notices, demands and other communications required or
permitted to be given by Lender to Borrower pursuant to this Note shall be given
in accordance with Section 31 of the Security Instrument.

      20.   CONSENT TO JURISDICTION AND VENUE. Borrower and Key Principal each
agrees that any controversy arising under or in relation to this Note shall be
litigated exclusively in the jurisdiction in which the Land is located (the
"PROPERTY JURISDICTION"). The state and federal courts and authorities with
jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over
all controversies which shall arise under or in relation to this Note. Borrower
and Key Principal each irrevocably consents

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<PAGE>   6

to service, jurisdiction, and venue of such courts for any such litigation and
waives any other venue to which it might be entitled by virtue of domicile,
habitual residence or otherwise.

      21.   WAIVER OF TRIAL BY JURY. BORROWER, KEY PRINCIPAL AND LENDER EACH (A)
AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES, AS LENDER, KEY PRINCIPAL AND
BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL
BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW
OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY
EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL
COUNSEL.

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<PAGE>   7

      ATTACHED SCHEDULES. THE FOLLOWING SCHEDULES ARE ATTACHED TO THIS NOTE:

            [X]   SCHEDULE A PREPAYMENT PREMIUM (REQUIRED)

            [X]   SCHEDULE B MODIFICATIONS TO MULTIFAMILY NOTE

      IN WITNESS WHEREOF, Borrower has signed and delivered this Note or has
caused this Note to be signed and delivered by its duly authorized
representative.

                                          BORROWER:

                                          ARV COVELL, LLC
                                          a California limited liability company

                                          By:___________________________________
                                             Name:  Abdo H.  Khoury,
                                             Title: Authorized Manager

Borrower's Employer ID Number: 33-0911962

Fannie Mae MBS/DUS [Pool] [Commitment] No.:

                                                                          Page 7

<PAGE>   8

                                          Pay to the order of FANNIE MAE,
                                          without recourse.

                                          LENDER:

                                          BANC ONE CAPITAL FUNDING CORPORATION,
                                          AN OHIO CORPORATION

                                          By:__________________________________
                                             Name:  Jennifer B.  Henson
                                             Title: Director

                                   SCHEDULE A

                               PREPAYMENT PREMIUM

      Any prepayment premium payable under Paragraph 10 of this Note shall be
computed as follows:

      (a)   If the prepayment is made during the first 9.5 years beginning on
            the date of the Note (the "YIELD MAINTENANCE PERIOD"), the
            prepayment premium shall be the greater of:

                  (i)   1% of the unpaid principal balance of this Note; or

                  (ii)  The product obtained by multiplying:

                        (A)   the amount of principal being prepaid,

                        by

                        (B)   the difference obtained by subtracting from the
                              interest rate on this Note the yield rate (the
                              "YIELD RATE") on the 6.5% U.S. Treasury Security
                              due February 1, 2010 (the "SPECIFIED U.S. TREASURY
                              SECURITY"), as the Yield Rate is reported in The
                              Wall Street Journal on the fifth Business Day
                              preceding (x) the date notice of prepayment is
                              given to Lender where prepayment is voluntary, or
                              (y) the date Lender accelerates the Loan,

                        by

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<PAGE>   9

                        (C)   the present value factor calculated using the
                              following formula:

                                    1 - (1 + r)(-n)
                                    ---------------
                                          r
                                    [r = Yield Rate
                                     n = the number of 365-day years (or 366-day
                                         years, if applicable), and any fraction
                                         thereof, remaining between the
                                         Prepayment Date and the expiration of
                                         the Yield Maintenance Period]

                                       9
<PAGE>   10

                                    In the event that no Yield Rate is published
                                    for the Specified U.S. Treasury Security,
                                    then the nearest equivalent U.S. Treasury
                                    Security shall be selected at Lender's
                                    discretion. If the publication of such Yield
                                    Rates in The Wall Street Journal is
                                    discontinued, Lender shall determine such
                                    Yield Rates from another source selected by
                                    Lender.

                                    For purposes of subparagraph (ii)(C), the
                                    "PREPAYMENT DATE" shall be (x) in the case
                                    of a voluntary prepayment, the date on which
                                    the prepayment is made, and (y) in any other
                                    case, the date on which Lender accelerates
                                    the unpaid principal balance of this Note.

      (b)   If the prepayment is made after the expiration of the Yield
            Maintenance Period but more than 90 days before the Maturity Date,
            the prepayment premium shall be 1% of the unpaid principal balance
            of this Note.

                                                          _____________________
                                                                INITIAL(S)

                                       10
<PAGE>   11

SCHEDULE B

                              MODIFICATIONS TO NOTE
                                (SENIOR HOUSING)

      The following modifications are made to the text of the Note that precedes
this Exhibit:

      1.    Section 9(b)(3) of the Note is hereby amended to read as follows:

      2.    Failure of Borrower to comply with Sections 14(d), 14 (e), or 14 (f)
            of the Security Instrument relating to the delivery of books and
            records, statements, schedules and reports;"

      3.    Section 9(b) of the Note is hereby amended to add the following
            paragraph (6) at the end thereof:

            "Borrower's failure to renew, continue, extend, or maintain all
            permits, licenses or other certificates or other approvals required
            to legally operate the Mortgaged Property as a seniors housing
            facility, as defined in the Security Instrument;"

      4.    All capitalized terms used in this Schedule not specifically defined
            herein shall have the meanings set forth in the text of the Note
            that precedes this Schedule.

                                          BORROWER'S INITIALS: _____________

                                       11
<PAGE>   12

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

Ballard Spahr Andrews & Ingersoll, LLP
300 East Lombard Street, Suite 1900
Baltimore, Maryland 21202
Attn: Thomas A. Hauser, Esquire

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

                           MULTIFAMILY DEED OF TRUST,
                              ASSIGNMENT OF RENTS,
                      SECURITY AGREEMENT AND FIXTURE FILING
                                  (CALIFORNIA)

ATTENTION COUNTY RECORDER: THIS INSTRUMENT IS INTENDED TO BE EFFECTIVE AS A
FINANCING STATEMENT FILED AS A FIXTURE FILING

                                       12
<PAGE>   13

PURSUANT TO SECTION 9402 OF THE CALIFORNIA COMMERCIAL CODE. PORTIONS OF THE
GOODS COMPRISING A PART OF THE MORTGAGED PROPERTY ARE OR ARE TO BECOME FIXTURES
RELATED TO THE LAND DESCRIBED IN EXHIBIT A HERETO. THIS INSTRUMENT IS TO BE
FILED FOR RECORD IN THE RECORDS OF THE COUNTY WHERE DEEDS OF TRUST ON REAL
PROPERTY ARE RECORDED AND SHOULD BE INDEXED AS BOTH A DEED OF TRUST AND AS A
FINANCING STATEMENT COVERING FIXTURES. THE ADDRESSES OF BORROWER (DEBTOR) AND
LENDER (SECURED PARTY) ARE SPECIFIED IN THE FIRST PARAGRAPH ON PAGE 1 OF THIS
INSTRUMENT.

                                       13
<PAGE>   14

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

<S>   <C>
1.    DEFINITIONS   2

2.    UNIFORM COMMERCIAL CODE SECURITY AGREEMENT   6

3.    ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION   7

4.    ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY   9

5.    PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS; PREPAYMENT
      PREMIUM   11

6.    EXCULPATION   11

7.    DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES   11

8.    COLLATERAL AGREEMENTS   12

9.    APPLICATION OF PAYMENTS   12

10.   COMPLIANCE WITH LAWS   13

11.   USE OF PROPERTY   13

12.   PROTECTION OF LENDER'S SECURITY   13

13.   INSPECTION   14

14.   BOOKS AND RECORDS; FINANCIAL REPORTING   14

15.   TAXES; OPERATING EXPENSES   16

16.   LIENS; ENCUMBRANCES   16

17.   PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY   17

18.   ENVIRONMENTAL HAZARDS   17
</TABLE>

                                                                         Page i

                                       i
<PAGE>   15

<TABLE>
<CAPTION>

<S>   <C>
19.   PROPERTY AND LIABILITY INSURANCE   23

20.   CONDEMNATION   24

21.   TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER   25

22.   EVENTS OF DEFAULT   29

23.   REMEDIES CUMULATIVE   30

24.   FORBEARANCE   30

25.   LOAN CHARGES   30

26.   WAIVER OF STATUTE OF LIMITATIONS   31

27.   WAIVER OF MARSHALING   31

28.   FURTHER ASSURANCES   31

29.   ESTOPPEL CERTIFICATE   31

30.   GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE   31

31.   NOTICE   32

32.   SALE OF NOTE; CHANGE IN SERVICER   32

33.   SINGLE ASSET BORROWER   32

34.   SUCCESSORS AND ASSIGNS BOUND   32

35.   JOINT AND SEVERAL LIABILITY   33

36.   RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY   33

37.   SEVERABILITY; AMENDMENTS   33

38.   CONSTRUCTION   33

39.   LOAN SERVICING   33
</TABLE>

                                                                         Page ii

                                       ii
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<TABLE>
<CAPTION>

<S>   <C>
40.   DISCLOSURE OF INFORMATION   34

41.   NO CHANGE IN FACTS OR CIRCUMSTANCES   34

42.   SUBROGATION   34

43.   ACCELERATION; REMEDIES   34

44.   RECONVEYANCE   35

45.   SUBSTITUTE TRUSTEE   35

46.   STATEMENT OF OBLIGATION   35

47.   SPOUSE'S SEPARATE PROPERTY   35

48.   FIXTURE FILING   35

49.   ADDITIONAL PROVISION REGARDING APPLICATION OF PAYMENTS   35

50.   WAIVER OF MARSHALING; OTHER WAIVERS   36

51.   ADDITIONAL PROVISIONS CONCERNING ENVIRONMENTAL HAZARDS   36

52.   ADDITIONAL PROVISION REGARDING INSURANCE   37

53.   WAIVER OF TRIAL BY JURY   38
</TABLE>

                                                                        Page iii

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<PAGE>   17

      MULTIFAMILY DEED OF TRUST,
                              ASSIGNMENT OF RENTS,
                             SECURITY AGREEMENT AND
                                 FIXTURE FILING

      THIS MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT
AND FIXTURE FILING (the "INSTRUMENT") is dated as of the 30th day of June, 2000,
by ARV COVELL, LLC, a limited liability company, organized and existing under
the laws of California, whose address is 245 Fischer Avenue, D-1, Costa Mesa,
California 92626, as trustor ("BORROWER"), to FIDELITY NATIONAL TITLE INSURANCE
COMPANY, as trustee ("TRUSTEE"), for the benefit of BANC ONE CAPITAL FUNDING
CORPORATION, an Ohio corporation, organized and existing under the laws of Ohio,
whose address is 150 E. Gay Street, 22nd Floor, Columbus, Ohio 43215, as
beneficiary ("LENDER").

      Borrower, in consideration of the Indebtedness and the trust created by
this Instrument, irrevocably grants, conveys and assigns to Trustee, in trust,
with power of sale, the Mortgaged Property, including the Land located in Yolo
County, State of California and described in Exhibit A attached to this
Instrument.

      TO SECURE TO LENDER the repayment of the Indebtedness evidenced by
Borrower's Multifamily Note payable to Lender, dated as of the date of this
Instrument, and maturing on July 1, 2010, in the principal amount of
$11,209,000.00, and all renewals, extensions and modifications of the
Indebtedness, the payment of all sums advanced by or on behalf of Lender to
protect the security of this Instrument under Section 12, and the performance of
the covenants and agreements of Borrower contained in the Loan Documents.

      Borrower represents and warrants that Borrower is lawfully seized of the
Mortgaged Property and has the right, power and authority to grant, convey and
assign the Mortgaged Property, and that the Mortgaged Property is unencumbered.
Borrower covenants that Borrower will warrant and defend generally the title to
the Mortgaged Property against all claims and demands, subject to any easements
and restrictions listed in a schedule of exceptions to coverage in any title
insurance policy issued to Lender contemporaneously with the execution and
recordation of this Instrument and insuring Lender's interest in the Mortgaged
Property.

      COVENANTS. Borrower and Lender covenant and agree as follows:

      1.    DEFINITIONS. The following terms, when used in this Instrument
(including when used in the above recitals), shall have the following meanings:

                                                                          Page 1

<PAGE>   18

      (a)   "BORROWER" means all persons or entities identified as "Borrower" in
the first paragraph of this Instrument, together with their successors and
assigns.

      (b)   "COLLATERAL AGREEMENT" means any separate agreement between Borrower
and Lender for the purpose of establishing replacement reserves for the
Mortgaged Property, establishing a fund to assure completion of repairs or
improvements specified in that agreement, or assuring reduction of the
outstanding principal balance of the Indebtedness if the occupancy of or income
from the Mortgaged Property does not increase to a level specified in that
agreement, or any other agreement or agreements between Borrower and Lender
which provide for the establishment of any other fund, reserve or account.

      (c)   "ENVIRONMENTAL PERMIT" means any permit, license, or other
authorization issued under any Hazardous Materials Law with respect to any
activities or businesses conducted on or in relation to the Mortgaged Property.

      (d)   "EVENT OF DEFAULT" means the occurrence of any event listed in
Section 22.

      (e)   "FIXTURES" means all property which is so attached to the Land or
the Improvements as to constitute a fixture under applicable law, including:
machinery, equipment, engines, boilers, incinerators, installed building
materials; systems and equipment for the purpose of supplying or distributing
heating, cooling, electricity, gas, water, air, or light; antennas, cable,
wiring and conduits used in connection with radio, television, security, fire
prevention, or fire detection or otherwise used to carry electronic signals;
telephone systems and equipment; elevators and related machinery and equipment;
fire detection, prevention and extinguishing systems and apparatus; security and
access control systems and apparatus; plumbing systems; water heaters, ranges,
stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers,
dryers and other appliances; light fixtures, awnings, storm windows and storm
doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors;
cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants;
swimming pools; and exercise equipment.

      (f)   "GOVERNMENTAL AUTHORITY" means any board, commission, department or
body of any municipal, county, state or federal governmental unit, or any
subdivision of any of them, that has or acquires jurisdiction over the Mortgaged
Property or the use, operation or improvement of the Mortgaged Property.

                                                                          Page 2

                                       2
<PAGE>   19

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

      (h)   "HAZARDOUS MATERIALS LAWS" means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other governmental
requirements, administrative rulings and court judgments and decrees in effect
now or in the future and including all amendments, that relate to Hazardous
Materials and apply to Borrower or to the Mortgaged Property. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water
Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 5101, et seq., and their state analogs.

      (i)   "IMPOSITIONS" and "IMPOSITION DEPOSITS" are defined in Section 7(a).

      (j)   "IMPROVEMENTS" means the buildings, structures, improvements, and
alterations now constructed or at any time in the future constructed or placed
upon the Land, including any future replacements and additions.

      (k)   "INDEBTEDNESS" means the principal of, interest on, and all other
amounts due at any time under, the Note, this Instrument or any other Loan
Document, including prepayment premiums, late charges, default interest, and
advances as provided in Section 12 to protect the security of this Instrument.

      (l)   [Intentionally omitted.]

      (m)   "KEY PRINCIPAL" means the natural person(s) or entity identified as
such at the foot of this Instrument, and any person or entity who becomes a Key
Principal after the date of this Instrument and is identified as such in an
amendment or supplement to this Instrument.

      (n)   "LAND" means the land described in Exhibit A.

      (o)   "LEASES" means all present and future leases, subleases, licenses,
concessions or grants or other possessory interests now or hereafter in force,
whether oral or written, covering or affecting

                                                                          Page 3

<PAGE>   20

the Mortgaged Property, or any portion of the Mortgaged Property (including
proprietary leases or occupancy agreements if Borrower is a cooperative housing
corporation), and all modifications, extensions or renewals.

      (p)   "LENDER" means the entity identified as "Lender" in the first
paragraph of this Instrument and its successors and assigns, or any subsequent
holder of the Note.

      (q)   "LOAN DOCUMENTS" means the Note, this Instrument, all guaranties,
all indemnity agreements, all Collateral Agreements, O&M Programs, and any other
documents now or in the future executed by Borrower, Key Principal, any
guarantor or any other person in connection with the loan evidenced by the Note,
as such documents may be amended from time to time.

      (r)   "LOAN SERVICER" means the entity that from time to time is
designated by Lender to collect payments and deposits and receive notices under
the Note, this Instrument and any other Loan Document, and otherwise to service
the loan evidenced by the Note for the benefit of Lender. Unless Borrower
receives notice to the contrary, the Loan Servicer is the entity identified as
"Lender" in the first paragraph of this Instrument.

      (s)   "MORTGAGED PROPERTY" means all of Borrower's present and future
right, title and interest in and to all of the following:

            (1)   the Land;

            (2)   the Improvements;

            (3)   the Fixtures;

            (4)   the Personalty;

            (5)   all current and future rights, including air rights,
                        development rights, zoning rights and other similar
                        rights or interests, easements, tenements,
                        rights-of-way, strips and gores of land, streets,
                        alleys, roads, sewer rights, waters, watercourses, and
                        appurtenances related to or benefitting the Land or the
                        Improvements, or both, and all rights-of-way, streets,
                        alleys and roads which may have been or may in the
                        future be vacated;

            (6)   all proceeds paid or to be paid by any insurer of the Land,
                        the Improvements, the Fixtures, the Personalty or any
                        other part of the Mortgaged Property, whether or not
                        Borrower obtained the insurance pursuant to Lender's
                        requirement;

            (7)   all awards, payments and other compensation made or to be made
                        by any municipal, state or federal authority with
                        respect to the Land, the Improvements, the Fixtures, the
                        Personalty or any other part of the

                                                                          Page 4

<PAGE>   21

                        Mortgaged Property, including any awards or settlements
                        resulting from condemnation proceedings or the total or
                        partial taking of the Land, the Improvements, the
                        Fixtures, the Personalty or any other part of the
                        Mortgaged Property under the power of eminent domain or
                        otherwise and including any conveyance in lieu thereof;

            (8)   all contracts, options and other agreements for the sale of
                        the Land, the Improvements, the Fixtures, the Personalty
                        or any other part of the Mortgaged Property entered into
                        by Borrower now or in the future, including cash or
                        securities deposited to secure performance by parties of
                        their obligations;

            (9)   all proceeds from the conversion, voluntary or involuntary, of
                        any of the above into cash or liquidated claims, and the
                        right to collect such proceeds;

            (10)  all Rents and Leases;

            (11)  all earnings, royalties, accounts receivable, issues and
                        profits from the Land, the Improvements or any other
                        part of the Mortgaged Property, and all undisbursed
                        proceeds of the loan secured by this Instrument and, if
                        Borrower is a cooperative housing corporation,
                        maintenance charges or assessments payable by
                        shareholders or residents;

            (12)  all Imposition Deposits;

            (13)  all refunds or rebates of Impositions by any municipal, state
                        or federal authority or insurance company (other than
                        refunds applicable to periods before the real property
                        tax year in which this Instrument is dated);

            (14)  all tenant security deposits which have not been forfeited by
                        any tenant under any Lease; and

            (15)  all names under or by which any of the above Mortgaged
                        Property may be operated or known, and all trademarks,
                        trade names, and goodwill relating to any of the
                        Mortgaged Property.

      (t)   "NOTE" means the Multifamily Note described on page 1 of this
Instrument, including the Acknowledgment and Agreement of Key Principal to
Personal Liability for Exceptions to Non-Recourse Liability (if any), and all
schedules, riders, allonges and addenda, as such Multifamily Note may be amended
from time to time.

      (u)   "O&M PROGRAM" is defined in Section 18(a).

                                                                          Page 5

<PAGE>   22

      (v)   "PERSONALTY" means all furniture, furnishings, equipment, machinery,
building materials, appliances, goods, supplies, tools, books, records (whether
in written or electronic form), computer equipment (hardware and software) and
other tangible personal property (other than Fixtures) which are used now or in
the future in connection with the ownership, management or operation of the Land
or the Improvements or are located on the Land or in the Improvements, and any
operating agreements relating to the Land or the Improvements, and any surveys,
plans and specifications and contracts for architectural, engineering and
construction services relating to the Land or the Improvements and all other
intangible property and rights relating to the operation of, or used in
connection with, the Land or the Improvements, including all governmental
permits relating to any activities on the Land.

      (w)   "PROPERTY JURISDICTION" is defined in Section 30(a).

      (x)   "RENTS" means all rents (whether from residential or non-residential
space), revenues and other income of the Land or the Improvements, including
parking fees, laundry and vending machine income and fees and charges for food,
health care and other services provided at the Mortgaged Property, whether now
due, past due, or to become due, and deposits forfeited by tenants.

      (y)   "TAXES" means all taxes, assessments, vault rentals and other
charges, if any, general, special or otherwise, including all assessments for
schools, public betterments and general or local improvements, which are levied,
assessed or imposed by any public authority or quasi-public authority, and
which, if not paid, will become a lien, on the Land or the Improvements.

      (z)   "TRANSFER" means (A) a sale, assignment, transfer or other
disposition (whether voluntary, involuntary or by operation of law); (B) the
granting, creating or attachment of a lien, encumbrance or security interest
(whether voluntary, involuntary or by operation of law); (C) the issuance or
other creation of an ownership interest in a legal entity, including a
partnership interest, interest in a limited liability company or corporate
stock; (D) the withdrawal, retirement, removal or involuntary resignation of a
partner in a partnership or a member or manager in a limited liability company;
or (E) the merger, dissolution, liquidation, or consolidation of a legal entity.
"Transfer" does not include (i) a conveyance of the Mortgaged Property at a
judicial or non-judicial foreclosure sale under this Instrument or (ii) the
Mortgaged Property becoming part of a bankruptcy estate by operation of law
under the United States Bankruptcy Code. For purposes of defining the term
"Transfer," the term "partnership" shall mean a general partnership, a limited
partnership, a joint venture and a limited liability partnership, and the term
"partner" shall mean a general partner, a limited partner and a joint venturer.

      2.    UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also
a security agreement under the Uniform Commercial Code for any of the Mortgaged
Property which, under applicable law, may be subject to a security interest
under the Uniform Commercial Code, whether acquired now or in the future, and
all products and cash and non-cash

                                                                          Page 6

<PAGE>   23

proceeds thereof (collectively, "UCC COLLATERAL"), and Borrower hereby grants to
Lender a security interest in the UCC Collateral. Borrower shall execute and
deliver to Lender, upon Lender's request, financing statements, continuation
statements and amendments, in such form as Lender may require to perfect or
continue the perfection of this security interest. Borrower shall pay all filing
costs and all costs and expenses of any record searches for financing statements
that Lender may require. Without the prior written consent of Lender, Borrower
shall not create or permit to exist any other lien or security interest in any
of the UCC Collateral. If an Event of Default has occurred and is continuing,
Lender shall have the remedies of a secured party under the Uniform Commercial
Code, in addition to all remedies provided by this Instrument or existing under
applicable law. In exercising any remedies, Lender may exercise its remedies
against the UCC Collateral separately or together, and in any order, without in
any way affecting the availability of Lender's other remedies. This Instrument
constitutes a financing statement with respect to any part of the Mortgaged
Property which is or may become a Fixture.

      3.    ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION.

      (a)   As part of the consideration for the Indebtedness, Borrower
absolutely and unconditionally assigns and transfers to Lender all Rents. It is
the intention of Borrower to establish a present, absolute and irrevocable
transfer and assignment to Lender of all Rents and to authorize and empower
Lender to collect and receive all Rents without the necessity of further action
on the part of Borrower. Promptly upon request by Lender, Borrower agrees to
execute and deliver such further assignments as Lender may from time to time
require. Borrower and Lender intend this assignment of Rents to be immediately
effective and to constitute an absolute present assignment and not an assignment
for additional security only. For purposes of giving effect to this absolute
assignment of Rents, and for no other purpose, Rents shall not be deemed to be a
part of the "Mortgaged Property," as that term is defined in Section 1(s).
However, if this present, absolute and unconditional assignment of Rents is not
enforceable by its terms under the laws of the Property Jurisdiction, then the
Rents shall be included as a part of the Mortgaged Property and it is the
intention of the Borrower that in this circumstance this Instrument create and
perfect a lien on Rents in favor of Lender, which lien shall be effective as of
the date of this Instrument.

      (b)   After the occurrence of an Event of Default, Borrower authorizes
Lender to collect, sue for and compromise Rents and directs each tenant of the
Mortgaged Property to pay all Rents to, or as directed by, Lender. However,
until the occurrence of an Event of Default, Lender hereby grants to Borrower a
revocable license to collect and receive all Rents, to hold all Rents in trust
for the benefit of Lender and to apply all Rents to pay the installments of
interest and principal then due and payable under the Note and the other amounts
then due and payable under the other Loan Documents, including Imposition
Deposits, and to pay the current costs and expenses of managing, operating and
maintaining the Mortgaged Property, including utilities, Taxes and insurance
premiums (to the extent not included in Imposition Deposits), tenant
improvements and other capital expenditures. So long as no Event of Default has
occurred and is continuing,

                                                                          Page 7

<PAGE>   24

the Rents remaining after application pursuant to the preceding sentence may be
retained by Borrower free and clear of, and released from, Lender's rights with
respect to Rents under this Instrument. From and after the occurrence of an
Event of Default, and without the necessity of Lender entering upon and taking
and maintaining control of the Mortgaged Property directly, or by a receiver,
Borrower*s license to collect Rents shall automatically terminate and Lender
shall without notice be entitled to all Rents as they become due and payable,
including Rents then due and unpaid. Borrower shall pay to Lender upon demand
all Rents to which Lender is entitled. At any time after the occurrence of an
Event of Default, Lender may give, and Borrower hereby irrevocably authorizes
Lender to give, notice to all tenants of the Mortgaged Property instructing them
to pay all Rents to Lender; provided, however, that the giving of any such
notice by Lender shall not affect, in any way, Lender's entitlement to the Rents
as of the date on which the Event of Default occurs. No tenant shall be
obligated to inquire further as to the occurrence or continuance of an Event of
Default, and no tenant shall be obligated to pay to Borrower any amounts which
are actually paid to Lender in response to such a notice. Any such notice by
Lender shall be delivered to each tenant personally, by mail or by delivering
such demand to each rental unit. Borrower shall not interfere with and shall
cooperate with Lender's collection of such Rents.

      (c)   Borrower represents and warrants to Lender that Borrower has not
executed any prior assignment of Rents (other than an assignment of Rents
securing indebtedness that will be paid off and discharged with the proceeds of
the loan evidenced by the Note), that Borrower has not performed, and Borrower
covenants and agrees that it will not perform, any acts and has not executed,
and shall not execute, any instrument which would prevent Lender from exercising
its rights under this Section 3, and that at the time of execution of this
Instrument there has been no anticipation or prepayment of any Rents for more
than two months prior to the due dates of such Rents. Borrower shall not collect
or accept payment of any Rents more than two months prior to the due dates of
such Rents.

      (d)   If an Event of Default has occurred and is continuing, Lender may,
regardless of the adequacy of Lender's security or the solvency of Borrower and
even in the absence of waste, enter upon and take and maintain full control of
the Mortgaged Property in order to perform all acts that Lender in its
discretion determines to be necessary or desirable for the operation and
maintenance of the Mortgaged Property, including the execution, cancellation or
modification of Leases, the collection of all Rents, the making of repairs to
the Mortgaged Property and the execution or termination of contracts providing
for the management, operation or maintenance of the Mortgaged Property, for the
purposes of enforcing the assignment of Rents pursuant to Section 3(a),
protecting the Mortgaged Property or the security of this Instrument, or for
such other purposes as Lender in its discretion may deem necessary or desirable.
Alternatively, if an Event of Default has occurred and is continuing, regardless
of the adequacy of Lender's security, without regard to Borrower*s solvency and
without the necessity of giving prior notice (oral or written) to Borrower,
Lender may apply to any court having jurisdiction for the appointment of a
receiver for the Mortgaged Property to take any or all of the actions set forth
in the preceding sentence. If Lender elects to seek the appointment of a
receiver for the Mortgaged Property at

                                                                          Page 8

<PAGE>   25

any time after an Event of Default has occurred and is continuing, Borrower, by
its execution of this Instrument, expressly consents to the appointment of such
receiver, including the appointment of a receiver ex parte if permitted by
applicable law. Lender or the receiver, as the case may be, shall be entitled to
receive a reasonable fee for managing the Mortgaged Property. Immediately upon
appointment of a receiver or immediately upon the Lender's entering upon and
taking possession and control of the Mortgaged Property, Borrower shall
surrender possession of the Mortgaged Property to Lender or the receiver, as the
case may be, and shall deliver to Lender or the receiver, as the case may be,
all documents, records (including records on electronic or magnetic media),
accounts, surveys, plans, and specifications relating to the Mortgaged Property
and all security deposits and prepaid Rents. In the event Lender takes
possession and control of the Mortgaged Property, Lender may exclude Borrower
and its representatives from the Mortgaged Property. Borrower acknowledges and
agrees that the exercise by Lender of any of the rights conferred under this
Section 3 shall not be construed to make Lender a mortgagee-in-possession of the
Mortgaged Property so long as Lender has not itself entered into actual
possession of the Land and Improvements.

      (e)   If Lender enters the Mortgaged Property, Lender shall be liable to
account only to Borrower and only for those Rents actually received. Lender
shall not be liable to Borrower, anyone claiming under or through Borrower or
anyone having an interest in the Mortgaged Property, by reason of any act or
omission of Lender under this Section 3, and Borrower hereby releases and
discharges Lender from any such liability to the fullest extent permitted by
law.

      (f)   If the Rents are not sufficient to meet the costs of taking control
of and managing the Mortgaged Property and collecting the Rents, any funds
expended by Lender for such purposes shall become an additional part of the
Indebtedness as provided in Section 12.

      (g)   Any entering upon and taking of control of the Mortgaged Property by
Lender or the receiver, as the case may be, and any application of Rents as
provided in this Instrument shall not cure or waive any Event of Default or
invalidate any other right or remedy of Lender under applicable law or provided
for in this Instrument.

      4.    ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY.

      (a)   As part of the consideration for the Indebtedness, Borrower
absolutely and unconditionally assigns and transfers to Lender all of Borrower's
right, title and interest in, to and under the Leases, including Borrower's
right, power and authority to modify the terms of any such Lease, or extend or
terminate any such Lease. It is the intention of Borrower to establish a
present, absolute and irrevocable transfer and assignment to Lender of all of
Borrower's right, title and interest in, to and under the Leases. Borrower and
Lender intend this assignment of the Leases to be immediately effective and to
constitute an absolute present assignment and not an assignment for additional
security only. For purposes of giving effect to this absolute assignment of the
Leases, and for no other purpose, the Leases shall not be deemed to be a part of
the "Mortgaged Property," as that term is defined in Section 1(s). However, if
this

                                                                          Page 9

<PAGE>   26

present, absolute and unconditional assignment of the Leases is not enforceable
by its terms under the laws of the Property Jurisdiction, then the Leases shall
be included as a part of the Mortgaged Property and it is the intention of the
Borrower that in this circumstance this Instrument create and perfect a lien on
the Leases in favor of Lender, which lien shall be effective as of the date of
this Instrument.

      (b)   Until the occurrence of an Event of Default, Borrower shall have all
rights, power and authority granted to Borrower under any Lease (except as
otherwise limited by this Section or any other provision of this Instrument),
including the right, power and authority to modify the terms of any Lease or
extend or terminate any Lease. Upon the occurrence of an Event of Default, the
permission given to Borrower pursuant to the preceding sentence to exercise all
rights, power and authority under Leases shall automatically terminate. Borrower
shall comply with and observe Borrower's obligations under all Leases, including
Borrower's obligations pertaining to the maintenance and disposition of tenant
security deposits.

      (c)   Borrower acknowledges and agrees that the exercise by Lender, either
directly or by a receiver, of any of the rights conferred under this Section 4
shall not be construed to make Lender a mortgagee-in-possession of the Mortgaged
Property so long as Lender has not itself entered into actual possession of the
Land and the Improvements. The acceptance by Lender of the assignment of the
Leases pursuant to Section 4(a) shall not at any time or in any event obligate
Lender to take any action under this Instrument or to expend any money or to
incur any expenses. Lender shall not be liable in any way for any injury or
damage to person or property sustained by any person or persons, firm or
corporation in or about the Mortgaged Property. Prior to Lender's actual entry
into and taking possession of the Mortgaged Property, Lender shall not (i) be
obligated to perform any of the terms, covenants and conditions contained in any
Lease (or otherwise have any obligation with respect to any Lease); (ii) be
obligated to appear in or defend any action or proceeding relating to the Lease
or the Mortgaged Property; or (iii) be responsible for the operation, control,
care, management or repair of the Mortgaged Property or any portion of the
Mortgaged Property. The execution of this Instrument by Borrower shall
constitute conclusive evidence that all responsibility for the operation,
control, care, management and repair of the Mortgaged Property is and shall be
that of Borrower, prior to such actual entry and taking of possession.

      (d)   From and after the occurrence of an Event of Default, and without
the necessity of Lender entering upon and taking and maintaining control of the
Mortgaged Property directly, by a receiver, or by any other manner or proceeding
permitted by the laws of the Property Jurisdiction, Lender immediately shall
have all rights, powers and authority granted to Borrower under any Lease,
including the right, power and authority to modify the terms of any such Lease,
or extend or terminate any such Lease.

      (e)   Borrower shall, promptly upon Lender's request, deliver to Lender an
executed copy of each residential Lease then in effect. All Leases for
residential dwelling units shall be on forms approved by Lender, shall be for
initial terms of at least six months and not more than two years,

                                                                         Page 10

<PAGE>   27

and shall not include options to purchase. If customary in the applicable
market, residential Leases with terms of less than six months may be permitted
with Lender's prior written consent.

      (f)   Borrower shall not lease any portion of the Mortgaged Property for
non-residential use except with the prior written consent of Lender and Lender's
prior written approval of the Lease agreement. Borrower shall not modify the
terms of, or extend or terminate, any Lease for non-residential use (including
any Lease in existence on the date of this Instrument) without the prior written
consent of Lender. Borrower shall, without request by Lender, deliver an
executed copy of each non-residential Lease to Lender promptly after such Lease
is signed. All non-residential Leases, including renewals or extensions of
existing Leases, shall specifically provide that (1) such Leases are subordinate
to the lien of this Instrument (unless waived in writing by Lender); (2) the
tenant shall attorn to Lender and any purchaser at a foreclosure sale, such
attornment to be self-executing and effective upon acquisition of title to the
Mortgaged Property by any purchaser at a foreclosure sale or by Lender in any
manner; (3) the tenant agrees to execute such further evidences of attornment as
Lender or any purchaser at a foreclosure sale may from time to time request; (4)
the Lease shall not be terminated by foreclosure or any other transfer of the
Mortgaged Property; (5) after a foreclosure sale of the Mortgaged Property,
Lender or any other purchaser at such foreclosure sale may, at Lender's or such
purchaser's option, accept or terminate such Lease; and (6) the tenant shall,
upon receipt after the occurrence of an Event of Default of a written request
from Lender, pay all Rents payable under the Lease to Lender.

      (g)   Borrower shall not receive or accept Rent under any Lease (whether
residential or non-residential) for more than two months in advance.

      5.    PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS;
PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance
with the terms of the Note and the other Loan Documents and shall perform,
observe and comply with all other provisions of the Note and the other Loan
Documents. Borrower shall pay a prepayment premium in connection with certain
prepayments of the Indebtedness, including a payment made after Lender's
exercise of any right of acceleration of the Indebtedness, as provided in the
Note.

      6.    EXCULPATION. Borrower's personal liability for payment of the
Indebtedness and for performance of the other obligations to be performed by it
under this Instrument is limited in the manner, and to the extent, provided in
the Note.

      7.    DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES.

      (a)   Borrower shall deposit with Lender on the day monthly installments
of principal or interest, or both, are due under the Note (or on another day
designated in writing by Lender), until the Indebtedness is paid in full, an
additional amount sufficient to accumulate with Lender the entire sum required
to pay, when due (1) any water and sewer charges which, if not paid, may

                                                                         Page 11

<PAGE>   28

result in a lien on all or any part of the Mortgaged Property, (2) the premiums
for fire and other hazard insurance, rent loss insurance and such other
insurance as Lender may require under Section 19, (3) Taxes, and (4) amounts for
other charges and expenses which Lender at any time reasonably deems necessary
to protect the Mortgaged Property, to prevent the imposition of liens on the
Mortgaged Property, or otherwise to protect Lender's interests, all as
reasonably estimated from time to time by Lender. The amounts deposited under
the preceding sentence are collectively referred to in this Instrument as the
"IMPOSITION DEPOSITS". The obligations of Borrower for which the Imposition
Deposits are required are collectively referred to in this Instrument as
"IMPOSITIONS". The amount of the Imposition Deposits shall be sufficient to
enable Lender to pay each Imposition before the last date upon which such
payment may be made without any penalty or interest charge being added. Lender
shall maintain records indicating how much of the monthly Imposition Deposits
and how much of the aggregate Imposition Deposits held by Lender are held for
the purpose of paying Taxes, insurance premiums and each other obligation of
Borrower for which Imposition Deposits are required. Any waiver by Lender of the
requirement that Borrower remit Imposition Deposits to Lender may be revoked by
Lender, in Lender's discretion, at any time upon notice to Borrower.

      (b)   Imposition Deposits shall be held in an institution (which may be
Lender, if Lender is such an institution) whose deposits or accounts are insured
or guaranteed by a federal agency. Lender shall not be obligated to open
additional accounts or deposit Imposition Deposits in additional institutions
when the amount of the Imposition Deposits exceeds the maximum amount of the
federal deposit insurance or guaranty. Lender shall apply the Imposition
Deposits to pay Impositions so long as no Event of Default has occurred and is
continuing. Unless applicable law requires, Lender shall not be required to pay
Borrower any interest, earnings or profits on the Imposition Deposits. Borrower
hereby pledges and grants to Lender a security interest in the Imposition
Deposits as additional security for all of Borrower's obligations under this
Instrument and the other Loan Documents. Any amounts deposited with Lender under
this Section 7 shall not be trust funds, nor shall they operate to reduce the
Indebtedness, unless applied by Lender for that purpose under Section 7(e).

      (c)   If Lender receives a bill or invoice for an Imposition, Lender shall
pay the Imposition from the Imposition Deposits held by Lender. Lender shall
have no obligation to pay any Imposition to the extent it exceeds Imposition
Deposits then held by Lender. Lender may pay an Imposition according to any
bill, statement or estimate from the appropriate public office or insurance
company without inquiring into the accuracy of the bill, statement or estimate
or into the validity of the Imposition.

      (d)   If at any time the amount of the Imposition Deposits held by Lender
for payment of a specific Imposition exceeds the amount reasonably deemed
necessary by Lender, the excess shall be credited against future installments of
Imposition Deposits. If at any time the amount of the Imposition Deposits held
by Lender for payment of a specific Imposition is less than the amount
reasonably estimated by Lender to be necessary, Borrower shall pay to Lender the
amount of the deficiency within 15 days after notice from Lender.

                                                                         Page 12

<PAGE>   29

      (e)   If an Event of Default has occurred and is continuing, Lender may
apply any Imposition Deposits, in any amounts and in any order as Lender
determines, in Lender's discretion, to pay any Impositions or as a credit
against the Indebtedness. Upon payment in full of the Indebtedness, Lender shall
refund to Borrower any Imposition Deposits held by Lender.

      8.    COLLATERAL AGREEMENTS. Borrower shall deposit with Lender such
amounts as may be required by any Collateral Agreement and shall perform all
other obligations of Borrower under each Collateral Agreement.

      9.    APPLICATION OF PAYMENTS. If at any time Lender receives, from
Borrower or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, then Lender may apply that
payment to amounts then due and payable in any manner and in any order
determined by Lender, in Lender's discretion. Neither Lender's acceptance of an
amount which is less than all amounts then due and payable nor Lender's
application of such payment in the manner authorized shall constitute or be
deemed to constitute either a waiver of the unpaid amounts or an accord and
satisfaction. Notwithstanding the application of any such amount to the
Indebtedness, Borrower's obligations under this Instrument and the Note shall
remain unchanged.

      10.   COMPLIANCE WITH LAWS. Borrower shall comply with all laws,
ordinances, regulations and requirements of any Governmental Authority and all
recorded lawful covenants and agreements relating to or affecting the Mortgaged
Property, including all laws, ordinances, regulations, requirements and
covenants pertaining to health and safety, construction of improvements on the
Mortgaged Property, fair housing, zoning and land use, and Leases. Borrower also
shall comply with all applicable laws that pertain to the maintenance and
disposition of tenant security deposits. Borrower shall at all times maintain
records sufficient to demonstrate compliance with the provisions of this Section
10. Borrower shall take appropriate measures to prevent, and shall not engage in
or knowingly permit, any illegal activities at the Mortgaged Property that could
endanger tenants or visitors, result in damage to the Mortgaged Property, result
in forfeiture of the Mortgaged Property, or otherwise materially impair the lien
created by this Instrument or Lender's interest in the Mortgaged Property.
Borrower represents and warrants to Lender that no portion of the Mortgaged
Property has been or will be purchased with the proceeds of any illegal
activity.

      11.   USE OF PROPERTY. Unless required by applicable law, Borrower shall
not (a) except for any change in use approved by Lender, allow changes in the
use for which all or any part of the Mortgaged Property is being used at the
time this Instrument was executed, (b) convert any individual dwelling units or
common areas to commercial use, (c) initiate or acquiesce in a change in the
zoning classification of the Mortgaged Property, or (d) establish any
condominium or cooperative regime with respect to the Mortgaged Property.

      12.   PROTECTION OF LENDER'S SECURITY.

                                                                         Page 13

<PAGE>   30

      (a)   If Borrower fails to perform any of its obligations under this
Instrument or any other Loan Document, or if any action or proceeding is
commenced which purports to affect the Mortgaged Property, Lender's security or
Lender's rights under this Instrument, including eminent domain, insolvency,
code enforcement, civil or criminal forfeiture, enforcement of Hazardous
Materials Laws, fraudulent conveyance or reorganizations or proceedings
involving a bankrupt or decedent, then Lender at Lender's option may make such
appearances, disburse such sums and take such actions as Lender reasonably deems
necessary to perform such obligations of Borrower and to protect Lender's
interest, including (1) payment of fees and out-of-pocket expenses of attorneys,
accountants, inspectors and consultants, (2) entry upon the Mortgaged Property
to make repairs or secure the Mortgaged Property, (3) procurement of the
insurance required by Section 19, and (4) payment of amounts which Borrower has
failed to pay under Sections 15 and 17.

      (b)   Any amounts disbursed by Lender under this Section 12, or under any
other provision of this Instrument that treats such disbursement as being made
under this Section 12, shall be added to, and become part of, the principal
component of the Indebtedness, shall be immediately due and payable and shall
bear interest from the date of disbursement until paid at the "DEFAULT RATE", as
defined in the Note.

      (c)   Nothing in this Section 12 shall require Lender to incur any expense
or take any action.

      13.   INSPECTION. Lender, its agents, representatives, and designees may
make or cause to be made entries upon and inspections of the Mortgaged Property
(including environmental inspections and tests) during normal business hours, or
at any other reasonable time.

      14.   BOOKS AND RECORDS; FINANCIAL REPORTING.

      (a)   Borrower shall keep and maintain at all times at the Mortgaged
Property or the management agent's offices, and upon Lender's request shall make
available at the Mortgaged Property, complete and accurate books of account and
records (including copies of supporting bills and invoices) adequate to reflect
correctly the operation of the Mortgaged Property, and copies of all written
contracts, Leases, and other instruments which affect the Mortgaged Property.
The books, records, contracts, Leases and other instruments shall be subject to
examination and inspection at any reasonable time by Lender.

      (b)   Borrower shall furnish to Lender all of the following:

            (1)   within 120 days after the end of each fiscal year of Borrower,
                        a statement of income and expenses for Borrower's
                        operation of the Mortgaged Property for that fiscal
                        year, a statement of changes in financial position of
                        Borrower relating to the Mortgaged Property for that
                        fiscal year and, when requested by Lender, a balance
                        sheet showing all assets and liabilities of

                                                                         Page 14

<PAGE>   31

                        Borrower relating to the Mortgaged Property as of the
                        end of that fiscal year;

            (2)   within 120 days after the end of each fiscal year of Borrower,
                        and at any other time upon Lender's request, a rent
                        schedule for the Mortgaged Property showing the name of
                        each tenant, and for each tenant, the space occupied,
                        the lease expiration date, the rent payable for the
                        current month, the date through which rent has been
                        paid, and any related information requested by Lender;

            (3)   within 120 days after the end of each fiscal year of Borrower,
                        and at any other time upon Lender's request, an
                        accounting of all security deposits held pursuant to all
                        Leases, including the name of the institution (if any)
                        and the names and identification numbers of the accounts
                        (if any) in which such security deposits are held and
                        the name of the person to contact at such financial
                        institution, along with any authority or release
                        necessary for Lender to access information regarding
                        such accounts;

            (4)   within 120 days after the end of each fiscal year of Borrower,
                        and at any other time upon Lender's request, a statement
                        that identifies all owners of any interest in Borrower
                        and the interest held by each, if Borrower is a
                        corporation, all officers and directors of Borrower, and
                        if Borrower is a limited liability company, all managers
                        who are not members;

            (5)   upon Lender's request, a monthly property management report
                        for the Mortgaged Property, showing the number of
                        inquiries made and rental applications received from
                        tenants or prospective tenants and deposits received
                        from tenants and any other information requested by
                        Lender; and

            (6)   upon Lender's request, a balance sheet, a statement of income
                        and expenses for Borrower and a statement of changes in
                        financial position of Borrower for Borrower's most
                        recent fiscal year; and

            (7)   if required by Lender, a statement of income and expense for
                        the Mortgaged Property for the prior month or quarter.

      (c)   Each of the statements, schedules and reports required by Section
14(b) shall be certified to be complete and accurate by an individual having
authority to bind Borrower, and shall be in such form and contain such detail as
Lender may reasonably require. Lender also may require that any statements,
schedules or reports be audited at Borrower's expense by independent certified
public accountants acceptable to Lender.

                                                                         Page 15

<PAGE>   32

      (d)   If Borrower fails to provide in a timely manner the statements,
schedules and reports required by Section 14(b), Lender shall have the right to
have Borrower's books and records audited, at Borrower's expense, by independent
certified public accountants selected by Lender in order to obtain such
statements, schedules and reports, and all related costs and expenses of Lender
shall become immediately due and payable and shall become an additional part of
the Indebtedness as provided in Section 12.

      (e)   If an Event of Default has occurred and is continuing, Borrower
shall deliver to Lender upon written demand all books and records relating to
the Mortgaged Property or its operation.

      (f)   Borrower authorizes Lender to obtain a credit report on Borrower at
any time.

      (g)   If an Event of Default has occurred and Lender has not previously
required Borrower to furnish a quarterly statement of income and expense for the
Mortgaged Property, Lender may require Borrower to furnish such a statement
within 45 days after the end of each fiscal quarter of Borrower following such
Event of Default.

                                                                         Page 16

<PAGE>   33

      15.   TAXES; OPERATING EXPENSES.

      (a)   Subject to the provisions of Section 15(c) and Section 15(d),
Borrower shall pay, or cause to be paid, all Taxes when due and before the
addition of any interest, fine, penalty or cost for nonpayment.

      (b)   Subject to the provisions of Section 15(c), Borrower shall pay the
expenses of operating, managing, maintaining and repairing the Mortgaged
Property (including insurance premiums, utilities, repairs and replacements)
before the last date upon which each such payment may be made without any
penalty or interest charge being added.

      (c)   As long as no Event of Default exists and Borrower has timely
delivered to Lender any bills or premium notices that it has received, Borrower
shall not be obligated to pay Taxes, insurance premiums or any other individual
Imposition to the extent that sufficient Imposition Deposits are held by Lender
for the purpose of paying that specific Imposition. If an Event of Default
exists, Lender may exercise any rights Lender may have with respect to
Imposition Deposits without regard to whether Impositions are then due and
payable. Lender shall have no liability to Borrower for failing to pay any
Impositions to the extent that any Event of Default has occurred and is
continuing, insufficient Imposition Deposits are held by Lender at the time an
Imposition becomes due and payable or Borrower has failed to provide Lender with
bills and premium notices as provided above.

      (d)   Borrower, at its own expense, may contest by appropriate legal
proceedings, conducted diligently and in good faith, the amount or validity of
any Imposition other than insurance premiums, if (1) Borrower notifies Lender of
the commencement or expected commencement of such proceedings, (2) the Mortgaged
Property is not in danger of being sold or forfeited, (3) Borrower deposits with
Lender reserves sufficient to pay the contested Imposition, if requested by
Lender, and (4) Borrower furnishes whatever additional security is required in
the proceedings or is reasonably requested by Lender, which may include the
delivery to Lender of the reserves established by Borrower to pay the contested
Imposition.

      (e)   Borrower shall promptly deliver to Lender a copy of all notices of,
and invoices for, Impositions, and if Borrower pays any Imposition directly,
Borrower shall promptly furnish to Lender receipts evidencing such payments.

      16.   LIENS; ENCUMBRANCES. Borrower acknowledges that, to the extent
provided in Section 21, the grant, creation or existence of any mortgage, deed
of trust, deed to secure debt, security interest or other lien or encumbrance (a
"LIEN") on the Mortgaged Property (other than the lien of this Instrument) or on
certain ownership interests in Borrower, whether voluntary, involuntary or by
operation of law, and whether or not such Lien has priority over the lien of
this Instrument, is a "TRANSFER" which constitutes an Event of Default.

                                                                         Page 17

<PAGE>   34

      17.   PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY.

      (a)   Borrower (1) shall not commit waste or permit impairment or
deterioration of the Mortgaged Property, (2) shall not abandon the Mortgaged
Property, (3) shall restore or repair promptly, in a good and workmanlike
manner, any damaged part of the Mortgaged Property to the equivalent of its
original condition, or such other condition as Lender may approve in writing,
whether or not insurance proceeds or condemnation awards are available to cover
any costs of such restoration or repair, (4) shall keep the Mortgaged Property
in good repair, including the replacement of Personalty and Fixtures with items
of equal or better function and quality, (5) shall provide for professional
management of the Mortgaged Property by a residential rental property manager
satisfactory to Lender under a contract approved by Lender in writing, and (6)
shall give notice to Lender of and, unless otherwise directed in writing by
Lender, shall appear in and defend any action or proceeding purporting to affect
the Mortgaged Property, Lender's security or Lender's rights under this
Instrument. Borrower shall not (and shall not permit any tenant or other person
to) remove, demolish or alter the Mortgaged Property or any part of the
Mortgaged Property except in connection with the replacement of tangible
Personalty.

      (b)   If, in connection with the making of the loan evidenced by the Note
or at any later date, Lender waives in writing the requirement of Section
17(a)(5) above that Borrower enter into a written contract for management of the
Mortgaged Property and if, after the date of this Instrument, Borrower intends
to change the management of the Mortgaged Property, Lender shall have the right
to approve such new property manager and the written contract for the management
of the Mortgaged Property and require that Borrower and such new property
manager enter into an Assignment of Management Agreement on a form approved by
Lender. If required by Lender (whether before or after an Event of Default),
Borrower will cause any Affiliate of Borrower to whom fees are payable for the
management of the Mortgaged Property to enter into an agreement with Lender, in
a form approved by Lender, providing for subordination of those fees and such
other provisions as Lender may require. "Affiliate of Borrower" means any
corporation, partnership, joint venture, limited liability company, limited
liability partnership, trust or individual controlled by, under common control
with, or which controls Borrower (the term "control" for these purposes shall
mean the ability, whether by the ownership of shares or other equity interests,
by contract or otherwise, to elect a majority of the directors of a corporation,
to make management decisions on behalf of, or independently to select the
managing partner of, a partnership, or otherwise to have the power independently
to remove and then select a majority of those individuals exercising managerial
authority over an entity, and control shall be conclusively presumed in the case
of the ownership of 50% or more of the equity interests).

      18.   ENVIRONMENTAL HAZARDS.

                                                                         Page 18

<PAGE>   35

      (a)   Except for matters covered by a written program of operations and
maintenance approved in writing by Lender (an "O&M PROGRAM") or matters
described in Section 18(b), Borrower shall not cause or permit any of the
following:

            (1)   the presence, use, generation, release, treatment, processing,
                        storage (including storage in above ground and
                        underground storage tanks), handling, or disposal of any
                        Hazardous Materials on or under the Mortgaged Property
                        or any other property of Borrower that is adjacent to
                        the Mortgaged Property;

            (2)   the transportation of any Hazardous Materials to, from, or
                        across the Mortgaged Property;

            (3)   any occurrence or condition on the Mortgaged Property or any
                        other property of Borrower that is adjacent to the
                        Mortgaged Property, which occurrence or condition is or
                        may be in violation of Hazardous Materials Laws; or

            (4)   any violation of or noncompliance with the terms of any
                        Environmental Permit with respect to the Mortgaged
                        Property or any property of Borrower that is adjacent to
                        the Mortgaged Property.

      The matters described in clauses (1) through (4) above are referred to
collectively in this Section 18 as "PROHIBITED ACTIVITIES OR CONDITIONS".

      (b)   Prohibited Activities and Conditions shall not include the safe and
lawful use and storage of quantities of (1) pre-packaged supplies, cleaning
materials and petroleum products customarily used in the operation and
maintenance of comparable multifamily properties, (2) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by tenants and occupants of residential dwelling units in
the Mortgaged Property; and (3) petroleum products used in the operation and
maintenance of motor vehicles from time to time located on the Mortgaged
Property's parking areas, so long as all of the foregoing are used, stored,
handled, transported and disposed of in compliance with Hazardous Materials
Laws.

      (c)   Borrower shall take all commercially reasonable actions (including
the inclusion of appropriate provisions in any Leases executed after the date of
this Instrument) to prevent its employees, agents, and contractors, and all
tenants and other occupants from causing or permitting any Prohibited Activities
or Conditions. Borrower shall not lease or allow the sublease or use of all or
any portion of the Mortgaged Property to any tenant or subtenant for
nonresidential use by any user that, in the ordinary course of its business,
would cause or permit any Prohibited Activity or Condition.

                                                                         Page 19

<PAGE>   36

      (d)   If an O&M Program has been established with respect to Hazardous
Materials, Borrower shall comply in a timely manner with, and cause all
employees, agents, and contractors of Borrower and any other persons present on
the Mortgaged Property to comply with the O&M Program. All costs of performance
of Borrower's obligations under any O&M Program shall be paid by Borrower, and
Lender's out-of-pocket costs incurred in connection with the monitoring and
review of the O&M Program and Borrower's performance shall be paid by Borrower
upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower
fails to pay promptly shall become an additional part of the Indebtedness as
provided in Section 12.

      (e)   Borrower represents and warrants to Lender that, except as
previously disclosed by Borrower to Lender in writing:

            (1)   Borrower has not at any time engaged in, caused or permitted
                        any Prohibited Activities or Conditions;

            (2)   to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, no Prohibited Activities or Conditions
                        exist or have existed;

            (3)   except to the extent previously disclosed by Borrower to
                        Lender in writing, the Mortgaged Property does not now
                        contain any underground storage tanks, and, to the best
                        of Borrower's knowledge after reasonable and diligent
                        inquiry, the Mortgaged Property has not contained any
                        underground storage tanks in the past. If there is an
                        underground storage tank located on the Property which
                        has been previously disclosed by Borrower to Lender in
                        writing, that tank complies with all requirements of
                        Hazardous Materials Laws;

            (4)   Borrower has complied with all Hazardous Materials Laws,
                        including all requirements for notification regarding
                        releases of Hazardous Materials. Without limiting the
                        generality of the foregoing, Borrower has obtained all
                        Environmental Permits required for the operation of the
                        Mortgaged Property in accordance with Hazardous
                        Materials Laws now in effect and all such Environmental
                        Permits are in full force and effect;

            (5)   no event has occurred with respect to the Mortgaged Property
                        that constitutes, or with the passing of time or the
                        giving of notice would constitute, noncompliance with
                        the terms of any Environmental Permit;

            (6)   there are no actions, suits, claims or proceedings pending or,
                        to the best of Borrower's knowledge after reasonable and
                        diligent inquiry, threatened that involve the Mortgaged
                        Property and allege, arise out of, or relate to any
                        Prohibited Activity or Condition; and

                                                                         Page 20

<PAGE>   37

            (7)   Borrower has not received any complaint, order, notice of
                        violation or other communication from any Governmental
                        Authority with regard to air emissions, water
                        discharges, noise emissions or Hazardous Materials, or
                        any other environmental, health or safety matters
                        affecting the Mortgaged Property or any other property
                        of Borrower that is adjacent to the Mortgaged Property.

      The representations and warranties in this Section 18 shall be continuing
representations and warranties that shall be deemed to be made by Borrower
throughout the term of the loan evidenced by the Note, until the Indebtedness
has been paid in full.

      (f)   Borrower shall promptly notify Lender in writing upon the occurrence
of any of the following events:

            (1)   Borrower's discovery of any Prohibited Activity or Condition;

            (2)   Borrower's receipt of or knowledge of any complaint, order,
                        notice of violation or other communication from any
                        Governmental Authority or other person with regard to
                        present or future alleged Prohibited Activities or
                        Conditions or any other environmental, health or safety
                        matters affecting the Mortgaged Property or any other
                        property of Borrower that is adjacent to the Mortgaged
                        Property; and

            (3)   any representation or warranty in this Section 18 becomes
                        untrue after the date of this Instrument.

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

      (g)   Borrower shall pay promptly the costs of any environmental
inspections, tests or audits ("ENVIRONMENTAL INSPECTIONS") required by Lender in
connection with any foreclosure or deed in lieu of foreclosure, or as a
condition of Lender's consent to any Transfer under Section 21, or required by
Lender following a reasonable determination by Lender that Prohibited Activities
or Conditions may exist. Any such costs incurred by Lender (including the fees
and out-of-pocket costs of attorneys and technical consultants whether incurred
in connection with any judicial or administrative process or otherwise) which
Borrower fails to pay promptly shall become an additional part of the
Indebtedness as provided in Section 12. The results of all Environmental
Inspections made by Lender shall at all times remain the property of Lender and
Lender shall have no obligation to disclose or otherwise make available to
Borrower or any other party such results or any other information obtained by
Lender in connection with its Environmental Inspections. Lender hereby reserves
the right, and Borrower hereby expressly authorizes Lender, to make available to
any party, including any prospective bidder at a foreclosure sale of the
Mortgaged Property, the results of any Environmental Inspections made by Lender
with respect

                                                                         Page 21

<PAGE>   38

to the Mortgaged Property. Borrower consents to Lender notifying any party
(either as part of a notice of sale or otherwise) of the results of any of
Lender's Environmental Inspections. Borrower acknowledges that Lender cannot
control or otherwise assure the truthfulness or accuracy of the results of any
of its Environmental Inspections and that the release of such results to
prospective bidders at a foreclosure sale of the Mortgaged Property may have a
material and adverse effect upon the amount which a party may bid at such sale.
Borrower agrees that Lender shall have no liability whatsoever as a result of
delivering the results of any of its Environmental Inspections to any third
party, and Borrower hereby releases and forever discharges Lender from any and
all claims, damages, or causes of action, arising out of, connected with or
incidental to the results of, the delivery of any of Lender's Environmental
Inspections.

      (h)   If any investigation, site monitoring, containment, clean-up,
restoration or other remedial work ("REMEDIAL WORK") is necessary to comply with
any Hazardous Materials Law or order of any Governmental Authority that has or
acquires jurisdiction over the Mortgaged Property or the use, operation or
improvement of the Mortgaged Property under any Hazardous Materials Law,
Borrower shall, by the earlier of (1) the applicable deadline required by
Hazardous Materials Law or (2) 30 days after notice from Lender demanding such
action, begin performing the Remedial Work, and thereafter diligently prosecute
it to completion, and shall in any event complete the work by the time required
by applicable Hazardous Materials Law. If Borrower fails to begin on a timely
basis or diligently prosecute any required Remedial Work, Lender may, at its
option, cause the Remedial Work to be completed, in which case Borrower shall
reimburse Lender on demand for the cost of doing so. Any reimbursement due from
Borrower to Lender shall become part of the Indebtedness as provided in Section
12.

      (i)   Borrower shall cooperate with any inquiry by any Governmental
Authority and shall comply with any governmental or judicial order which arises
from any alleged Prohibited Activity or Condition.

      (j)   Borrower shall indemnify, hold harmless and defend (i) Lender, (ii)
any prior owner or holder of the Note, (iii) the Loan Servicer, (iv) any prior
Loan Servicer, (v) the officers, directors, shareholders, partners, employees
and trustees of any of the foregoing, and (vi) the heirs, legal representatives,
successors and assigns of each of the foregoing (collectively, the
"INDEMNITEES") from and against all proceedings, claims, damages, penalties and
costs (whether initiated or sought by Governmental Authorities or private
parties), including fees and out-of-pocket expenses of attorneys and expert
witnesses, investigatory fees, and remediation costs, whether incurred in
connection with any judicial or administrative process or otherwise, arising
directly or indirectly from any of the following:

            (1)   any breach of any representation or warranty of Borrower in
                        this Section 18;

            (2)   any failure by Borrower to perform any of its obligations
                        under this Section 18;

            (3)   the existence or alleged existence of any Prohibited Activity
                        or Condition;

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<PAGE>   39

            (4)   the presence or alleged presence of Hazardous Materials on or
                        under the Mortgaged Property or any property of Borrower
                        that is adjacent to the Mortgaged Property; and

            (5)   the actual or alleged violation of any Hazardous Materials
                        Law.

      (k)   Counsel selected by Borrower to defend Indemnitees shall be subject
to the approval of those Indemnitees. However, any Indemnitee may elect to
defend any claim or legal or administrative proceeding at the Borrower's
expense.

      (l)   Borrower shall not, without the prior written consent of those
Indemnitees who are named as parties to a claim or legal or administrative
proceeding (a "CLAIM"), settle or compromise the Claim if the settlement (1)
results in the entry of any judgment that does not include as an unconditional
term the delivery by the claimant or plaintiff to Lender of a written release of
those Indemnitees, satisfactory in form and substance to Lender; or (2) may
materially and adversely affect Lender, as determined by Lender in its
discretion.

      (m)   Lender agrees that the indemnity under this Section 18 shall be
limited to the assets of Borrower and Lender shall not seek to recover any
deficiency from any natural persons who are general partners of Borrower.

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

            (1)   pay or satisfy any judgment or decree that may be entered
                        against any Indemnitee or Indemnitees in any legal or
                        administrative proceeding incident to any matters
                        against which Indemnitees are entitled to be indemnified
                        under this Section 18;

            (2)   reimburse Indemnitees for any expenses paid or incurred in
                        connection with any matters against which Indemnitees
                        are entitled to be indemnified under this Section 18;
                        and

            (3)   reimburse Indemnitees for any and all expenses, including fees
                        and out-of-pocket expenses of attorneys and expert
                        witnesses, paid or incurred in connection with the
                        enforcement by Indemnitees of their rights under this
                        Section 18, or in monitoring and participating in any
                        legal or administrative proceeding.

      (o)   In any circumstances in which the indemnity under this Section 18
applies, Lender may employ its own legal counsel and consultants to prosecute,
defend or negotiate any claim or legal or administrative proceeding and Lender,
with the prior written consent of Borrower (which shall not be unreasonably
withheld, delayed or conditioned), may settle or compromise any action or

                                                                         Page 23

<PAGE>   40

legal or administrative proceeding. Borrower shall reimburse Lender upon demand
for all costs and expenses incurred by Lender, including all costs of
settlements entered into in good faith, and the fees and out-of-pocket expenses
of such attorneys and consultants.

      (p)   The provisions of this Section 18 shall be in addition to any and
all other obligations and liabilities that Borrower may have under applicable
law or under other Loan Documents, and each Indemnitee shall be entitled to
indemnification under this Section 18 without regard to whether Lender or that
Indemnitee has exercised any rights against the Mortgaged Property or any other
security, pursued any rights against any guarantor, or pursued any other rights
available under the Loan Documents or applicable law. If Borrower consists of
more than one person or entity, the obligation of those persons or entities to
indemnify the Indemnitees under this Section 18 shall be joint and several. The
obligation of Borrower to indemnify the Indemnitees under this Section 18 shall
survive any repayment or discharge of the Indebtedness, any foreclosure
proceeding, any foreclosure sale, any delivery of any deed in lieu of
foreclosure, and any release of record of the lien of this Instrument.

      19.   PROPERTY AND LIABILITY INSURANCE.

      (a)   Borrower shall keep the Improvements insured at all times against
such hazards as Lender may from time to time require, which insurance shall
include but not be limited to coverage against loss by fire and allied perils,
general boiler and machinery coverage, and business income coverage. Lender's
insurance requirements may change from time to time throughout the term of the
Indebtedness. If Lender so requires, such insurance shall also include sinkhole
insurance, mine subsidence insurance, earthquake insurance, and, if the
Mortgaged Property does not conform to applicable zoning or land use laws,
building ordinance or law coverage. If any of the Improvements is located in an
area identified by the Federal Emergency Management Agency (or any successor to
that agency) as an area having special flood hazards, and if flood insurance is
available in that area, Borrower shall insure such Improvements against loss by
flood.

      (b)   All premiums on insurance policies required under Section 19(a)
shall be paid in the manner provided in Section 7, unless Lender has designated
in writing another method of payment. All such policies shall also be in a form
approved by Lender. All policies of property damage insurance shall include a
non-contributing, non-reporting mortgage clause in favor of, and in a form
approved by, Lender. Lender shall have the right to hold the original policies
or duplicate original policies of all insurance required by Section 19(a).
Borrower shall promptly deliver to Lender a copy of all renewal and other
notices received by Borrower with respect to the policies and all receipts for
paid premiums. At least 30 days prior to the expiration date of a policy,
Borrower shall deliver to Lender the original (or a duplicate original) of a
renewal policy in form satisfactory to Lender.

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<PAGE>   41

      (c)   Borrower shall maintain at all times commercial general liability
insurance, workers' compensation insurance and such other liability, errors and
omissions and fidelity insurance coverages as Lender may from time to time
require.

      (d)   All insurance policies and renewals of insurance policies required
by this Section 19 shall be in such amounts and for such periods as Lender may
from time to time require, and shall be issued by insurance companies
satisfactory to Lender.

      (e)   Borrower shall comply with all insurance requirements and shall not
permit any condition to exist on the Mortgaged Property that would invalidate
any part of any insurance coverage that this Instrument requires Borrower to
maintain.

      (f)   In the event of loss, Borrower shall give immediate written notice
to the insurance carrier and to Lender. Borrower hereby authorizes and appoints
Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and
compromise any claims under policies of property damage insurance, to appear in
and prosecute any action arising from such property damage insurance policies,
to collect and receive the proceeds of property damage insurance, and to deduct
from such proceeds Lender's expenses incurred in the collection of such
proceeds. This power of attorney is coupled with an interest and therefore is
irrevocable. However, nothing contained in this Section 19 shall require Lender
to incur any expense or take any action. Lender may, at Lender's option, (1)
hold the balance of such proceeds to be used to reimburse Borrower for the cost
of restoring and repairing the Mortgaged Property to the equivalent of its
original condition or to a condition approved by Lender (the "RESTORATION"), or
(2) apply the balance of such proceeds to the payment of the Indebtedness,
whether or not then due. To the extent Lender determines to apply insurance
proceeds to Restoration, Lender shall do so in accordance with Lender's
then-current policies relating to the restoration of casualty damage on similar
multifamily properties.

      (g)   Lender shall not exercise its option to apply insurance proceeds to
the payment of the Indebtedness if all of the following conditions are met: (1)
no Event of Default (or any event which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default) has occurred and
is continuing; (2) Lender determines, in its discretion, that there will be
sufficient funds to complete the Restoration; (3) Lender determines, in its
discretion, that the rental income from the Mortgaged Property after completion
of the Restoration will be sufficient to meet all operating costs and other
expenses, Imposition Deposits, deposits to reserves and loan repayment
obligations relating to the Mortgaged Property; (4) Lender determines, in its
discretion, that the Restoration will be completed before the earlier of (A) one
year before the maturity date of the Note or (B) one year after the date of the
loss or casualty; and (5) upon Lender's request, Borrower provides Lender
evidence of the availability during and after the Restoration of the insurance
required to be maintained by Borrower pursuant to this Section 19.

      (h)   If the Mortgaged Property is sold at a foreclosure sale or Lender
acquires title to the Mortgaged Property, Lender shall automatically succeed to
all rights of Borrower in and to any

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<PAGE>   42

insurance policies and unearned insurance premiums and in and to the proceeds
resulting from any damage to the Mortgaged Property prior to such sale or
acquisition.

      20.   CONDEMNATION.

      (a)   Borrower shall promptly notify Lender of any action or proceeding
relating to any condemnation or other taking, or conveyance in lieu thereof, of
all or any part of the Mortgaged Property, whether direct or indirect (a
"CONDEMNATION"). Borrower shall appear in and prosecute or defend any action or
proceeding relating to any Condemnation unless otherwise directed by Lender in
writing. Borrower authorizes and appoints Lender as attorney-in-fact for
Borrower to commence, appear in and prosecute, in Lender's or Borrower's name,
any action or proceeding relating to any Condemnation and to settle or
compromise any claim in connection with any Condemnation. This power of attorney
is coupled with an interest and therefore is irrevocable. However, nothing
contained in this Section 20 shall require Lender to incur any expense or take
any action. Borrower hereby transfers and assigns to Lender all right, title and
interest of Borrower in and to any award or payment with respect to (i) any
Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to
the Mortgaged Property caused by governmental action that does not result in a
Condemnation.

      (b)   Lender may apply such awards or proceeds, after the deduction of
Lender's expenses incurred in the collection of such amounts, at Lender's
option, to the restoration or repair of the Mortgaged Property or to the payment
of the Indebtedness, with the balance, if any, to Borrower. Unless Lender
otherwise agrees in writing, any application of any awards or proceeds to the
Indebtedness shall not extend or postpone the due date of any monthly
installments referred to in the Note, Section 7 of this Instrument or any
Collateral Agreement, or change the amount of such installments. Borrower agrees
to execute such further evidence of assignment of any awards or proceeds as
Lender may require.

      21.   TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER.

      (a)   The occurrence of any of the following events shall constitute an
Event of Default under this Instrument:

            (1)   a Transfer of all or any part of the Mortgaged Property or any
                        interest in the Mortgaged Property;

            (2)   a Transfer of a Controlling Interest in Borrower;

            (3)   a Transfer of a Controlling Interest in any entity which owns,
                        directly or indirectly through one or more intermediate
                        entities, a Controlling Interest in Borrower;

                                                                         Page 26

<PAGE>   43

            (4)   a Transfer of all or any part of Key Principal's ownership
                        interests (other than limited partnership interests) in
                        Borrower, or in any other entity which owns, directly or
                        indirectly through one or more intermediate entities, an
                        ownership interest in Borrower;

            (5)   if Key Principal is an entity, (A) a Transfer of a Controlling
                        Interest in Key Principal, or (B) a Transfer of a
                        Controlling Interest in any entity which owns, directly
                        or indirectly through one or more intermediate entities,
                        a Controlling Interest in Key Principal;

            (6)   if Borrower or Key Principal is a trust, the termination or
                        revocation of such trust; and

            (7)   a conversion of Borrower from one type of legal entity into
                        another type of legal entity, whether or not there is a
                        Transfer.

      Lender shall not be required to demonstrate any actual impairment of its
security or any increased risk of default in order to exercise any of its
remedies with respect to an Event of Default under this Section 21.

      (b)   The occurrence of any of the following events shall not constitute
an Event of Default under this Instrument, notwithstanding any provision of
Section 21(a) to the contrary:

            (1)   a Transfer to which Lender has consented;

            (2)   a Transfer that occurs by devise, descent, or by operation of
                        law upon the death of a natural person;

            (3)   the grant of a leasehold interest in an individual dwelling
                        unit for a term of two years or less not containing an
                        option to purchase;

            (4)   a Transfer of obsolete or worn out Personalty or Fixtures that
                        are contemporaneously replaced by items of equal or
                        better function and quality, which are free of liens,
                        encumbrances and security interests other than those
                        created by the Loan Documents or consented to by Lender;

            (5)   the grant of an easement, if before the grant Lender
                        determines that the easement will not materially affect
                        the operation or value of the Mortgaged Property or
                        Lender's interest in the Mortgaged Property, and
                        Borrower pays to Lender, upon demand, all costs and
                        expenses incurred by Lender in connection with reviewing
                        Borrower's request; and

                                                                         Page 27

<PAGE>   44

            (6)   the creation of a tax lien or a mechanic's, materialman's or
                        judgment lien against the Mortgaged Property which is
                        bonded off, released of record or otherwise remedied to
                        Lender's satisfaction within 30 days of the date of
                        creation.

      (c)   Lender shall consent, without any adjustment to the rate at which
the Indebtedness secured by this Instrument bears interest or to any other
economic terms of the Indebtedness, to a Transfer that would otherwise violate
this Section 21 if, prior to the Transfer, Borrower has satisfied each of the
following requirements:

            (1)   the submission to Lender of all information required by Lender
                        to make the determination required by this Section
                        21(c);

            (2)   the absence of any Event of Default;

            (3)   the transferee meets all of the eligibility, credit,
                        management and other standards (including any standards
                        with respect to previous relationships between Lender
                        and the transferee and the organization of the
                        transferee) customarily applied by Lender at the time of
                        the proposed Transfer to the approval of borrowers in
                        connection with the origination or purchase of similar
                        mortgages, deeds of trust or deeds to secure debt on
                        multifamily properties;

            (4)   the Mortgaged Property, at the time of the proposed Transfer,
                        meets all standards as to its physical condition that
                        are customarily applied by Lender at the time of the
                        proposed Transfer to the approval of properties in
                        connection with the origination or purchase of similar
                        mortgages on multifamily properties;

            (5)   in the case of a Transfer of all or any part of the Mortgaged
                        Property, or direct or indirect ownership interests in
                        Borrower or Key Principal (if an entity), if transferor
                        or any other person has obligations under any Loan
                        Document, the execution by the transferee or one or more
                        individuals or entities acceptable to Lender of an
                        assumption agreement (including, if applicable, an
                        Acknowledgment and Agreement of Key Principal to
                        Personal Liability for Exceptions to Non-Recourse
                        Liability) that is acceptable to Lender and that, among
                        other things, requires the transferee to perform all
                        obligations of transferor or such person set forth in
                        such Loan Document, and may require that the transferee
                        comply with any provisions of this Instrument or any
                        other Loan Document which previously may have been
                        waived by Lender;

                                                                         Page 28

<PAGE>   45

            (6)   if a guaranty has been executed and delivered in connection
                        with the Note, this Instrument or any of the other Loan
                        Documents, the Borrower causes one or more individuals
                        or entities acceptable to Lender to execute and deliver
                        to Lender a guaranty in a form acceptable to Lender; and

            (7)   Lender's receipt of all of the following:

                  (A)   a non-refundable review fee in the amount of $3,000 and
                              a transfer fee equal to 1 percent of the
                              outstanding Indebtedness immediately prior to the
                              Transfer.

                  (B)   In addition, Borrower shall be required to reimburse
                              Lender for all of Lender's out-of-pocket costs
                              (including reasonable attorneys' fees) incurred in
                              reviewing the Transfer request, to the extent such
                              expenses exceed $3,000.

      (d)   For purposes of this Section, the following terms shall have the
meanings set forth below:

            (1)   "INITIAL OWNERS" means, with respect to Borrower or any other
                        entity, the persons or entities who on the date of the
                        Note own the aggregate 100% of the ownership interests
                        in Borrower or that entity.

            (2)   A Transfer of a "CONTROLLING INTEREST" shall mean, with
                        respect to any entity, the following:

                        (i)   if such entity is a general partnership or a joint
                              venture, a Transfer of any general partnership
                              interest or joint venture interest which would
                              cause the Initial Owners to own less than 51% of
                              all general partnership or joint venture interests
                              in such entity;

                        (ii)  if such entity is a limited partnership, a
                              Transfer of any general partnership interest;

                        (iii) if such entity is a limited liability company or a
                              limited liability partnership, a Transfer of any
                              membership or other ownership interest which would
                              cause the Initial Owners to own less than 51% of
                              all membership or other ownership interests in
                              such entity;

                        (iv)  if such entity is a corporation (other than a
                              Publicly-Held Corporation) with only one class of
                              voting stock, a Transfer of any voting stock which
                              would cause the Initial Owners to own less than
                              51% of voting stock in such corporation;

                                                                         Page 29

<PAGE>   46

                        (v)   if such entity is a corporation (other than a
                              Publicly-Held Corporation) with more than one
                              class of voting stock, a Transfer of any voting
                              stock which would cause the Initial Owners to own
                              less than a sufficient number of shares of voting
                              stock having the power to elect the majority of
                              directors of such corporation; and

                        (vi)  if such entity is a trust, the removal,
                              appointment or substitution of a trustee of such
                              trust other than (A) in the case of a land trust,
                              or (B) if the trustee of such trust after such
                              removal, appointment or substitution is a trustee
                              identified in the trust agreement approved by
                              Lender.

            (3)   "PUBLICLY-HELD CORPORATION" shall mean a corporation the
                        outstanding voting stock of which is registered under
                        Section 12(b) or 12(g) of the Securities and Exchange
                        Act of 1934, as amended.

      22.   EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an Event of Default under this Instrument:

      (a)   any failure by Borrower to pay or deposit when due any amount
required by the Note, this Instrument or any other Loan Document;

      (b)   any failure by Borrower to maintain the insurance coverage required
by Section 19;

      (c)   any failure by Borrower to comply with the provisions of Section 33;

      (d)   fraud or material misrepresentation or material omission by
Borrower, or any of its officers, directors, trustees, general partners or
managers, Key Principal or any guarantor in connection with (A) the application
for or creation of the Indebtedness, (B) any financial statement, rent roll, or
other report or information provided to Lender during the term of the
Indebtedness, or (C) any request for Lender's consent to any proposed action,
including a request for disbursement of funds under any Collateral Agreement;

      (e)   any Event of Default under Section 21;

      (f)   the commencement of a forfeiture action or proceeding, whether civil
or criminal, which, in Lender's reasonable judgment, could result in a
forfeiture of the Mortgaged Property or otherwise materially impair the lien
created by this Instrument or Lender's interest in the Mortgaged Property;

                                                                         Page 30

<PAGE>   47

      (g)   any failure by Borrower to perform any of its obligations under this
Instrument (other than those specified in Sections 22(a) through (f)), as and
when required, which continues for a period of 30 days after notice of such
failure by Lender to Borrower, but no such notice or grace period shall apply in
the case of any such failure which could, in Lender's judgment, absent immediate
exercise by Lender of a right or remedy under this Instrument, result in harm to
Lender, impairment of the Note or this Instrument or any other security given
under any other Loan Document;

      (h)   any failure by Borrower to perform any of its obligations as and
when required under any Loan Document other than this Instrument which continues
beyond the applicable cure period, if any, specified in that Loan Document; and

      (i)   any exercise by the holder of any other debt instrument secured by a
mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a
right to declare all amounts due under that debt instrument immediately due and
payable.

      23.   REMEDIES CUMULATIVE. Each right and remedy provided in this
Instrument is distinct from all other rights or remedies under this Instrument
or any other Loan Document or afforded by applicable law, and each shall be
cumulative and may be exercised concurrently, independently, or successively, in
any order.

      24.   FORBEARANCE.

      (a)   Lender may (but shall not be obligated to) agree with Borrower, from
time to time, and without giving notice to, or obtaining the consent of, or
having any effect upon the obligations of, any guarantor or other third party
obligor, to take any of the following actions: extend the time for payment of
all or any part of the Indebtedness; reduce the payments due under this
Instrument, the Note, or any other Loan Document; release anyone liable for the
payment of any amounts under this Instrument, the Note, or any other Loan
Document; accept a renewal of the Note; modify the terms and time of payment of
the Indebtedness; join in any extension or subordination agreement; release any
Mortgaged Property; take or release other or additional security; modify the
rate of interest or period of amortization of the Note or change the amount of
the monthly installments payable under the Note; and otherwise modify this
Instrument, the Note, or any other Loan Document.

      (b)   Any forbearance by Lender in exercising any right or remedy under
the Note, this Instrument, or any other Loan Document or otherwise afforded by
applicable law, shall not be a waiver of or preclude the exercise of any other
right or remedy. The acceptance by Lender of payment of all or any part of the
Indebtedness after the due date of such payment, or in an amount which is less
than the required payment, shall not be a waiver of Lender's right to require
prompt payment when due of all other payments on account of the Indebtedness or
to exercise any remedies for any failure to make prompt payment. Enforcement by
Lender of any security for the Indebtedness shall not constitute an election by
Lender of remedies so as to preclude the

                                                                         Page 31

<PAGE>   48

exercise of any other right available to Lender. Lender's receipt of any awards
or proceeds under Sections 19 and 20 shall not operate to cure or waive any
Event of Default.

      25.   LOAN CHARGES. If any applicable law limiting the amount of interest
or other charges permitted to be collected from Borrower is interpreted so that
any charge provided for in any Loan Document, whether considered separately or
together with other charges levied in connection with any other Loan Document,
violates that law, and Borrower is entitled to the benefit of that law, that
charge is hereby reduced to the extent necessary to eliminate that violation.
The amounts, if any, previously paid to Lender in excess of the permitted
amounts shall be applied by Lender to reduce the principal of the Indebtedness.
For the purpose of determining whether any applicable law limiting the amount of
interest or other charges permitted to be collected from Borrower has been
violated, all Indebtedness which constitutes interest, as well as all other
charges levied in connection with the Indebtedness which constitute interest,
shall be deemed to be allocated and spread over the stated term of the Note.
Unless otherwise required by applicable law, such allocation and spreading shall
be effected in such a manner that the rate of interest so computed is uniform
throughout the stated term of the Note.

      26.   WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the right
to assert any statute of limitations as a bar to the enforcement of the lien of
this Instrument or to any action brought to enforce any Loan Document.

      27.   WAIVER OF MARSHALING. Notwithstanding the existence of any other
security interests in the Mortgaged Property held by Lender or by any other
party, Lender shall have the right to determine the order in which any or all of
the Mortgaged Property shall be subjected to the remedies provided in this
Instrument, the Note, any other Loan Document or applicable law. Lender shall
have the right to determine the order in which any or all portions of the
Indebtedness are satisfied from the proceeds realized upon the exercise of such
remedies. Borrower and any party who now or in the future acquires a security
interest in the Mortgaged Property and who has actual or constructive notice of
this Instrument waives any and all right to require the marshaling of assets or
to require that any of the Mortgaged Property be sold in the inverse order of
alienation or that any of the Mortgaged Property be sold in parcels or as an
entirety in connection with the exercise of any of the remedies permitted by
applicable law or provided in this Instrument.

      28.   FURTHER ASSURANCES. Borrower shall execute, acknowledge, and
deliver, at its sole cost and expense, all further acts, deeds, conveyances,
assignments, estoppel certificates, financing statements, transfers and
assurances as Lender may require from time to time in order to better assure,
grant, and convey to Lender the rights intended to be granted, now or in the
future, to Lender under this Instrument and the Loan Documents.

      29.   ESTOPPEL CERTIFICATE. Within 10 days after a request from Lender,
Borrower shall deliver to Lender a written statement, signed and acknowledged by
Borrower, certifying to Lender or any person designated by Lender, as of the
date of such statement, (i) that the Loan

                                                                         Page 32

<PAGE>   49

Documents are unmodified and in full force and effect (or, if there have been
modifications, that the Loan Documents are in full force and effect as modified
and setting forth such modifications); (ii) the unpaid principal balance of the
Note; (iii) the date to which interest under the Note has been paid; (iv) that
Borrower is not in default in paying the Indebtedness or in performing or
observing any of the covenants or agreements contained in this Instrument or any
of the other Loan Documents (or, if the Borrower is in default, describing such
default in reasonable detail); (v) whether or not there are then existing any
setoffs or defenses known to Borrower against the enforcement of any right or
remedy of Lender under the Loan Documents; and (vi) any additional facts
requested by Lender.

      30.   GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

      (a)   This Instrument, and any Loan Document which does not itself
expressly identify the law that is to apply to it, shall be governed by the laws
of the jurisdiction in which the Land is located (the "PROPERTY JURISDICTION").

      (b)   Borrower agrees that any controversy arising under or in relation to
the Note, this Instrument, or any other Loan Document shall be litigated
exclusively in the Property Jurisdiction. The state and federal courts and
authorities with jurisdiction in the Property Jurisdiction shall have exclusive
jurisdiction over all controversies which shall arise under or in relation to
the Note, any security for the Indebtedness, or any other Loan Document.
Borrower irrevocably consents to service, jurisdiction, and venue of such courts
for any such litigation and waives any other venue to which it might be entitled
by virtue of domicile, habitual residence or otherwise.

      31.   NOTICE.

      (a)   All notices, demands and other communications ("NOTICE") under or
concerning this Instrument shall be in writing. Each notice shall be addressed
to the intended recipient at its address set forth in this Instrument, and shall
be deemed given on the earliest to occur of (1) the date when the notice is
received by the addressee; (2) the first Business Day after the notice is
delivered to a recognized overnight courier service, with arrangements made for
payment of charges for next Business Day delivery; or (3) the third Business Day
after the notice is deposited in the United States mail with postage prepaid,
certified mail, return receipt requested. As used in this Section 31, the term
"Business Day" means any day other than a Saturday, a Sunday or any other day on
which Lender is not open for business.

      (b)   Any party to this Instrument may change the address to which notices
intended for it are to be directed by means of notice given to the other party
in accordance with this Section 31. Each party agrees that it will not refuse or
reject delivery of any notice given in accordance with this Section 31, that it
will acknowledge, in writing, the receipt of any notice upon request by the
other party and that any notice rejected or refused by it shall be deemed for
purposes of this

                                                                         Page 33

<PAGE>   50

Section 31 to have been received by the rejecting party on the date so refused
or rejected, as conclusively established by the records of the U.S. Postal
Service or the courier service.

      (c)   Any notice under the Note and any other Loan Document which does not
specify how notices are to be given shall be given in accordance with this
Section 31.

      32.   SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest in
the Note (together with this Instrument and the other Loan Documents) may be
sold one or more times without prior notice to Borrower. A sale may result in a
change of the Loan Servicer. There also may be one or more changes of the Loan
Servicer unrelated to a sale of the Note. If there is a change of the Loan
Servicer, Borrower will be given notice of the change.

      33.   SINGLE ASSET BORROWER. Until the Indebtedness is paid in full,
Borrower (a) shall not acquire any real or personal property other than the
Mortgaged Property and personal property related to the operation and
maintenance of the Mortgaged Property; (b) shall not operate any business other
than the management and operation of the Mortgaged Property; and (c) shall not
maintain its assets in a way difficult to segregate and identify.

      34.   SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the
rights granted by this Instrument shall inure to, the respective successors and
assigns of Lender and Borrower. However, a Transfer not permitted by Section 21
shall be an Event of Default.

      35.   JOINT AND SEVERAL LIABILITY. If more than one person or entity signs
this Instrument as Borrower, the obligations of such persons and entities shall
be joint and several.

      36.   RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY.

      (a)   The relationship between Lender and Borrower shall be solely that of
creditor and debtor, respectively, and nothing contained in this Instrument
shall create any other relationship between Lender and Borrower.

      (b)   No creditor of any party to this Instrument and no other person
shall be a third party beneficiary of this Instrument or any other Loan
Document. Without limiting the generality of the preceding sentence, (1) any
arrangement (a "SERVICING ARRANGEMENT") between the Lender and any Loan Servicer
for loss sharing or interim advancement of funds shall constitute a contractual
obligation of such Loan Servicer that is independent of the obligation of
Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third
party beneficiary of any Servicing Arrangement, and (3) no payment by the Loan
Servicer under any Servicing Arrangement will reduce the amount of the
Indebtedness.

      37.   SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any
provision of this Instrument shall not affect the validity or enforceability of
any other provision, and all other provisions shall remain in full force and
effect. This Instrument contains the entire

                                                                         Page 34

<PAGE>   51

agreement among the parties as to the rights granted and the obligations assumed
in this Instrument. This Instrument may not be amended or modified except by a
writing signed by the party against whom enforcement is sought.

      38.   CONSTRUCTION. The captions and headings of the sections of this
Instrument are for convenience only and shall be disregarded in construing this
Instrument. Any reference in this Instrument to an "Exhibit" or a "Section"
shall, unless otherwise explicitly provided, be construed as referring,
respectively, to an Exhibit attached to this Instrument or to a Section of this
Instrument. All Exhibits attached to or referred to in this Instrument are
incorporated by reference into this Instrument. Any reference in this Instrument
to a statute or regulation shall be construed as referring to that statute or
regulation as amended from time to time. Use of the singular in this Agreement
includes the plural and use of the plural includes the singular. As used in this
Instrument, the term "including" means "including, but not limited to."

      39.   LOAN SERVICING. All actions regarding the servicing of the loan
evidenced by the Note, including the collection of payments, the giving and
receipt of notice, inspections of the Property, inspections of books and
records, and the granting of consents and approvals, may be taken by the Loan
Servicer unless Borrower receives notice to the contrary. If Borrower receives
conflicting notices regarding the identity of the Loan Servicer or any other
subject, any such notice from Lender shall govern.

      40.   DISCLOSURE OF INFORMATION. Lender may furnish information regarding
Borrower or the Mortgaged Property to third parties with an existing or
prospective interest in the servicing, enforcement, evaluation, performance,
purchase or securitization of the Indebtedness, including trustees, master
servicers, special servicers, rating agencies, and organizations maintaining
databases on the underwriting and performance of multifamily mortgage loans.
Borrower irrevocably waives any and all rights it may have under applicable law
to prohibit such disclosure, including any right of privacy.

      41.   NO CHANGE IN FACTS OR CIRCUMSTANCES. All information in the
application for the loan submitted to Lender (the "LOAN APPLICATION") and in all
financial statements, rent rolls, reports, certificates and other documents
submitted in connection with the Loan Application are complete and accurate in
all material respects. There has been no material adverse change in any fact or
circumstance that would make any such information incomplete or inaccurate.

      42.   SUBROGATION. If, and to the extent that, the proceeds of the loan
evidenced by the Note are used to pay, satisfy or discharge any obligation of
Borrower for the payment of money that is secured by a pre-existing mortgage,
deed of trust or other lien encumbering the Mortgaged Property (a "PRIOR LIEN"),
such loan proceeds shall be deemed to have been advanced by Lender at Borrower's
request, and Lender shall automatically, and without further action on its part,
be subrogated to the rights, including lien priority, of the owner or holder of
the obligation secured by the Prior Lien, whether or not the Prior Lien is
released.

                                                                         Page 35

<PAGE>   52

      43.   ACCELERATION; REMEDIES. If an Event of Default has occurred and is
continuing, Lender, at Lender's option, may declare the Indebtedness to be
immediately due and payable without further demand, and may invoke the power of
sale and any other remedies permitted by California law or provided in this
Instrument or in any other Loan Document. Borrower acknowledges that the power
of sale granted in this Instrument may be exercised by Lender without prior
judicial hearing. Lender shall be entitled to collect all costs and expenses
incurred in pursuing such remedies, including attorneys' fees, costs of
documentary evidence, abstracts and title reports.

      If the power of sale is invoked, Lender shall execute a written notice of
the occurrence of an Event of Default and of Lender's election to cause the
Mortgaged Property to be sold and shall cause the notice to be recorded in each
county in which the Mortgaged Property or some part of the Mortgaged Property is
located. Trustee shall give notice of default and notice of sale and shall sell
the Mortgaged Property according to California law. Trustee may sell the
Mortgaged Property at the time and place and under the terms designated in the
notice of sale in one or more parcels and in such order as Trustee may
determine. Trustee may postpone the sale of all or any part of the Mortgaged
Property by public announcement at the time and place of any previously
scheduled sale. Lender or Lender's designee may purchase the Mortgaged Property
at any sale.

      At the sale, Lender shall be entitled to credit bid, or to instruct
Trustee, on behalf of Lender to credit bid, up to and including the entire
amount of the Indebtedness plus Trustee's fees and expenses. Trustee shall
deliver to the purchaser at the sale, within a reasonable time, but in any event
within 10 calendar days, after the sale, a deed conveying the Mortgaged Property
so sold without any express or implied covenant or warranty. The recitals in
Trustee's deed shall be prima facie evidence of the truth of the statements made
in those recitals. Trustee shall apply the proceeds of the sale in the following
order: (a) to all costs and expenses of exercising the power of sale, including
the payment of Trustee's fees and attorneys' fees and costs of title evidence;
(b) to the Indebtedness in such order as Lender, in Lender's discretion,
directs; and (c) the excess, if any, to the person or persons legally entitled
to the excess.

      44.   RECONVEYANCE. Upon payment of the Indebtedness, Lender shall request
Trustee to reconvey the Mortgaged Property and shall surrender this Instrument
and the Note to Trustee. Trustee shall reconvey the Mortgaged Property without
warranty to the person or persons legally entitled to the Mortgaged Property.
Such person or persons shall pay Trustee's reasonable costs incurred in so
reconveying the Mortgaged Property.

      45.   SUBSTITUTE TRUSTEE. Lender, at Lender's option, may from time to
time, by a written instrument, appoint a successor trustee, which instrument,
when executed and acknowledged by Lender and recorded in the office of the
Recorder of the county or counties where the Mortgaged Property is situated,
shall be conclusive proof of proper substitution of the successor trustee. The
successor trustee shall, without conveyance of the Mortgaged Property, succeed
to all the title, power and duties conferred upon the Trustee in this Instrument
and by California law. The instrument of substitution shall contain the name of
the original Lender,

                                                                         Page 36

<PAGE>   53

Trustee and Borrower under this Instrument, the book and page where this
Instrument is recorded, and the name and address of the successor trustee. If
notice of default has been recorded, this power of substitution cannot be
exercised until after the costs, fees and expenses of the then acting Trustee
have been paid to such Trustee, who shall endorse receipt of those costs, fees
and expenses upon the instrument of substitution. The procedure provided for
substitution of trustee in this Instrument shall govern to the exclusion of all
other provisions for substitution, statutory or otherwise.

      46.   STATEMENT OF OBLIGATION. Lender may collect a fee not to exceed the
maximum allowed by applicable law for furnishing the statement of obligation as
provided in Section 2943 of the Civil Code of California.

      47.   SPOUSE'S SEPARATE PROPERTY. Each Borrower who is a married person
expressly agrees that recourse may be had against his or her community property
and separate property.

      48.   FIXTURE FILING. This Instrument is also a fixture filing under the
Uniform Commercial Code of California.

      49.   ADDITIONAL PROVISION REGARDING APPLICATION OF PAYMENTS. In addition
to the provisions of Section 9, Borrower further agrees that, if Lender accepts
a guaranty of only a portion of the Indebtedness, Borrower waives its right
under California Civil Code Section 2822(a), to designate the portion of the
Indebtedness which shall be satisfied by a guarantor's partial payment.

      50.   WAIVER OF MARSHALING; OTHER WAIVERS. To the extent permitted by law,
Borrower waives (i) the benefit of all present or future laws providing for any
appraisement before sale of any portion of the Mortgaged Property, (ii) all
rights of redemption, valuation, appraisement, stay of execution, notice of
election to mature or declare due the whole of the Indebtedness and marshalling
in the event of foreclosure of the lien created by this Instrument, (iii) all
rights and remedies which Borrower may have or be able to assert by reason of
the laws of the State of California pertaining to the rights and remedies of
sureties, (iv) the right to assert any statute of limitations as a bar to the
enforcement of the lien of this Instrument or to any action brought to enforce
the Note or any other obligation secured by this Instrument, and (v) any rights,
legal or equitable, to require marshaling of assets or to require upon
foreclosure sales in a particular order, including any rights under California
Civil Code Sections 2899 and 3433. Lender shall have the right to determine the
order in which any or all of the Mortgaged Property shall be subjected to the
remedies provided by this Instrument. Lender shall have the right to determine
the order in which any or all portions of the Indebtedness are satisfied from
the proceeds realized upon the exercise of the remedies provided by this
Instrument. By signing this Instrument, Borrower does not waive its rights under
Section 2924c of the California Civil Code.

                                                                         Page 37

<PAGE>   54

      51.   ADDITIONAL PROVISIONS CONCERNING ENVIRONMENTAL HAZARDS. In addition
to the provisions of Section 18:

      (a)   Except for matters covered by an O&M Program or matters described in
Section 18(b), Borrower shall not cause or permit any lien (whether or not such
lien has priority over the lien created by this Instrument) upon the Mortgaged
Property imposed pursuant to any Hazardous Materials Laws. Any such lien shall
be considered a Prohibited Activity or Condition.

      (b)   Borrower represents and warrants to Lender that, except as
previously disclosed by Borrower to Lender in writing:

            (1)   at the time of acquiring the Mortgaged Property, Borrower
                        undertook all appropriate inquiry into the previous
                        ownership and uses of the Mortgaged Property consistent
                        with good commercial or customary practice and no
                        evidence or indication came to light which would suggest
                        that the Mortgaged Property has been or is now being
                        used for any Prohibited Activities or Conditions; and

            (2)   the Mortgaged Property has not been designated as "hazardous
                        waste property" or "border zone property" pursuant to
                        Section 25220, et seq., of the California Health and
                        Safety Code.

      The representations and warranties in this Section 51(b) shall be
continuing representations and warranties that shall be deemed to be made by
Borrower throughout the term of the loan evidenced by the Note, until the
Indebtedness has been paid in full.

      (c)   Without limiting any of the remedies provided in this Instrument,
Borrower acknowledges and agrees that each of the provisions in Section 18 and
in this Section 51 is an environmental provision (as defined in Section
736(f)(2) of the California Code of Civil Procedure) made by Borrower relating
to the real property security (the "ENVIRONMENTAL PROVISIONS"), and that
Borrower's failure to comply with any of the Environmental Provisions will be a
breach of contract that will entitle Lender to pursue the remedies provided by
Section 736 of the California Code of Civil Procedure ("SECTION 736") for the
recovery of damages and for the enforcement of the Environmental Provisions.
Pursuant to Section 736, Lender's action for recovery of damages or enforcement
of the Environmental Provisions shall not constitute an action within the
meaning of Section 726(a) of the California Code of Civil Procedure or
constitute a money judgment for a deficiency or a deficiency judgment within the
meaning of Sections 580a, 580b, 580d, or 726(b) of the California Code of Civil
Procedure.

      (d)   Any reference in this Instrument or in any other Loan Document to
Section 18 of this Instrument shall be construed as referring together to
Section 18 and this Section 51.

                                                                         Page 38

<PAGE>   55

      52.   ADDITIONAL PROVISION REGARDING INSURANCE. In addition to the
provisions of Section 19, Borrower further agrees that to the extent that
Borrower obtains any form of property damage insurance for the Mortgaged
Property or any portion thereof that insures perils not required to be insured
against by Lender, such policy of property damage insurance shall include a
standard mortgagee clause and shall name Lender as loss payee and, within 10
days following Borrower's purchase of such additional insurance, Borrower shall
cause to be delivered to Lender a duplicate original policy of insurance with
respect to such policy. Any insurance proceeds payable to Borrower under such
policy shall be additional security for the Indebtedness and Lender shall have
the same rights to such policy and proceeds as it has with respect to insurance
policies required by Lender pursuant to Section 19 (except that Lender shall not
require that the premium for such additional insurance be included among the
Imposition Deposits).

      53.   WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (A) COVENANTS AND
AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF
THIS INSTRUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER
THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY
WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN
THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH
PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.

                                                                         Page 39

<PAGE>   56

      ATTACHED EXHIBITS. The following Exhibits are attached to this Instrument:

            [ ]   Exhibit A   Description of the Land (required).

            [ ]   Exhibits B-1, B-2, B-3   Modifications to Instrument

      IN WITNESS WHEREOF, Borrower has signed and delivered this Instrument or
has caused this Instrument to be signed and delivered by its duly authorized
representative.

                                                       BORROWER:

                                          ARV COVELL, LLC
                                          a California limited liability company

                                          By:___________________________________
                                          Name:  Abdo H.  Khoury,
                                          Title: Authorized Manager

Borrower's Employer ID Number: 33-0911962

Fannie Mae MBS\DUS Commitment No.:

                                                                         Page 40

<PAGE>   57

                                 ACKNOWLEDGMENT

STATE OF CALIFORNIA

COUNTY OF ORANGE

      On _____________, 2000, before me, _________________ a Notary Public in
and for said state, personally appeared ABDO H. KHOURY, personally known to me
or proved to me on the basis of satisfactory evidence to be the person(s) whose
names(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her their signature(s) on the instrument, the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.

      WITNESS my hand and official seal.

                                          ______________________________________
                                          Notary Public

[SEAL]

                                                                         Page 41

<PAGE>   58

                                  KEY PRINCIPAL

KEY PRINCIPAL

NAME:                        ARV Assisted Living Inc.

ADDRESS:                     245 Fischer Avenue, D-1
                             Costa Mesa, California 92626

                                                                         Page 42

<PAGE>   59

EXHIBIT A

                            [DESCRIPTION OF THE LAND]

                                                                          Page 1

<PAGE>   60

EXHIBIT B

                           MODIFICATIONS TO INSTRUMENT

The following modifications are made to the text of the Instrument that precedes
this Exhibit:

                                                                        Page A-1

                                       1
<PAGE>   61

                       EXCEPTIONS TO NON-RECOURSE GUARANTY

      This Exceptions to Non-Recourse Guaranty ("GUARANTY") is entered into as
of June 30, 2000, by the undersigned (the "KEY PRINCIPAL" whether one or more),
for the benefit of BANC ONE CAPITAL FUNDING CORPORATION, and/or any subsequent
holder of the Note (the "LENDER").

                                    RECITALS

      A.    ARV COVELL, LLC (the "BORROWER") has requested that Lender make a
loan to Borrower in the amount of $11,209,000.00 (the "LOAN"). The Loan will be
evidenced by a Multifamily Note from Borrower to Lender dated as of the date of
this Guaranty (the "NOTE"). The Note will be secured by a Multifamily Deed of
Trust, Assignment of Rents, Security Agreement and Fixture Filing (California)
dated the same date as the Note (the "SECURITY INSTRUMENT"), encumbering the
real property described in the Security Instrument (the "PROPERTY").

      B.    Key Principal has an economic interest in Borrower or will otherwise
obtain a material financial benefit from the Loan.

      C.    As a condition to making the Loan to Borrower, Lender requires that
the Key Principal execute this Guaranty.

      NOW, THEREFORE, in order to induce Lender to make the Loan to Borrower,
and in consideration thereof, Key Principal agrees as follows:

      1.    "Indebtedness" and other capitalized terms used but not defined in
this Guaranty shall have the meanings assigned to them in the Security
Instrument.

      2.    Key Principal hereby absolutely, unconditionally and irrevocably
guarantees to Lender the full and prompt payment when due, whether at maturity
or earlier, by reason of acceleration or otherwise, and at all times thereafter,
of all amounts for which Borrower is personally liable under Paragraph 9 of the
Note.

      3.    The obligations of Key Principal under this Guaranty shall survive
any foreclosure proceeding, any foreclosure sale, any delivery of any deed in
lieu of foreclosure, and any release of record of the Security Instrument.

      4.    Key Principal's obligations under this Guaranty constitute an
unconditional guaranty of payment and not merely a guaranty of collection. If
Key Principal (or any Key Principal, if more than one) is a married person, Key
Principal (or each such married Key Principal, if more than one) agrees that
Lender may look to all of Key Principal's community property and separate
property to satisfy Key Principal's obligations under this Guaranty.

      5.    The obligations of Key Principal under this Guaranty shall be
performed without demand by Lender and shall be unconditional irrespective of
the genuineness, validity, regularity or enforceability of the Note, the
Security Instrument, or any other Loan Document, and without regard to

                                                                        Page A-2

                                       2
<PAGE>   62

any other circumstance which might otherwise constitute a legal or equitable
discharge of a surety or a guarantor. Key Principal hereby waives any and all
benefits and defenses under California Civil Code SECTION 2810 and agrees that
by doing so Key Principal shall be liable even if Borrower had no liability at
the time of execution of the Note, the Security Instrument or any other Loan
Document, or thereafter ceases to be liable. Key Principal hereby waives any and
all benefits and defenses under California Civil Code SECTION 2809 and agrees
that by doing so Key Principal's liability may be larger in amount and more
burdensome than that of Borrower. Key Principal hereby waives the benefit of all
principles or provisions of law, statutory or otherwise, which are or might be
in conflict with the terms of this Guaranty and agrees that Key Principal's
obligations shall not be affected by any circumstances, whether or not referred
to in this Guaranty, which might otherwise constitute a legal or equitable
discharge of a surety or a guarantor. Key Principal hereby waives the benefits
of any right of discharge under any and all statutes or other laws relating to
guarantors or sureties and any other rights of sureties and guarantors
thereunder. Without limiting the generality of the foregoing, Key Principal
hereby waives, to the fullest extent permitted by law, diligence in collecting
the Indebtedness, presentment, demand for payment, protest, all notices with
respect to the Note and this Guaranty which may be required by statute, rule of
law or otherwise to preserve Lender's rights against Key Principal under this
Guaranty, including notice of acceptance, notice of any amendment of the Loan
Documents, notice of the occurrence of any default or Event of Default, notice
of intent to accelerate, notice of acceleration, notice of dishonor, notice of
foreclosure, notice of protest, and notice of the incurring by Borrower of any
obligation or indebtedness. Key Principal also waives, to the fullest extent
permitted by law, all rights to require Lender to (a) proceed against Borrower
or any other guarantor of Borrower's payment or performance with respect to the
Indebtedness (an "OTHER GUARANTOR"), (b) if Borrower or any guarantor is a
partnership, proceed against any general partner of Borrower or the guarantor,
(c) proceed against or exhaust any collateral held by Lender to secure the
repayment of the Indebtedness, or (d) pursue any other remedy it may now or
hereafter have against Borrower, or, if Borrower is a partnership, any general
partner of Borrower, including any and all benefits under California Civil Code
Sections 2845, 2849 and 2850.

      6.    Key Principal understands that the exercise by Lender of certain
rights and remedies contained in the Security Instrument (such as a nonjudicial
foreclosure sale) may affect or eliminate Key Principal's right of subrogation
against Borrower and that Key Principal may therefore incur a partially or
totally nonreimbursable liability under this Guaranty. Nevertheless, Key
Principal hereby authorizes and empowers Lender to exercise, in its sole and
absolute discretion, any right or remedy, or any combination thereof, which may
then be available, since it is the intent and purpose of Key Principal that the
obligations under this Guaranty shall be absolute, independent and unconditional
under any and all circumstances. Key Principal expressly waives any defense
(which defense, if Key Principal had not given this waiver, Key Principal might
otherwise have) to a judgment against Key Principal by reason of a nonjudicial
foreclosure. Without limiting the generality of the foregoing, Key Principal
hereby expressly waives any and all benefits under (i) California Code of Civil
Procedure SECTION 580a (which Section, if Key Principal had not given this
waiver, would otherwise limit Key Principal's liability after a nonjudicial
foreclosure sale to the difference between the obligations of Key Principal
under this Guaranty and the fair market value of the property or interests sold
at such nonjudicial foreclosure sale), (ii) California Code of Civil Procedure
SECTIONS 580b and 580d (which Sections, if Key Principal had not given this
waiver, would otherwise limit Lender's right to recover a deficiency judgment
with respect to purchase money obligations and after a nonjudicial foreclosure
sale, respectively), and (iii) California Code of Civil Procedure SECTION 726
(which Section, if Key Principal had not given this waiver, among other things,
would otherwise require Lender to exhaust all of its security before a personal
judgment could be obtained for a deficiency). Notwithstanding any

                                                                        Page A-3

                                       3
<PAGE>   63

foreclosure of the lien of the Security Instrument, whether by the exercise of
the power of sale contained in the Security Instrument, by an action for
judicial foreclosure or by Lender's acceptance of a deed in lieu of foreclosure,
Key Principal shall remain bound under this Guaranty.

      7.    In accordance with SECTION 2856 of the California Civil Code, Key
Principal also waives any right or defense based upon an election of remedies by
Lender, even though such election (e.g., nonjudicial foreclosure with respect to
any collateral held by Lender to secure repayment of the Indebtedness) destroys
or otherwise impairs the subrogation rights of Key Principal or the right of Key
Principal (after payment of the obligations guaranteed by Key Principal under
this Guaranty) to proceed against Borrower for reimbursement, or both, by
operation of SECTION 580d of the Code of Civil Procedure or otherwise.

      8.    In accordance with SECTION 2856 of the California Civil Code, Key
Principal waives any and all other rights and defenses available to Key
Principal by reason of SECTIONS 2787 through 2855, inclusive, of the California
Civil Code, including any and all rights or defenses Key Principal may have by
reason of protection afforded to Borrower with respect to any of the obligations
of Key Principal under this Guaranty pursuant to the antideficiency or other
laws of the State of California limiting or discharging Borrower's Indebtedness,
including SECTIONS 580a, 580b, 580d, and 726 of the California Code of Civil
Procedure.

      9.    In accordance with SECTION 2856 of the California Civil Code, Key
Principal agrees to withhold the exercise of any and all subrogation and
reimbursement rights against Borrower, against any other person, and against any
collateral or security for the Indebtedness, including any such rights pursuant
to SECTIONS 2847 and 2848 of the California Civil Code, until the Indebtedness
has been indefeasibly paid and satisfied in full, all obligations owed to Lender
under the Loan Documents have been fully performed, and Lender has released,
transferred or disposed of all of its right, title and interest in such
collateral or security.

      10.   At any time or from time to time and any number of times, without
notice to Key Principal and without affecting the liability of Key Principal,
(a) the time for payment of the principal of or interest on the Indebtedness may
be extended or the Indebtedness may be renewed in whole or in part; (b) the time
for Borrower's performance of or compliance with any covenant or agreement
contained in the Note, the Security Instrument or any other Loan Document,
whether presently existing or hereinafter entered into, may be extended or such
performance or compliance may be waived; (c) the maturity of the Indebtedness
may be accelerated as provided in the Note, the Security Instrument, or any
other Loan Document; (d) the Note, the Security Instrument, or any other Loan
Document may be modified or amended by Lender and Borrower in any respect,
including an increase in the principal amount; and (e) any security for the
Indebtedness may be modified, exchanged, surrendered or otherwise dealt with or
additional security may be pledged or mortgaged for the Indebtedness.

      11.   If more than one person executes this Guaranty, the obligations of
those persons under this Guaranty shall be joint and several. Lender, in its
discretion, may (a) bring suit against Key Principal, or any one or more of the
persons constituting Key Principal, and any Other Guarantor, jointly and
severally, or against any one or more of them; (b) compromise or settle with any
one or more of the persons constituting Key Principal, or any Other Guarantor,
for such consideration as Lender may deem proper; (c) release one or more of the
persons constituting Key Principal, or any Other Guarantor, from liability; and
(d) otherwise deal with Key Principal and any Other Guarantor, or any one or
more of them, in any manner, and no such action shall impair the rights of
Lender to collect

                                                                        Page A-4

                                       4
<PAGE>   64

from Key Principal any amount guaranteed by Key Principal under this Guaranty.
Nothing contained in this paragraph shall in any way affect or impair the rights
or obligations of Key Principal with respect to any Other Guarantor.

      12.   Any indebtedness of Borrower held by Key Principal now or in the
future is and shall be subordinated to the Indebtedness and any such
indebtedness of Borrower shall be collected, enforced and received by Key
Principal, as trustee for Lender, but without reducing or affecting in any
manner the liability of Key Principal under the other provisions of this
Guaranty.

      13.   Key Principal shall have no right of, and hereby waives any claim
for, subrogation or reimbursement against Borrower or any general partner of
Borrower by reason of any payment by Key Principal under this Guaranty, whether
such right or claim arises at law or in equity or under any contract or statute,
until the Indebtedness has been paid in full and there has expired the maximum
possible period thereafter during which any payment made by Borrower to Lender
with respect to the Indebtedness could be deemed a preference under the United
States Bankruptcy Code.

      14.   If any payment by Borrower is held to constitute a preference under
any applicable bankruptcy, insolvency, or similar laws, or if for any other
reason Lender is required to refund any sums to Borrower, such refund shall not
constitute a release of any liability of Key Principal under this Guaranty. It
is the intention of Lender and Key Principal that Key Principal's obligations
under this Guaranty shall not be discharged except by Key Principal's
performance of such obligations and then only to the extent of such performance.

      15.   Key Principal shall from time to time, upon request by Lender,
deliver to Lender such financial statements as Lender may reasonably require.

      16.   Lender may assign its rights under this Guaranty in whole or in part
and, upon any such assignment, all the terms and provisions of this Guaranty
shall inure to the benefit of such assignee to the extent so assigned. The terms
used to designate any of the parties herein shall be deemed to include the
heirs, legal representatives, successors and assigns of such parties.

      17.   This Guaranty and the other Loan Documents represent the final
agreement between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements. There are no unwritten oral
agreements between the parties. All prior or contemporaneous agreements,
understandings, representations, and statements, oral or written, are merged
into this Guaranty and the other Loan Documents. Key Principal acknowledges that
it has received a copy of the Note and all other Loan Documents. Neither this
Guaranty nor any of its provisions may be waived, modified, amended, discharged,
or terminated except by an agreement in writing signed by the party against
which the enforcement of the waiver, modification, amendment, discharge, or
termination is sought, and then only to the extent set forth in that agreement.

      18.   Key Principal agrees that any controversy arising under or in
relation to this Guaranty shall be litigated exclusively in the jurisdiction
where the Land is located (the "PROPERTY JURISDICTION"). The state and federal
courts and authorities with jurisdiction in the Property Jurisdiction shall have
exclusive jurisdiction over all controversies which shall arise under or in
relation to this Guaranty, the Note, the Security Instrument or any other Loan
Document. Key Principal irrevocably consents to service, jurisdiction, and venue
of such courts for any such litigation and

                                                                        Page A-5

                                       5
<PAGE>   65

waives any other venue to which it might be entitled by virtue of domicile,
habitual residence or otherwise.

      19.   Key Principal (or each Key Principal, if more than one) agrees to
notify Lender (in the manner for giving notices provided in Section 31 of the
Security Instrument) of any change in Key Principal's address within 10 Business
Days after such change of address occurs.

      20.   KEY PRINCIPAL AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY
JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS GUARANTY OR THE RELATIONSHIP
BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY
AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE
EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO
TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH
THE BENEFIT OF COMPETENT LEGAL COUNSEL.

      IN WITNESS WHEREOF, Key Principal has signed and delivered this Guaranty
or has caused this Guaranty to be signed and delivered by its duly authorized
representative.

                                          KEY PRINCIPAL

                                          ARV ASSISTED LIVING, INC., a Delaware
                                          corporation

                                          ______________________________________
                                          Name:     Abdo H. Khoury
                                          Title:    Senior Vice President
                                          Address:  245 Fischer Avenue, D-1
                                                    Costa Mesa, California 92626
                                          Social Security/Employer ID No.:
                                                    33-0160968

                                                                        Page A-6

                                       6<PAGE>   1

                                                                    EXHIBIT 10.3

                                   $10,000,000
                               TERM LOAN AGREEMENT

                           DATED AS OF APRIL 24, 2000
                                      AMONG
                            ARV ASSISTED LIVING, INC.
                                   AS BORROWER

                                       AND

                          LFSRI II ASSISTED LIVING LLC
                                    AS LENDER

                           WEIL, GOTSHAL & MANGES LLP
                                767 FIFTH AVENUE
                          NEW YORK, NEW YORK 10153-0119

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      ----
<S>                      <C>                                                                          <C>
Article I             Definitions, Interpretation And Accounting Terms..................................1

         Section 1.1.    Defined Terms..................................................................1

         Section 1.2.    Computation of Time Periods...................................................13

         Section 1.3.    Accounting Terms and Principles...............................................13

         Section 1.4.    Certain Terms.................................................................13

Article II            The Term Loan Facility...........................................................14

         Section 2.1.    The Term Loan Commitment......................................................14

         Section 2.2.    Borrowing Procedures..........................................................14

         Section 2.3.    Repayment of Term Loan, Extension of Maturity Date............................14

         Section 2.4.    Evidence of Debt..............................................................14

         Section 2.5.    Optional Prepayments..........................................................15

         Section 2.6.    Mandatory Prepayments.........................................................15

         Section 2.7.    Reduction of Commitment; Extension of Commitment
                             Termination Date..........................................................16

         Section 2.8.    Interest......................................................................16

         Section 2.10.   Payments and Computations.....................................................17

         Section 2.11.   Special Provisions Governing Term Loans.......................................17

         Section 2.12.   Taxes.........................................................................18

Article III           Conditions To Term Loans.........................................................18

         Section 3.1.    Conditions Precedent to Initial Loans.........................................18

         Section 3.2.    Conditions Precedent to Each Term Loan........................................20

Article IV            Representations and Warranties...................................................20

         Section 4.1.    Corporate Existence; Compliance with Law......................................20

         Section 4.2.    Corporate Power; Authorization; Enforceable Obligations.......................21

         Section 4.3.    Ownership of Borrower; Subsidiaries...........................................21

         Section 4.4.    Financial Statements..........................................................22

         Section 4.5.    Material Adverse Change.......................................................22

         Section 4.6.    Solvency......................................................................22

         Section 4.7.    Litigation....................................................................22

         Section 4.8.    Taxes.........................................................................22

         Section 4.9.    Full Disclosure...............................................................23

         Section 4.10.   Margin Regulations............................................................23

         Section 4.11.   No Burdensome Restrictions; No Defaults.......................................23
</TABLE>

                                       i
<PAGE>   3

                                TABLE OF CONTENTS
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      ----
<S>                      <C>                                                                          <C>
         Section 4.12.   Investment Company Act; Public Utility Holding Company Act....................24

         Section 4.13.   Use of Proceeds...............................................................24

         Section 4.14.   Insurance.....................................................................24

         Section 4.15.   Labor Matters.................................................................24

         Section 4.16.   ERISA.........................................................................25

         Section 4.17.   Environmental Matters.........................................................25

         Section 4.18.   Intellectual Property.........................................................26

         Section 4.19.   Properties....................................................................26

         Section 4.20.   Ranking.......................................................................27

Article V             Reporting Covenants..............................................................27

         Section 5.1.    Financial Statements..........................................................27

         Section 5.2.    Default Notices...............................................................28

         Section 5.3.    Litigation....................................................................28

         Section 5.4.    SEC Filings; Press Releases...................................................28

         Section 5.5.    Labor Relations...............................................................29

         Section 5.6.    Tax Returns...................................................................29

         Section 5.7.    ERISA Matters.................................................................29

         Section 5.8.    Environmental Matters.........................................................29

         Section 5.9.    Other Information.............................................................30

Article VI            Affirmative Covenants............................................................30

         Section 6.1.    Preservation of Corporate Existence, Etc......................................30

         Section 6.2.    Compliance with Laws, Etc.....................................................30

         Section 6.3.    Conduct of Business...........................................................31

         Section 6.4.    Payment of Taxes, Etc.........................................................31

         Section 6.5.    Maintenance of Insurance......................................................31

         Section 6.6.    Access........................................................................31

         Section 6.7.    Keeping of Books..............................................................31

         Section 6.8.    Maintenance of Properties, Etc................................................31

         Section 6.9.    Application of Proceeds.......................................................32

         Section 6.10.   Environmental.................................................................32

Article VII           Negative Covenants...............................................................32

         Section 7.1.    Indebtedness..................................................................32
</TABLE>

                                       ii
<PAGE>   4

                                TABLE OF CONTENTS
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      ----
<S>                      <C>                                                                          <C>
         Section 7.2.    Limitation on Liens...........................................................33

         Section 7.3.    Limitation on Restricted Payments.............................................34

         Section 7.4.    Limitation on Transactions with Affiliates....................................34

         Section 7.5.    Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries.34

         Section 7.6.    Limitation on Issuance of Preferred Stock by Subsidiaries.....................35

         Section 7.7.    Waiver of Stay, Extension or Usury Laws.......................................35

         Section 7.8.    Limitation on Investments, Loans and Advances.................................35

         Section 7.9.    Certain Changes...............................................................35

         Section 7.10.   Compliance with ERISA.........................................................35

         Section 7.11.   Environmental.................................................................35

Article VIII          Events of Default................................................................36

         Section 8.1.    Events of Default.............................................................36

         Section 8.2.    Remedies......................................................................37

         Section 8.3.    Rescission....................................................................38

Article IX            Miscellaneous....................................................................38

         Section 9.1.    Amendments, Waivers, Etc......................................................38

         Section 9.2.    Assignments and Participations................................................38

         Section 9.3.    Costs and Expenses............................................................38

         Section 9.4.    Indemnities...................................................................39

         Section 9.5.    Right of Set-off..............................................................39

         Section 9.6.    Notices, Etc..................................................................40

         Section 9.7.    Binding Effect................................................................41

         Section 9.8.    Governing Law.................................................................41

         Section 9.9.    Submission to Jurisdiction; Service of Process................................41

         Section 9.10.   Waiver of Jury Trial..........................................................42

         Section 9.11.   Marshaling; Payments Set Aside................................................42

         Section 9.12.   Section Titles................................................................42

         Section 9.13.   Execution in Counterparts.....................................................42

         Section 9.14.   Entire Agreement..............................................................42

         Section 9.15.   Confidentiality...............................................................42
</TABLE>

                                      iii
<PAGE>   5

Schedules

Schedule 4.2      -        Consents
Schedule 4.3      -        Options, Warrants; Ownership of Subsidiaries
Schedule 4.11     -        Defaults
Schedule 4.15     -        Labor Matters
Schedule 4.16     -        List of Plans
Schedule 4.17     -        Environmental Matters
Schedule 7.1      -        Existing Indebtedness
Schedule 7.2      -        Liens
Schedule 7.8      -        Existing Obligations and Investments

Exhibits

Exhibit A         -        Form of Term Note
Exhibit B         -        Form of Legal Opinion
Exhibit C         -        Form of Warrant
Exhibit D                  Form of Payment Direction Letter

                                       iv
<PAGE>   6

         TERM LOAN AGREEMENT, dated as of April 24, 2000, among ARV Assisted
Living, Inc., a Delaware corporation (the "Borrower"), and LFSRI II Assisted
Living, LLC, a Delaware limited liability company (the "Lender").

                              W I T N E S S E T H:

         WHEREAS, the Borrower has requested that the Lender make available term
loans for the purposes specified in this Agreement; and

         WHEREAS, the Lender is willing to make available to the Borrower such
term loans upon the terms and subject to the conditions set forth herein;

         NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, the parties hereto hereby agree as follows:

                                   ARTICLE I

                DEFINITIONS, INTERPRETATION AND ACCOUNTING TERMS

         SECTION 1.1. DEFINED TERMS. As used in this Agreement, the following
terms have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):

         "Affiliate" means, with respect to any Person, any other Person which,
directly or indirectly, controls, is controlled by or is under common control
with such Person, each officer, director, general partner or joint-venturer of
such Person, and each Person who is the beneficial owner of 10% or more of any
class of Voting Stock of such Person. For the purposes of this definition,
"control" means the possession of the power to direct or cause the direction of
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.

         "Agreement" means this Term Loan Agreement as amended, supplemented or
otherwise modified from time to time.

         "Applicable Margin" means 10% per annum.

         "Asset Sale" has the meaning specified in clause (a) of the definition
of "Net Cash Proceeds."

         "Borrowing" means Term Loans made on the same day by the Lender.

         "Borrowing Extension Fee" means an amount equal to 0.5% of the
aggregate unutilized Commitment extended by the Borrower in accordance with
Section 2.7(a).

         "Business Day" means any day other than (i) a Saturday or Sunday or
(ii) a day on which federally insured depository institutions in New York City
or California are authorized or obligated by law, regulation, governmental
decree or executive order to be closed.

<PAGE>   7

         "Capital Lease" means, with respect to any Person, any lease of
property by such Person as lessee which would be accounted for as a capital
lease on a balance sheet of such Person prepared in conformity with GAAP.

         "Capital Lease Obligations" means, with respect to any Person, the
capitalized amount of all obligations of such Person or any of its Subsidiaries
under Capital Leases, as determined on a consolidated basis in conformity with
GAAP.

         "Cash Equivalents" means (a) securities issued or fully guaranteed or
insured by the United States government or any agency thereof, (b) certificates
of deposit, eurodollar time deposits, overnight bank deposits and bankers'
acceptances of any commercial bank organized under the laws of the United
States, any state thereof, the District of Columbia, any foreign bank, or its
branches or agencies (fully protected against currency fluctuations) which, at
the time of acquisition, are rated at least "A-1" by Standard & Poor's Rating
Services ("S&P") or "P-1" by Moody's Investors Services, Inc. ("Moody's"), (c)
commercial paper of an issuer rated at least "A-1" by S&P or "P-1" by Moody's,
and (d) shares of any money market fund that (i) has at least 95% of its assets
invested continuously in the types of investments referred to in clauses (a)
through (c) above, (ii) has net assets of not less than $500,000,000 and (iii)
is rated at least "A-1" by S&P or "P-1" by Moody's; provided, however, that the
maturities of all obligations of the type specified in clauses (a) through (c)
above shall not exceed 180 days.

         "Change of Control" means any of the following: (a) any person or group
of persons (within the meaning of the Securities Exchange Act of 1934, as
amended) shall have acquired beneficial ownership (within the meaning of Rule
13d-3 promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended) of 50% or more of the issued and outstanding
Voting Stock of the Borrower, excluding however any such Change of Control where
the Lender's open market purchases of the outstanding Voting Stock of the
Borrower are the immediate cause of the Change of Control; or (b) during any
period of twelve consecutive calendar months, individuals who at the beginning
of such period constituted the board of directors of the Borrower (together with
any new directors whose election by the board of directors of the Borrower or
whose nomination for election by the stockholders of the Borrower was approved
by a vote of at least two-thirds of the directors then still in office who
either were directors at the beginning of such period or whose elections or
nomination for election was previously so approved) cease for any reason other
than death or disability to constitute a majority of the directors then in
office; or (c) any person or two or more persons acting in concert shall have
acquired by contract or otherwise, or shall have entered into a contract or
arrangement that, upon consummation, will result in its or their acquisition of
the power to exercise, directly or indirectly, a controlling influence over the
management or policies of the Borrower; or (d) the sale, transfer, conveyance or
disposal of all or substantially all the assets, property or business of the
Borrower; or (e) the Borrower shall enter into any merger, consolidation or
amalgamation other than any such merger, consolidation or amalgamation permitted
pursuant to Section 7.9.

         "Closing Date" means April 24, 2000.

         "Code" means the Internal Revenue Code of 1986 (or any successor
legislation thereto), as amended from time to time.

                                       2
<PAGE>   8

         "Commitment" means the Commitment of the Lender to make Term Loans to
the Borrower in the aggregate principal amount not to exceed $10,000,000,
subject to reduction as provided in Section 2.7(b).

         "Commitment Fee" has the meaning specified in Section 2.9(a).

         "Commitment Termination Date" means the Initial Commitment Termination
Date unless the Commitment Termination Date is extended in accordance with
Section 2.7(a), in which event "Commitment Termination Date" means the 90th day
following the Initial Commitment Termination Date.

         "Compliance Certificate" has the meaning specified in Section 5.1(h).

         "Constituent Documents" means, with respect to any Person, (i) the
articles/certificate of incorporation (or the equivalent organizational
documents) of such Person, (ii) the by-laws (or the equivalent governing
documents) of such Person and (iii) any document setting forth the manner of
election and duties of the directors or managing members of such Person (if any)
and the designation, amount and/or relative rights, limitations and preferences
of any class or series of such Person's Stock.

         "Contaminant" means any material, substance or waste that is
classified, regulated or otherwise characterized under any Environmental Law as
hazardous, toxic, a contaminant or a pollutant or by other words of similar
meaning or regulatory effect, including any petroleum or petroleum-derived
substance or waste, asbestos and polychlorinated biphenyls, but excludes any
medical products or devices customarily used in the operation of senior housing
facilities to the extent such products or devices are used in compliance with
all Requirements of Law.

         "Contractual Obligation" of any Person means any obligation, agreement,
undertaking or similar provision of any Security issued by such Person or of any
agreement, undertaking, contract, lease, indenture, mortgage, deed of trust or
other instrument (excluding a Loan Document) to which such Person is a party or
by which it or any of its property is bound or to which any of its properties is
subject.

         "Debt Issuance" means the incurrence of Indebtedness of the type
specified in clause (a) and (b) of the definition of "Indebtedness" by the
Borrower or any of its Subsidiaries.

         "Default" means any event which with the passing of time or the giving
of notice or both would become an Event of Default.

         "Determination Date" means with respect to any Interest Period, the
date which is two (2) Eurodollar Business Days before the commencement of such
Interest Period.

         "Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any event
(other than upon the occurrence of a Change of Control), matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the
Maturity Date.

                                       3
<PAGE>   9

         "Dollars" and the sign "$" each mean the lawful money of the United
States of America.

         "Environmental Laws" means all applicable Requirements of Law now or
hereafter in effect, as amended or supplemented from time to time, relating to
pollution or the regulation and protection of human health, safety, the
environment or natural resources, including the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section
9601 et seq.); the Hazardous Material Transportation Act, as amended (49 U.S.C.
Section 180 et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act,
as amended (7 U.S.C. Section 136 et seq.); the Resource Conservation and
Recovery Act, as amended (42 U.S.C. Section 6901 et seq.); the Toxic Substance
Control Act, as amended (42 U.S.C. Section 7401 et seq.); the Clean Air Act, as
amended (42 U.S.C. Section 740 et seq.); the Federal Water Pollution Control
Act, as amended (33 U.S.C. Section 1251 et seq.); the Occupational Safety and
Health Act, as amended (29 U.S.C. Section 651 et seq.); the Safe Drinking Water
Act, as amended (42 U.S.C. Section 300f et seq.); and their state and local
counterparts or equivalents and any transfer of ownership notification or
approval statute.

         "Environmental Liabilities and Costs" means, with respect to any
Person, all liabilities, obligations, responsibilities, Remedial Actions,
losses, damages, punitive damages, consequential damages, treble damages, costs
and expenses (including all fees, disbursements and expenses of counsel, experts
and consultants and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim or demand by
any other Person, whether based in contract, tort, implied or express warranty,
strict liability, criminal or civil statute, including any thereof arising under
any Environmental Law, Permit, order or agreement with any Governmental
Authority or other Person, which relate to any environmental, health or safety
condition or a Release or threatened Release, and result from the past, present
or future operations of, or ownership of property by, such Person or any of its
Subsidiaries.

         "Environmental Lien" means any Lien in favor of any Governmental
Authority for Environmental Liabilities and Costs.

         "ERISA" means the Employee Retirement Income Security Act of 1974 (or
any successor legislation thereto), as amended from time to time.

         "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control or treated as a single employer with the
Borrower or any of its Subsidiaries within the meaning of Section 414 (b), (c),
(m) or (o) of the Code.

         "ERISA Event" means (i) a reportable event described in Section 4043(b)
or 4043(c)(1), (2), (3), (5), (6), (8) or (9) of ERISA with respect to a Title
IV Plan or a Multiemployer Plan; (ii) the withdrawal of the Borrower, any of its
Subsidiaries or any ERISA Affiliate from a Title IV Plan subject to Section 4063
of ERISA during a plan year in which it was a substantial employer, as defined
in Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of the
Borrower, any of its Subsidiaries or any ERISA Affiliate from any Multiemployer
Plan; (iv) notice of reorganization or insolvency of a Multiemployer Plan; (v)
the filing of a notice of intent to terminate a Title IV Plan or the treatment
of a plan amendment as a termination under Section 4041 of ERISA; (vi) the
institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by
the PBGC; (vii) the failure to make any required contribution to a Title IV Plan
or Multiemployer Plan; (viii) the imposition of a lien under Section 412 of the
Code or Section 302 of ERISA on the Borrower or any of its Subsidiaries or any
ERISA Affiliate;

                                       4
<PAGE>   10

or (ix) any other event or condition which might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan
or the imposition of any liability under Title IV of ERISA, other than for PBGC
premiums due but not delinquent under Section 4007 of ERISA.

         "Eurodollar Business Day" means a Business Day on which banks in the
City of London, England are open for interbank or foreign exchange transactions.

         "Event of Default" has the meaning specified in Section 8.1.

         "Existing Indebtedness" has the meaning specified in Section 7.1(d).

         "Federal Reserve Board" means the Board of Governors of the Federal
Reserve System, or any successor thereto.

         "Financial Statements" means the financial statements of the Borrower
and its Subsidiaries delivered in accordance with Sections 4.4 and 5.1.

         "Fiscal Quarter" means each of the three-month periods ending on March
31, June 30, September 30 and December 31.

         "Fiscal Year" means the twelve-month period ending on December 31.

         "GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board, or in such other statements by such other
entity as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances as of the date of
determination.

         "Governmental Authority" means 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.

         "Guaranty Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of such Person with respect to any
Indebtedness of another Person, including (a) the direct or indirect guaranty,
endorsement (other than for collection or deposit in the ordinary course of
business), co-making, discounting with recourse or sale with recourse by such
Person of Indebtedness of another Person and (b) any liability of such Person
for Indebtedness of another Person through any agreement (contingent or
otherwise) (i) to purchase, repurchase or otherwise acquire such Indebtedness or
any security therefor, or to provide funds for the payment or discharge of such
Indebtedness (whether in the form of a loan, advance, stock purchase, capital
contribution or otherwise), (ii) to maintain the solvency or any balance sheet
item, level of income or financial condition of another Person, (iii) to make
take-or-pay or similar payments, if required, regardless of non-performance by
any other party or parties to an agreement, (iv) to purchase, sell or lease (as
lessor or lessee) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss, or (v) to supply funds to or in
any other manner invest in such other Person (including to pay for property or
services irrespective of

                                       5
<PAGE>   11

whether such property is received or such services are rendered). The amount of
any Guaranty Obligation shall be equal to the amount of the Indebtedness so
guaranteed or otherwise supported.

         "Hedging Contracts" means all Interest Rate Contracts, foreign exchange
contracts, currency swap or option agreements, forward contracts, commodity
swap, purchase or option agreements, other commodity price hedging arrangements,
and all other similar agreements or arrangements designed to alter the risks of
any Person arising from fluctuations in interest rates, currency values or
commodity prices.

         "Indebtedness" of any Person means without duplication (a) all
indebtedness of such Person for borrowed money, (b) all obligations of such
Person evidenced by notes, bonds, debentures or similar instruments or which
bear interest, (c) all reimbursement and all obligations with respect to letters
of credit, bankers' acceptances, surety bonds and performance bonds, whether or
not matured, (d) all indebtedness for the deferred purchase price of property or
services, other than trade payables and accruals for expenses incurred in the
ordinary course of business and obligations for post-retirement benefits, (e)
all indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property but excluding consignments to the extent that such Person's only
obligation with respect to unused consigned property is the return of such
property to the consignor), (f) all Capital Lease Obligations of such Person and
the present value of future rental payments under all synthetic leases, (g) all
Guaranty Obligations of such Person, (h) all obligations of such Person to
purchase, redeem, retire, defease or otherwise acquire for value any Stock or
Stock Equivalents of such Person, valued, in the case of redeemable preferred
stock, at the greater of its voluntary or involuntary liquidation preference
plus accrued and unpaid dividends, (i) all payments that such Person would have
to make in the event of an early termination on the date Indebtedness of such
Person is being determined in respect of Hedging Contracts of such Person and
(j) all Indebtedness of the type referred to above of another Person secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Lien upon or in property (including accounts
and general intangibles) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness.

         "Indemnified Party" has the meaning specified in Section 9.4.

         "Indenture" means the Indenture dated as of April 3, 1996 between the
Borrower and The Chase Manhattan Bank N.A., as Trustee providing for the
issuance of 6 3/4% Convertible Subordinated Notes Due 2006.

         "Initial Commitment Termination Date" means August 24, 2000.

         "Initial Maturity Date" means April 24, 2002.

         "Interest Period" means, in connection with the calculation of interest
payable on any Payment Date, the period from and including the immediately
preceding Payment Date to but excluding such Payment Date; provided, however,
that the first Interest Period shall be the period from and including the
Closing Date to but excluding May 15, 2000.

         "Interest Rate Contracts" means all interest rate swap agreements,
interest rate cap agreements, interest rate collar agreements and interest rate
insurance.

                                       6
<PAGE>   12

         "Investment" means, with respect to any Person, (a) any purchase or
other acquisition by that Person of (i) any Security issued by, (ii) a
beneficial interest in any Security issued by, or (iii) any other equity
ownership interest in, any other Person, (b) any purchase by that Person of all
or a significant part of the assets of a business conducted by another Person,
and (c) any loan, advance (other than deposits with financial institutions
available for withdrawal on demand, prepaid expenses, accounts receivable,
advances to employees and similar items made or incurred in the ordinary course
of business as presently conducted), or capital contribution by that Person to
any other Person, including all Indebtedness to such Person arising from a sale
of property by such Person other than in the ordinary course of its business.

         "IRS" means the Internal Revenue Service of the United States or any
successor thereto.

         "Leases" means, with respect to any Person, all of those leasehold
estates in real property of such Person, as lessee, as such may be amended,
supplemented or otherwise modified from time to time.

         "Lender" has the meaning specified in the preamble to this Agreement.

         "LIBOR Rate" means with respect to each Interest Period, the rate
(expressed as a percentage per annum, rounded to the nearest 100th) for deposits
in U.S. dollars for a one-month period that appears on Telerate Page 3750 (or
the successor thereto) as of 11:00 a.m., London, England time, on the related
Determination Date. If such rate does not appear on Telerate Page 3750 as of
11:00 a.m., London, England time, on such Determination Date, LIBOR shall be the
arithmetic mean of the offered rates expressed as a percentage per annum) for
deposits in U.S. dollars for a one-month period that appear on the Reuters
Screen LIBOR Page as of 11:00 a.m., London, England time, on such Determination
Date, if at least two such offered rates so appear. If fewer than two such
offered rates appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London,
England time, on such Determination Date, the Lender shall request the principal
London, England office of any four major reference banks in the London interbank
market selected by the Lender to provide such bank's offered quotation
(expressed as a percentage per annum) to prime banks in the London interbank
market for deposits in U.S. Dollars for a one-month period as of 11:00 a.m.,
London, England time, on such Determination Date for amounts of not less than
One Million U.S. Dollars (U.S. $1,000,000.00). If at least two such offered
quotations are so provided, LIBOR shall be the arithmetic mean of such
quotations. If fewer than two such quotations are so provided, the Lender shall
request any three major banks in New York City selected by the Lender to provide
such bank's rate (expressed as a percentage per annum) for loans in U.S. Dollars
to leading European banks for a one month period as of approximately 11:00 a.m.,
New York City time on the applicable Determination Date for amounts of not less
than One Million U.S. Dollars (U.S. $1,000,000.00). If at least two such rates
are so provided, LIBOR shall be the arithmetic mean of such rates. If fewer than
two rates are so provided, then LIBOR for the applicable Interest Period shall
be LIBOR that was in effect for the next preceding Interest Period.

         "Lien" means any mortgage, deed of trust, pledge, hypothecation,
assignment, charge, deposit arrangement, encumbrance, lien (statutory or other),
security interest or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever intended to assure
payment of any Indebtedness or other obligation, including any conditional sale
or other title retention agreement, the interest of a lessor under a Capital
Lease, any financing lease having substantially the same economic effect as any
of the foregoing, and

                                       7
<PAGE>   13

the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction naming the owner of the asset to which such
Lien relates as debtor.

         "Loan Documents" means, collectively, this Agreement, the Note, the
Warrant Documents, the Second Amendment to Rights Agreement and each
certificate, agreement or document executed by the Borrower and delivered to the
Lender in connection with or pursuant to any of the foregoing.

         "Material Adverse Change" means a material adverse change in any of (a)
the condition (financial or otherwise), business, performance, prospects,
operations, assets, liabilities (contingent or otherwise) or properties of the
Borrower or the Borrower and its Subsidiaries taken as a whole, (b) the
legality, validity or enforceability of any Loan Document, (c) the ability of
the Borrower to repay the Obligations or perform its obligations under the Loan
Documents, or (d) the rights and remedies of the Lender under the Loan
Documents.

         "Material Adverse Effect" means an effect that results in or causes, or
could reasonably be expected to result in or cause, a Material Adverse Change.

         "Maturity Date" means the Initial Maturity Date, unless the Maturity
Date is extended in accordance with Section 2.3(b), in which event the Maturity
Date means the third anniversary of the Closing Date.

         "Maturity Date Extension Fee" means an amount equal to 2.50% of the
aggregate principal amount of the Term Loans outstanding on the Initial Maturity
Date.

         "Multiemployer Plan" means a multiemployer plan, as defined in Section
4001(a)(3) of ERISA, to which the Borrower, any of its Subsidiaries or any ERISA
Affiliate has any obligation or liability, contingent or otherwise.

         "Net Cash Proceeds" means (a) proceeds received by the Borrower after
the Closing Date in cash or Cash Equivalents from any sale, lease, transfer or
other disposition of any of its assets (an "Asset Sale"), net of (x) the
reasonable cash costs of sale, assignment or other disposition, (y) taxes paid
or payable as a result thereof and (z) any amount required to be paid or prepaid
on Indebtedness (other than the Obligations) secured by the assets subject to
such Asset Sale; provided, however, that the evidence of each of (x), (y) and
(z) are provided to the Lender in form and substance satisfactory to it; (b)
proceeds of property insurance on account of the loss of or damage to any such
assets or property, and payments of compensation for any such assets or property
taken by condemnation or eminent domain, to the extent that within 360 days
after the receipt thereof, replacement or repair of such asset or property has
not commenced or, in the event that at any time such replacement or repair is
abandoned or otherwise discontinued or is not diligently pursued, the remaining
award or proceeds, as the case may be, net of taxes paid or payable as a result
thereof evidence of which is provided to the Lender, shall constitute Net Cash
Proceeds at such time; and (c) proceeds received after the Closing Date by the
Borrower in cash or Cash Equivalents from any Debt Issuance under Section 7.1,
in each case net of brokers' and advisors' fees and other costs incurred in
connection with such transaction; provided, however, that evidence of such costs
is provided to the Lender.

         "Non-Recourse Indebtedness" means Indebtedness as to which (a) neither
the Borrower nor any of its Subsidiaries (i) provides credit support (including
any undertaking, agreement or instrument which would constitute Indebtedness) or
(ii) is directly or indirectly

                                       8
<PAGE>   14

liable (except for any such liability if and to the extent customarily included
in non-recourse real estate loan documentation entered into by the Borrower and
its Subsidiaries in the ordinary course of business) and (b) no default with
respect to such Indebtedness (including any rights which the holders thereof may
have to take enforcement action against the relevant Non-Recourse Subsidiary or
its assets) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of the Borrower to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.

         "Non-Recourse Subsidiary" means a Subsidiary of the Borrower (a) whose
properties and assets, to the extent they secure Indebtedness, secure only
Non-Recourse Indebtedness and (b) which has no Indebtedness other than
Non-Recourse Indebtedness and (c) the Investment in such Subsidiary is permitted
hereunder.

         "Note" means the promissory note of the Borrower payable to the order
of the Lender in a principal amount equal to $10,000,000.

         "Obligations" means the Term Loans and all other advances, debts,
liabilities, obligations, covenants and duties owing by the Borrower to the
Lender, any Affiliate of the Lender or any Indemnitee, of every type and
description, present or future, arising under this Agreement or under any other
Loan Document, by reason of an extension of credit, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including those
acquired by assignment), absolute or contingent, due or to become due, now
existing or hereafter arising and however acquired and whether or not evidenced
by any note, guaranty or other instrument or for the payment of money. The term
"Obligations" includes all fees and all interest, charges, expenses, fees,
attorneys' fees and disbursements and other sums chargeable to the Borrower
under this Agreement or any other Loan Document, but excludes any obligations
under the promissory note of the Borrower to the Lender dated October 1, 1999 in
the principal amount of $1,500,000 and delivered pursuant to the terms of the
Settlement Agreement.

         "Payment Date" means the 15th day of each calendar month or if in any
calendar month the 15th day is not a Business Day, the Payment Date for such
month shall be the first Business Day immediately preceding such day.

         "PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.

         "Permit" means any permit, approval, authorization, license, variance
or permission required from a Governmental Authority under an applicable
Requirement of Law.

         "Permitted Encumbrances" means the following types of Liens (excluding
any such Lien imposed pursuant to Section 401(a)(29) or Section 412(n) of the
Code or by ERISA, any Environmental Lien, and any such Lien expressly prohibited
by any applicable terms of any of the Loan Documents):

         (i) Liens for taxes, assessments or governmental charges or claims the
payment of which is not, at the time, required by Section 6.4;

         (ii) statutory Liens of landlords, statutory Liens and rights of
set-off of banks, statutory Liens of carriers, warehousemen, mechanics,
repairmen, workmen and materialmen, and other Liens imposed by law, in each case
incurred in the ordinary course of

                                       9
<PAGE>   15

business (a) for amounts not yet overdue or (b) for amounts that are overdue and
that (in the case of any such amounts overdue for a period in excess of 5 days)
are being contested in good faith by appropriate proceedings, so long as such
reserves or other appropriate provisions, if any, as shall be required by GAAP
shall have been made for any such contested amounts;

         (iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, trade contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money);

         (iv) any attachment or judgment Lien not constituting an Event of
Default under Section 8.1;

         (v) leases or subleases granted to third parties in accordance with any
applicable terms of the Loan Documents and not interfering in any material
respect with the ordinary conduct of the business of the Borrower or any of its
Subsidiaries or resulting in a material diminution in the value of the assets of
the Borrower and its Subsidiaries taken as a whole;

         (vi) easements, rights-of-way, restrictions, encroachments, and other
minor defects or irregularities in title, in each case which do not and will not
interfere in any material respect with the ordinary conduct of the business of
the Borrower or any of its Subsidiaries or result in a material diminution in
value of the assets of the Borrower and its Subsidiaries taken as a whole;

         (vii) any (a) interest or title of a lessor or sublessor under any
lease not prohibited by this Agreement, (b) restriction or encumbrance that the
interest or title of such lessor or sublessor may be subject to, or (c)
subordination of the interest of the lessee or sublessee under such lease to any
restriction or encumbrance referred to in the preceding clause (b), so long as
the holder of such restriction or encumbrance agrees to recognize the rights of
such lessee or sublessee under such lease;

         (viii) Liens arising from filing Uniform Commercial Code financing
statements relating solely to leases not prohibited by this Agreement;

         (ix) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;

         (x) any zoning or similar law or right reserved to or vested in any
governmental office or agency to control or regulate the use of any real
property;

         (xi) Liens securing obligations (other than obligations representing
Indebtedness for borrowed money) under operating, reciprocal easement or similar
agreements entered into in the ordinary course of business of the Borrower and
its Subsidiaries; and

         (xii) licenses of intellectual property (including, but not limited to,
permits, patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, copyright applications, franchises and
authorizations) granted by the Borrower or any

                                       10
<PAGE>   16

of its Subsidiaries in the ordinary course of business and not interfering in
any material respect with the ordinary conduct of the business of the Borrower
or such Subsidiary.

         "Person" means an individual, partnership, corporation (including a
business trust), joint stock company, estate, trust, limited liability company,
unincorporated association, joint venture or other entity, or a Governmental
Authority.

         "Preferred Stock" means, with respect to any Person, capital stock that
has preferential rights to any other capital stock of such Person with respect
to dividends, redemptions or upon liquidations.

         "Release" means, with respect to any Person, any release, spill,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration, in each case, of any Contaminant into the indoor or
outdoor environment or into or out of any property owned by such Person,
including the movement of Contaminants through or in the air, soil, surface
water, ground water or property.

         "Remedial Action" means all actions required to (a) clean up, remove,
treat or in any other way address any Contaminant in the indoor or outdoor
environment, (b) prevent the Release or threat of Release or minimize the
further Release so that a Contaminant does not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor environment or (c)
perform pre-remedial studies and investigations and post-remedial monitoring and
care.

         "Requirement of Law" means, with respect to any Person, all federal,
state, local and foreign laws, rules and regulations, orders, judgments, decrees
and other determinations of any Governmental Authority or arbitrator, applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject, including ERISA, labor and benefit laws and
Environmental Laws.

         "Responsible Officer" means, with respect to any Person, any of the
principal executive officers, including chief financial officer, treasurer and
controller of such Person, but in any event, with respect to financial matters
generally or Section 5.1, the chief financial officer of such Person.

         "Restricted Payment" means (a) any dividend or other distribution,
direct or indirect, on account of any Stock or Stock Equivalents of the Borrower
or any Subsidiary now or hereafter outstanding, except a dividend payable solely
in Stock or Stock Equivalents (other than Disqualified Capital Stock) or a
dividend or distribution payable solely to the Borrower, (b) any redemption,
retirement, sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any Stock or Stock Equivalents of the Borrower or
any Subsidiary now or hereafter outstanding other than one payable solely in
other Stock or Stock Equivalents of such Person (other than Disqualified Capital
Stock) or solely to the Borrower, or (c) any payment or prepayment of principal
or premium (if any), fees on, or redemption, purchase, retirement, defeasance,
sinking fund or similar payment with respect to, any Indebtedness of the
Borrower or any Subsidiary which is subordinate or junior in right of payment to
the Term Loans, other than one payable solely in Stock or Stock Equivalents of
such Person (other than Disqualified Capital Stock).

                                       11
<PAGE>   17

         "Rights Agreement" means the Rights Agreement dated as of May 14, 1998
between the Borrower and ChaseMellon Shareholder Services, LLC, as amended.

         "Second Amendment to Rights Agreement" means the Second Amendment to
Rights Agreement dated as of April 24, 2000.

         "Security" means any Stock, Stock Equivalent, voting trust certificate,
bond, debenture, note or other evidence of Indebtedness, whether secured,
unsecured, convertible or subordinated, or any certificate of interest, share or
participation in, or any temporary or interim certificate for the purchase or
acquisition of, or any right to subscribe to, purchase or acquire, any of the
foregoing, but shall not include any evidence of the Obligations.

         "Settlement Agreement" means the Settlement Agreement dated as of
September 29, 1999 among the Borrower, the Lender and the other parties named
therein.

         "Solvent" means, with respect to any Person, that the value of the
assets of such Person (both at fair value and present fair saleable value) is,
on the date of determination, greater than the total amount of liabilities
(including contingent and unliquidated liabilities) of such Person as of such
date and that, as of such date, such Person is able to pay all liabilities of
such Person as such liabilities mature and does not have unreasonably small
capital. In computing the amount of contingent or unliquidated liabilities at
any time, such liabilities will be computed at the amount which, in light of all
the facts and circumstances existing at such time, represents the amount that
can reasonably be expected to become an actual or matured liability.

         "Stock" means shares of capital stock (whether denominated as common
stock or preferred stock), beneficial, partnership or membership interests,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity,
whether voting or non-voting.

         "Stock Equivalent" means any security convertible into or exchangeable
for Stock and any warrant, option or other right to purchase or subscribe for
any Stock, whether or not presently convertible, exchangeable or exercisable.

         "Subsidiary" means, with respect to any Person, any corporation,
partnership, limited liability company or other business entity of which (i) an
aggregate of 50% or more of the outstanding Voting Stock or interest in
participation rights in profits or capital contribution is, at the time,
directly or indirectly, owned or controlled by such Person and/or one or more
Subsidiaries of such Person or (ii) any such Person is a general partner or
manager or may exercise the powers of a general partner or manager.

         "Tax Affiliate" means, with respect to any Person, (a) any Subsidiary
of such Person, and (b) any Affiliate of such Person with which such Person
files or is eligible to file consolidated, combined or unitary tax returns.

         "Taxes" has the meaning specified in Section 2.12(a).

         "Tax Returns" has the meaning specified in Section 4.8

         "Telerate Page 3750" means the display designated as "Page 3750 on the
Dow Jones Telerate Service (or such other page as may replace Page 3750 on that
service or such other

                                       12
<PAGE>   18

service as may be nominated by the British Banker's Association as the
information vendor for the purpose of displaying British Bankers' Association
Interest Settlement Rates for the U.S. Dollar deposits).

         "Term Loans" has the meaning specified in Section 2.1

         "Title IV Plan" means a pension plan, other than a Multiemployer Plan,
which is covered by Title IV of ERISA to which the Borrower any of its
Subsidiaries or any ERISA Affiliate has any obligation or liability (contingent
or otherwise).

         "Voting Stock" means Stock of any Person having ordinary power to vote
in the election of members of the board of directors, managers, trustees or
other controlling Persons, of such Person (irrespective of whether, at the time,
Stock of any other class or classes of such entity shall have or might have
voting power by reason of the happening of any contingency) and, in the case of
any partnership, any interest of a general partner.

         "Warrants" shall mean the warrant to purchase from the Borrower 750,000
shares of common stock of ARV Assisted Living, Inc. in the form set forth on
Exhibit C and all warrants issued upon transfer, division or combination of, or
in substitution for, any thereof. All Warrants shall at all times be identical
as to terms and conditions and date, except as to the number of shares of common
stock of the Borrower for which they may be exercised.

         "Warrant Documents" means, collectively, the Warrants, and each
certificate, agreement or document executed by the Borrower in connection with
or pursuant to any of the foregoing.

         "Withdrawal Liability" means, with respect to the Borrower at any time,
the aggregate liability incurred (whether or not assessed) with respect to all
Multiemployer Plans pursuant to Section 4201 of ERISA or for increases in
contributions required to be made pursuant to Section 4243 of ERISA.

         SECTION 1.2. COMPUTATION OF TIME PERIODS. In this Agreement, in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding" and the word "through" means "to and including."

         SECTION 1.3. ACCOUNTING TERMS AND PRINCIPLES. All accounting terms not
specifically defined herein shall be construed in conformity with GAAP and all
accounting determinations required to be made pursuant hereto shall, unless
expressly otherwise provided herein, be made in conformity with GAAP.

         SECTION 1.4. CERTAIN TERMS.

         (a) The words "herein," "hereof" and "hereunder" and similar words
refer to this Agreement as a whole, and not to any particular Article, Section,
subsection or clause in, this Agreement.

         (b) References in this Agreement to an Exhibit, Schedule, Article,
Section, subsection or clause refer to the appropriate Exhibit or Schedule to,
or Article, Section, subsection or clause in this Agreement.

                                       13
<PAGE>   19

         (c) Each agreement defined in this Article I shall include all
appendices, exhibits and schedules thereto. Unless the prior written consent of
the Lender is required hereunder for an amendment, restatement, supplement or
other modification to any such agreement and such consent is not obtained,
references in this Agreement to such agreement shall be to such agreement as so
amended, restated, supplemented or modified.

         (d) References in this Agreement to any statute shall be to such
statute as amended or modified and in effect at the time any such reference is
operative.

         (e) The term "including" when used in any Loan Document means
"including without limitation" except when used in the computation of time
periods.

         (f) The term "Lender" includes its successors, assigns and transferees.

                                   ARTICLE II

                             THE TERM LOAN FACILITY

         SECTION 2.1. THE TERM LOAN COMMITMENT.

         On the terms and subject to the conditions contained in this Agreement,
the Lender agrees to make available to the Borrower from time to time during the
period from the Closing Date to the Commitment Termination Date each term loan
(each, a "Term Loan" and collectively, the "Term Loans"), requested by the
Borrower in accordance with Section 2.2. All Term Loans made hereunder shall not
exceed at any time outstanding the Lender's Commitment. Amounts repaid or
prepaid may not be reborrowed under this Agreement.

         SECTION 2.2. BORROWING PROCEDURES.

         (a) Except for the Borrowing made on the Closing Date, each Borrowing
shall be made on notice given by the Borrower to the Lender not later than 11:00
A.M. (New York City time) three Business Days prior to the proposed date of such
Borrowing. Each such notice shall be in writing identified as a borrowing notice
hereunder and specifying (A) the proposed date of such Borrowing and (B) the
aggregate amount of such Borrowing. Each Borrowing shall be made in an aggregate
amount of not less than $1,000,000 and in increments of $1,000,000 with a
minimum initial aggregate amount of not less than $5,000,000 on the Closing
Date. No Borrowing may be made after the Commitment Termination Date.

         (b) On the date of any proposed Borrowing, subject to the fulfillment
of the applicable conditions set forth in Sections 3.1 and 3.2, the Lender will
make available, in immediately available funds, the Term Loans for such
Borrowing to the Borrower.

         SECTION 2.3. REPAYMENT OF TERM LOAN, EXTENSION OF MATURITY DATE.

         (a) The Borrower shall repay the entire outstanding principal amount of
the Term Loans, together with any accrued and unpaid interest thereon, on the
Maturity Date.

         (b) So long as no Default shall have occurred, the Borrower may, by
prior written notice to the Lender not later than 10 Business Days prior to the
Initial Maturity Date extend the Maturity Date to the third anniversary of the
Closing Date, provided that the Borrower

                                       14
<PAGE>   20

shall, if it makes such election, pay the Maturity Date Extension Fee on the
Initial Maturity Date to the Lender.

         SECTION 2.4. EVIDENCE OF DEBT. The Term Loans shall be evidenced by a
promissory note of the Borrower substantially in the form of Exhibit A, with
appropriate insertions as to payee, date and principal amount and payable to the
order of the Lender. The Lender is authorized to record the date and amount of
each Term Loan made by the Lender on the schedule annexed thereto and any such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded, absent manifest error; provided that neither the
failure to so record nor any error in such recordation shall affect the
Borrower's obligations under the Note.

         SECTION 2.5. OPTIONAL PREPAYMENTS.

         (a) At any time to but excluding the Initial Maturity Date, the
Borrower may, upon at least ten Business Days' prior notice to the Lender
stating the proposed date and aggregate principal amount of the prepayment,
prepay the outstanding principal amount of the Term Loans, in whole or in part,
together with accrued and unpaid interest to the date of such prepayment on the
principal amount prepaid; provided, however, that on the date of such prepayment
the Borrower shall pay to the Lender an amount calculated to compensate the
Lender on the same basis as if the prepaid amount of the Term Loan was
outstanding through the Initial Maturity Date and bearing interest from the date
of prepayment to the Initial Maturity Date at a rate of 10% per annum. If the
Borrower has exercised its right to extend the Maturity Date to the third
anniversary of the Closing Date under Section 2.3(b), it may at any time after
the Initial Maturity Date, upon at least 10 Business Days' prior notice to the
Lender, prepay in full or in part, without any premium or penalty (other than
amounts owing pursuant to Section 2.11(b)), the Term Loans. Any prepayment shall
be made ratably in respect of the Term Loans. The Borrower shall also pay any
amounts owing pursuant to Section 2.11(b) as a result of exercising any of its
rights under this Section 2.5. Upon the giving of such notice of prepayment, the
principal amount of the Term Loans specified to be prepaid shall become due and
payable on the date specified for such prepayment.

         (b) The Borrower shall have no right to optionally prepay the principal
amount of any Term Loan other than as provided in this Section 2.5. Amounts of
any Term Loan prepaid, may not be reborrowed.

         SECTION 2.6. MANDATORY PREPAYMENTS.

         (a) Upon any Change of Control, the Borrower shall make a mandatory
prepayment in an amount equal to the aggregate principal amount of all Term
Loans then outstanding, together with, all accrued but unpaid interest thereon
and all applicable breakage costs owing under Section 2.11(b). In the event the
Borrower is required to make such mandatory prepayment prior to the Initial
Maturity Date, there shall also be due and owing to the Lender on the date of
any such mandatory prepayment an amount calculated to compensate the Lender on
the same basis as if the prepaid amount of the Term Loan was outstanding through
the Initial Maturity Date and bearing interest from the date of prepayment until
the Initial Maturity Date at a rate of 10% per annum; provided, however, that no
such amount shall be required to be paid if the Change of Control is caused
solely by the Lender selling the issued and outstanding Voting Stock of the
Borrower owned by the Lender in a transaction where Lender is the only seller of
Voting Stock of the Borrower to the purchaser of such Voting Stock of Borrower.

                                       15
<PAGE>   21

         (b) Any prepayments made by the Borrower required to be applied in
accordance with this Section 2.6 shall be applied to the outstanding principal
balance of the Term Loans ratably. Amounts of any Term Loan prepaid may not be
reborrowed.

         SECTION 2.7. REDUCTION OF COMMITMENT; EXTENSION OF COMMITMENT
TERMINATION DATE.

         (a) The Borrower may, upon notice to the Lender at least 10 Business
Days prior to the Initial Commitment Termination Date, extend the Commitment
Termination Date for all or any portion of the Commitment which has not been
borrowed as of the Initial Commitment Termination Date to a date that is 90 days
following the Initial Commitment Termination Date, provided that the Borrower
shall pay to the Lender the Borrowing Extension Fee on the Initial Commitment
Termination Date and provided further that the portion of the Commitment so
extended equals or exceeds $1,000,000 and is in increments of $1,000,000. Such
notice shall set forth (i) the date of such extension and (ii) the amount of the
unutilized Commitment that shall be extended. Any unutilized Commitment not
extended shall terminate on the Initial Commitment Termination Date.

         (b) The Borrower may without penalty cancel the unutilized Commitment,
in whole or in part upon not less than 10 Business Days' prior notice to the
Lender or upon the extension of the Commitment Termination Date provided that
the unutilized Commitment not subject to such cancellation, if any, shall be in
increments of $1,000,000. Any unutilized Commitment shall terminate on the
Commitment Termination Date.

         SECTION 2.8. INTEREST.

         (a) Rate of Interest. All Term Loans and the outstanding amount of all
other Obligations shall bear interest, in the case of Term Loans, on the unpaid
principal amount thereof from and including the date such Term Loans are made
and, in the case of such other Obligations, from and including the date such
other Obligations are due and payable until, in all cases, paid in full, except
as otherwise provided in Section 2.8(c), at a rate per annum equal to the sum of
(I) the LIBOR Rate determined for the applicable Interest Period, plus (II) the
Applicable Margin.

         (b) Interest Payments. Interest accrued on each Term Loan during any
Interest Period shall be payable on the Payment Date relating to such Interest
Period and if not previously paid in full, on the Maturity Date. Interest
accrued on the amount of all other Obligations shall be payable on demand from
and after the time such Obligation becomes due and payable (whether by
acceleration or otherwise).

         (c) Default Interest. Notwithstanding the rates of interest specified
in Section 2.8(a) or elsewhere herein, effective immediately upon the occurrence
of an Event of Default, and for as long thereafter as such Event of Default
shall be continuing, the principal balance of all Term Loans and the amount of
all other Obligations shall bear interest at a rate which is five percent per
annum in excess of the rate of interest applicable to such Obligations from time
to time.

         SECTION 2.9. COMMITMENT FEES.

         The Borrower agrees to pay to the Lender a commitment fee in an amount
equal to $200,000 on the Closing Date. Such fee shall be fully earned when paid
and not refundable.

                                       16
<PAGE>   22

         SECTION 2.10. PAYMENTS AND COMPUTATIONS.

         (a) The Borrower shall make each payment hereunder (including fees and
expenses) not later than 11:00 A.M. (New York City time) on the day when due, in
Dollars, to the Lender in immediately available funds without set-off or
counterclaim. Payments received by the Lender after 11:00 A.M. (New York City
time) shall be deemed to be received on the next Business Day.

         (b) All computations of interest and of fees shall be made by the
Lender on the basis of a year of 360 days, in each case for the actual number of
days (including the first day but excluding the last day) occurring in the
period for which such interest and fees are payable. Each determination by the
Lender of an interest rate hereunder shall be conclusive and binding for all
purposes, absent manifest error.

         (c) Whenever any payment hereunder shall be stated to be due on a day
other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest or fees, as the case may be, unless otherwise
provided in the definition of Payment Date.

         (d) All payments and any other amounts received by the Lender from or
for the benefit of the Borrower shall be applied first, to pay all Obligations
then due and payable; and second, as the Borrower so designates.

         SECTION 2.11. SPECIAL PROVISIONS GOVERNING TERM LOANS.

         (a) Determination of Interest Rate. The LIBOR Rate for each Interest
Period for Term Loans shall be determined by the Lender pursuant to the
procedures set forth in the definition of "LIBOR Rate." The Lender's
determination shall be presumed to be correct, absent manifest error, and shall
be binding on the Borrower.

         (b) Breakage Costs. In addition to all amounts required to be paid by
the Borrower pursuant to Section 2.5 and Section 2.6, the Borrower shall
compensate the Lender, upon demand, for all losses, expenses and liabilities
(including any loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by the Lender to fund or
maintain the Lender's Term Loans to the Borrower but excluding any loss of the
Applicable Margin on the relevant Term Loans) which the Lender may sustain (i)
if for any reason (other than a default by the Lender) a proposed Borrowing does
not occur on a date specified therefor in a notice of borrowing given by the
Borrower or in a request by it transmitted by it by facsimile for borrowing does
not commence after notice therefor is given, (ii) if for any reason any Term
Loan is prepaid (including mandatorily pursuant to Section 2.6) on a date which
is not the last day of the applicable Interest Period, or (iii) as a consequence
of any failure by the Borrower to repay Term Loans when required by the terms
hereof. The Lender shall deliver to the Borrower concurrently with such demand a
written statement as to such losses, expenses and liabilities, and this
statement shall be conclusive as to the amount of compensation due to the
Lender, absent manifest error.

         SECTION 2.12. TAXES.

         (a) Any and all payments by the Borrower under each Loan Document shall
be made free and clear of and without deduction for any and all present or
future taxes, levies,

                                       17
<PAGE>   23

imposts, deductions, charges or withholdings, and all liabilities with respect
thereto (all such taxes (other than those taxes on or measured by the income of
the Lender), levies, imposts, deductions, charges, withholdings and liabilities
being hereinafter referred to as "Taxes"). If any Taxes shall be required by law
to be deducted from or in respect of any sum payable under any Loan Document to
the Lender (i) the sum payable shall be increased as may be necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.12) the Lender receives an amount
equal to the sum it would have received had no such deductions been made, (ii)
the Borrower shall make such deductions, (iii) the Borrower shall pay the full
amount deducted to the relevant taxing authority or other authority in
accordance with applicable law, and (iv) the Borrower shall deliver to the
Lender evidence of such payment.

         (b) In addition, the Borrower agrees to pay any present or future stamp
or documentary taxes or any other excise or property taxes, charges or similar
levies of the United States or any political subdivision thereof or any
applicable foreign jurisdiction, and all liabilities with respect thereto, which
arise from any payment made under any Loan Document or from the execution,
delivery or registration of, or otherwise with respect to, any Loan Document
(collectively, "Other Taxes").

         (c) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 2.12 shall survive the payment in full of the Obligations.

                                  ARTICLE III

                            CONDITIONS TO TERM LOANS

         SECTION 3.1. CONDITIONS PRECEDENT TO INITIAL LOANS. The obligation of
the Lender to make the Term Loans requested to be made by it on the Closing Date
is subject to the satisfaction of all of the following conditions precedent:

         (a) Certain Documents. The Lender shall have received on the Closing
Date each of the following, each dated the Closing Date unless otherwise
indicated or agreed to by the Lender, in form and substance satisfactory to the
Lender and its counsel:

                  (i) this Agreement, duly executed and delivered by the
Borrower and a Note of the Borrower conforming to the requirements set forth
herein;

                  (ii) the Warrant, duly executed and delivered by the Borrower;

                  (iii) favorable opinion of O'Melveny & Myers LLP, counsel to
the Borrower, which shall be to the effect set forth in Exhibit B addressed to
the Lender and addressing such other matters as the Lender may reasonably
request, including without limitation, the enforceability of the Loan Documents;

                  (iv) evidence of the waiver of compliance with the
requirements set forth in Section 3.01 of the Settlement Agreement;

                  (v) the Second Amendment to Rights Agreement executed by the
parties thereto and delivered by the Borrower to the Lender;

                                       18
<PAGE>   24

                  (vi) a copy of the articles or certificate of incorporation
(or equivalent organizational documents) of the Borrower, certified as of a
recent date by the Secretary of State of the state of incorporation of the
Borrower, together with certificates of such official attesting to the good
standing of the Borrower;

                  (vii) a certificate of the Secretary or an Assistant Secretary
of the Borrower certifying (A) the names and true signatures of each officer of
the Borrower who has been authorized to execute and deliver any Loan Document or
other document required hereunder to be executed and delivered by or on behalf
of the Borrower, (B) the by-laws (or equivalent Constituent Document) of the
Borrower as in effect on the date of such certification, (C) the resolutions of
the Borrower's Board of Directors (or equivalent governing body) approving and
authorizing the execution, delivery and performance of this Agreement and the
other Loan Documents to which it is a party and (D) that there have been no
changes in the certificate of incorporation (or equivalent Constituent Document)
of the Borrower from the certificate of incorporation (or equivalent Constituent
Document) delivered pursuant to the immediately preceding clause;

                  (viii) a letter from the Borrower to the Lender reaffirming as
of the Closing Date those matters set forth in the letter of the Borrower to its
accountants dated as of March 2, 2000;

                  (ix) a certificate of a Responsible Officer to the effect that
the conditions set forth in Sections 3.1(b), (c), (d) and 3.2(b) have been
satisfied;

                  (x) a payment direction letter in the form of Exhibit D
executed by the Lender and duly acknowledged by the Borrower; and

                  (xi) such other certificates, documents, agreements and
information respecting the Borrower as the Lender may reasonably request.

         (b) Issuance of Warrants. The Borrower shall have issued to the Lender
Warrants in accordance with the terms of the Warrant.

         (c) Fees and Expenses Paid. There shall have been paid to the Lender
all fees due and payable on or before the Closing Date (including all such fees
described in Sections 2.9 and 9.3), and all expenses due and payable on or
before the Closing Date (including all such expenses described in Section 9.3).

         (d) Consents, Etc. All consents and authorizations required pursuant to
any material Contractual Obligation with any other Person and all consents and
authorizations of, and effected all notices to and filings with, any
Governmental Authority, in each case, as may be necessary to allow the Borrower
to execute, deliver and perform, in all material respects, its obligations
hereunder, the Loan Documents and each other agreement or instrument to be
executed and delivered by it, pursuant thereto or in connection therewith.

         SECTION 3.2. CONDITIONS PRECEDENT TO EACH TERM LOAN. The obligation of
the Lender on any date (including the Closing Date) to make any Term Loan is
subject to the satisfaction of all of the following conditions precedent:

                                       19
<PAGE>   25

         (a) Request for Borrowing. With respect to any Term Loan, the Lender
shall have received a duly executed notice of borrowing.

         (b) Representations and Warranties; No Defaults. The following
statements shall be true on the date of such Term Loan, both before and after
giving effect thereto and to the application of the proceeds from any such Term
Loan:

                  (i) The representations and warranties set forth in Article IV
and in the other Loan Documents shall be true and correct in all material
respects on and as of any such date with the same effect as though made on and
as of such date.

                  (ii) No Default or Event of Default has occurred and is
continuing.

         (c) No Legal Impediments. The making of the Term Loans on such date
does not violate any Requirement of Law with respect to the Borrower, its
Subsidiaries or the Lender on the date of or immediately following such Term
Loan and is not enjoined, temporarily, preliminarily or permanently.

         (d) No Material Adverse Change. Since December 31, 1999, there has been
no Material Adverse Change and there have been no events or developments that in
the aggregate has had a Material Adverse Effect.

         (e) Additional Matters. The Lender shall have received such additional
documents, information and materials as the Lender may reasonably request.

Each submission by the Borrower to the Lender of a notice of borrowing and the
acceptance by the Borrower of the proceeds of each Term Loan requested therein,
shall be deemed to constitute a representation and warranty by the Borrower as
to the matters specified in Section 3.2(b) on the date of the making of such
Term Loan.

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

         To induce the Lender to enter into this Agreement, the Borrower
represents and warrants to the Lender that, on and as of the Closing Date, after
giving effect to the making of the Term Loans on the Closing Date and on and as
of each date as required by Section 3.2(b)(i):

         SECTION 4.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the
Borrower and its Subsidiaries (a) is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization; (b) is duly qualified as a foreign corporation or organization and
in good standing under the laws of each jurisdiction where such qualification is
necessary, except where the failure to be so qualified or in good standing would
not have a Material Adverse Effect; (c) has all requisite power and authority
and the legal right to own, and operate its properties, to lease the property it
operates under lease and to conduct its business as now or currently proposed to
be conducted; (d) is in compliance with its Constituent Documents; (e) except as
disclosed in Schedule 4.11, is in compliance with all applicable Contractual
Obligations and Requirements of Law except where the failure to be in compliance
would not in the aggregate have a Material Adverse Effect; and (f) has all
necessary licenses, permits, consents or approvals from or by, has made all
necessary filings with, and has given all

                                       20
<PAGE>   26

necessary notices to, each Governmental Authority having jurisdiction, to the
extent required for such ownership, operation and conduct, except for licenses,
permits, consents, approvals or filings which can be obtained or made by the
taking of ministerial action to secure the grant or transfer thereof or the
failure to obtain or make would not in the aggregate have a Material Adverse
Effect.

         SECTION 4.2. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS.

         (a) The execution, delivery and performance by the Borrower of the Loan
Documents and the consummation of the transactions contemplated thereby:

                  (i) are within the Borrower's corporate powers;

                  (ii) have been duly authorized by all necessary corporate
action, including the consent of shareholders where required;

                  (iii) do not and will not (A) contravene the Borrower's
Constituent Documents, (B) violate any other applicable Requirement of Law
applicable to the Borrower or any of its Subsidiaries (including Regulations T,
U and X of the Federal Reserve Board), or any order or decree of any
Governmental Authority or arbitrator applicable to the Borrower or any of its
Subsidiaries, (C) conflict with or result in the breach of, or constitute a
default under, or result in or permit the termination or acceleration of, any
Contractual Obligation of the Borrower or any of its Subsidiaries, or (D) result
in the creation or imposition of any Lien upon any of the property of the
Borrower or any of its Subsidiaries; and

                  (iv) do not require the consent of, authorization by, approval
of, notice to, or filing or registration with, any Governmental Authority or any
other Person, other than those listed on Schedule 4.2 and which have been or
will be, prior to the Closing Date, obtained or made, copies of which have been
or will be delivered to the Lender pursuant to Section 3.1, and each of which on
the Closing Date will be in full force and effect.

         (b) This Agreement has been, and each of the other Loan Documents will
have been upon delivery thereof pursuant to the terms of this Agreement, duly
executed and delivered by the Borrower. This Agreement is, and the other Loan
Documents will be, when delivered hereunder, the legal, valid and binding
obligation of the Borrower party thereto, enforceable against the Borrower in
accordance with its terms.

         SECTION 4.3. OWNERSHIP OF BORROWER; SUBSIDIARIES.

         (a) All of the outstanding capital stock of the Borrower has been
validly issued, is fully paid and non assessable. No Stock of the Borrower is
subject to any option, warrant, right of conversion or purchase or any similar
right other than as set forth on Schedule 4.3, as such Schedule may be amended
from time to time by the Borrower during the period from the Closing Date to the
Commitment Termination Date.

         (b) Set forth on Schedule 4.3 hereto is a complete and accurate list
showing, as of the Closing Date, all Subsidiaries of the Borrower and, as to
each such Subsidiary, the jurisdiction of its incorporation, the number of
shares of each class of Stock authorized (if applicable), the number outstanding
on the Closing Date and the number and percentage of the outstanding shares of
each such class owned (directly or indirectly) by the Borrower.

                                       21
<PAGE>   27

         SECTION 4.4. FINANCIAL STATEMENTS.

         (a) The consolidated balance sheets of the Borrower and its
Subsidiaries as at December 31, 1999 and the related consolidated statements of
income, retained earnings and cash flows of the Borrower and its Subsidiaries
for the fiscal year then ended, and the balance sheets of the Borrower and its
Subsidiaries as at February 29, 2000, and the related consolidated statements of
income, retained earnings and cash flows of the Borrower and its Subsidiaries
for the two months then ended, copies of which have been furnished to each
Lender, fairly present, subject, in the case of said balance sheets as at
February 29, 2000, and said statements of income, retained earnings and cash
flows for the two months then ended, to the absence of footnote disclosure and
normal recurring year-end audit adjustments, the consolidated financial
condition of the Borrower and its Subsidiaries as at such dates and the
consolidated results of the operations of the Borrower and its Subsidiaries for
the period ended on such dates, all in conformity with GAAP.

         (b) Neither the Borrower nor any of its Subsidiaries has any material
obligation, contingent liability or liability for taxes, long-term leases or
unusual forward or long-term commitment which is not reflected in the Financial
Statements referred to in clause (a) above or in the notes thereto or permitted
by this Agreement.

         SECTION 4.5. MATERIAL ADVERSE CHANGE. Since December 31, 1999, there
has been no Material Adverse Change and there have been no events or
developments that in the aggregate have had a Material Adverse Effect.

         SECTION 4.6. SOLVENCY. After giving effect to the Term Loans to be made
on the Closing Date and before and after each other date as Term Loans requested
hereunder are made, the disbursement of the proceeds of such Term Loans pursuant
to the instructions of the Borrower, the consummation of the other financing
transactions contemplated hereby and the payment and accrual of all transaction
costs in connection with the foregoing, the Borrower is Solvent.

         SECTION 4.7. LITIGATION. There are no pending or, to the knowledge of
the Borrower, threatened actions, investigations, litigation or proceedings
affecting the Borrower, or any of its Subsidiaries before any court,
Governmental Authority or arbitrator other than those that in the aggregate
could not have a Material Adverse Effect. The performance of any action by the
Borrower required or contemplated by any of the Loan Documents is not restrained
or enjoined (either temporarily, preliminarily or permanently).

         SECTION 4.8. TAXES.

         (a) All federal, state, local and foreign income and franchise and
other material tax returns, reports and statements (collectively, the "Tax
Returns") required to be filed by the Borrower or any of its Tax Affiliates have
been filed with the appropriate Governmental Authorities in all jurisdictions in
which such Tax Returns are required to be filed, all such Tax Returns are true
and correct in all material respects, and all taxes, charges and other
impositions reflected therein or otherwise due and payable have been paid prior
to the date on which any fine, penalty, interest, late charge or loss may be
added thereto for non-payment thereof except where contested in good faith and
by appropriate proceedings if adequate reserves therefor have been established
on the books of the Borrower or such Tax Affiliate in conformity with GAAP.
Proper

                                       22
<PAGE>   28

and accurate amounts have been withheld by the Borrower and each of its Tax
Affiliates from their respective employees for all periods in full and complete
compliance with the tax, social security and unemployment withholding provisions
of applicable Requirements of Law and such withholdings have been timely paid to
the respective Governmental Authorities.

         (b) None of the Borrower or any of its Tax Affiliates has (i) any
obligation under any tax sharing agreement or arrangement other than that to
which the Lender has a copy prior to the date hereof or (ii) been a member of an
affiliated, combined or unitary group other than the group of which the Borrower
is the common parent.

         SECTION 4.9. FULL DISCLOSURE. The information prepared or furnished by
or on behalf of the Borrower in connection with this Agreement or any Loan
Document, or the consummation of the financing taken as a whole does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein or herein not misleading. All
facts known to the Borrower which are material to an understanding of the
financial condition, business, properties or prospects of the Borrower and the
Borrower and the Subsidiaries taken as one enterprise have been disclosed to the
Lender.

         SECTION 4.10. MARGIN REGULATIONS. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Federal Reserve Board), and no
proceeds of any Borrowing will be used to purchase or carry any margin stock or
to extend credit to others for the purpose of purchasing or carrying any margin
stock in contravention of Regulation T, U or X of the Federal Reserve Board.

         SECTION 4.11. NO BURDENSOME RESTRICTIONS; NO DEFAULTS.

         (a) Neither the Borrower nor any of its Subsidiaries (i) is a party to
any Contractual Obligation the compliance with which would have a Material
Adverse Effect or the performance of which by any thereof, either
unconditionally or upon the happening of an event, will result in the creation
of a Lien on the property or assets of any thereof or (ii) is subject to any
charter or corporate restriction which could reasonably be expected to have a
Material Adverse Effect.

         (b) Except as disclosed in Schedule 4.11, neither the Borrower nor any
of its Subsidiaries is in default under or with respect to any Requirement of
Law or Contractual Obligation owed by it and, to the knowledge of the Borrower,
no other party is in default under or with respect to any Contractual Obligation
owed to the Borrower or to any Subsidiary, other than, in either case, those
defaults which in the aggregate could not have a Material Adverse Effect.

         (c) No Default or Event of Default has occurred and is continuing.

         (d) To the best knowledge of the Borrower, there is no Requirement of
Law applicable to the Borrower the compliance with which by such Borrower could
reasonably be expected to have a Material Adverse Effect.

         (e) Except as disclosed in Schedule 4.11, the Borrower is not
delinquent in the payment of any Indebtedness owed by the Borrower to the
federal government of the United States.

                                       23
<PAGE>   29

         SECTION 4.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY
ACT. Neither the Borrower nor any of its Subsidiaries is (a) an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended or (b) a "holding company," or an "affiliate" or
a "holding company" or a "subsidiary company" of a "holding company," as each
such term is defined and used in the Public Utility Holding Act of 1935, as
amended.

         SECTION 4.13. USE OF PROCEEDS. The proceeds of the Term Loans are being
used by the Borrower solely as follows: (a) to refinance existing Indebtedness
of the Borrower and its Subsidiaries, and for the payment of related transaction
costs, fees and expenses and (b) for working capital and general corporate
purposes.

         SECTION 4.14. INSURANCE. All policies of insurance of any kind or
nature of the Borrower or any of its Subsidiaries, including policies of life,
fire, theft, product liability, public liability, property damage, other
casualty, employee fidelity, workers' compensation and employee health and
welfare insurance, are in full force and effect and are of a nature and provide
such coverage as is sufficient and as is customarily carried by businesses of
the size and character of such Person. None of the Borrower or any of its
Subsidiaries has been refused insurance for any material coverage which it had
applied or had any policy of insurance terminated in the past year (other than
at its request).

         SECTION 4.15. LABOR MATTERS.

         (a) There are no strikes, work stoppages, slowdowns or lockouts pending
or threatened against or involving the Borrower or any of its Subsidiaries,
other than those which in the aggregate could not reasonably be expected to have
a Material Adverse Effect.

         (b) Except as disclosed in Schedule 4.15, there are no unfair labor
practices, grievances or complaints pending, or, to the Borrower's knowledge,
threatened against or involving the Borrower or any of its Subsidiaries, nor are
there any arbitrations or grievances threatened involving the Borrower or any of
its Subsidiaries, other than those which, in the aggregate, if resolved
adversely to the Borrower or such Subsidiary, could not reasonably be expected
to have a Material Adverse Effect.

         (c) Except as set forth on Schedule 4.15, as of the Closing Date, there
is no collective bargaining agreement covering any of the employees of the
Borrower or the Subsidiaries.

         (d) Schedule 4.15 sets forth as of the date hereof, all material
consulting agreements, executive employment agreements, executive compensation
plans, deferred compensation agreements, employee stock purchase and stock
option plans and severance plans of the Borrower and any of its Subsidiaries.

                                       24
<PAGE>   30

         SECTION 4.16. ERISA.

         (a) Schedule 4.16 separately identifies as of the date hereof all Title
IV Plans, all Multiemployer Plans and all of the employee benefit plans within
the meaning of Section 3(3) of ERISA (except those already listed on Schedule
4.15) to which the Borrower or any of its Subsidiaries has any obligation or
liability, contingent or otherwise.

         (b) Each employee benefit plan of the Borrower or any of its
Subsidiaries which is intended to qualify under Section 401 of the Code does so
qualify, and any trust created thereunder is exempt from tax under the
provisions of Section 501 of the Code, except where all such failures have no
Material Adverse Effect.

         (c) Each Title IV Plan is in compliance in all material respects with
applicable provisions of ERISA, the Code and other Requirements of Law except
for any non-compliance that in the aggregate with all other non-compliance would
not have a Material Adverse Effect.

         (d) There has been no, nor is there reasonably expected to occur, any
ERISA Event which could reasonably be expected to have a Material Adverse
Effect.

         (e) Except to the extent set forth on Schedule 4.16, none of the
Borrower, any Subsidiary or any ERISA Affiliate would have any Withdrawal
Liability as a result of a complete withdrawal as of the date hereof from any
Multiemployer Plan.

         SECTION 4.17. ENVIRONMENTAL MATTERS.

         (a) The operations of the Borrower and each of its Subsidiaries have
been and are in compliance with all Environmental Laws, including obtaining and
complying with all required environmental, health and safety Permits, other than
non-compliances that in the aggregate with all matters covered by this Section
4.17 have (i) no reasonable likelihood of causing total Environmental
Liabilities and Costs to exceed $500,000 in cash in any twelve-month period and
(ii) no Material Adverse Effect.

         (b) The Borrower and its Subsidiaries have obtained and currently
possess all environmental, health and safety Permits necessary for their
operations, all such Permits are in full force and effect and the Borrower and
each of its Subsidiaries is in compliance with the terms and conditions of such
Permits except for failures that in the aggregate with all matters covered by
this Section 4.17 have (i) no reasonable likelihood of causing total
Environmental Liabilities and Costs to exceed $500,000 in cash in any
twelve-month period and (ii) no Material Adverse Effect.

         (c) None of the currently (or, to the knowledge of the Borrower,
previously at the time it was owned) owned or leased property or operations of
the Borrower or any of its Subsidiaries is subject to any threatened or
outstanding claim, order, agreement, notice of violation or potential liability
or is subject to any pending or, to its knowledge, threatened judicial or
docketed administrative proceeding or governmental investigation (each an
"Environmental Contingency") with respect to (i) Environmental Law, (ii) a
Remedial Action or (iii) Environmental Liabilities and Costs arising from a
Release or threatened Release, other than those that in the aggregate with all
matters covered by this Section 4.17 have (A) no reasonable likelihood of
causing total Environmental Liabilities and Costs to exceed $500,000 in cash in
any twelve-month period and (B) no Material Adverse Effect. Schedule 4.17 lists
all Environmental Contingencies as of the date hereof that, if adversely
determined, would in the aggregate with all

                                       25
<PAGE>   31

matters covered by this Section 4.17 cause (x) total Environmental Liabilities
and Costs to exceed $500,000 in cash in any twelve-month period or (y) a
Material Adverse Effect.

         (d) Except as disclosed on Schedule 4.17 none of the Borrower or any of
its Subsidiaries is a treatment, storage or disposal facility requiring a permit
under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et
seq., the regulations thereunder or any state analog.

         (e) There are no facts, circumstances or conditions arising out of or
relating to the operations or ownership of real property owned or operated by
the Borrower or any of its Subsidiaries which are not specifically included in
the financial information furnished to the Lender other than those that in the
aggregate have (i) no reasonable likelihood of causing the Borrower and its
Subsidiaries to incur Environmental Liabilities and Costs in excess of $500,000
in cash in any twelve-month period and (ii) no Material Adverse Affect.

         SECTION 4.18. INTELLECTUAL PROPERTY. The Borrower and its Subsidiaries
own or license or otherwise have the right to use all licenses, permits,
patents, patent applications, trademarks, trademark applications, service marks,
trade names, copyrights, copyright applications, franchises, authorizations and
other intellectual property rights that are necessary for the operations of
their respective businesses, without infringement upon or conflict with the
rights of any other Person with respect thereto, including all trade names
associated with any private label brands of the Borrower or any of the
Subsidiaries. To the Borrower's knowledge, no slogan or other advertising
device, product, process, method, substance, part or component, or other
material now employed, or now contemplated to be employed, by the Borrower or
any of its Subsidiaries infringes upon or conflicts with any rights owned by any
other Person, and no claim or litigation regarding any of the foregoing is
pending or threatened.

         SECTION 4.19. PROPERTIES.

         (a) Each of the Borrower and its Subsidiaries has good and marketable
title to, or valid leasehold interests in, all real property and good title to
all personal property purported to be owned by it, including those reflected on
the most recent Financial Statements delivered by the Borrower, and none of such
properties and assets is subject to any Lien, except Liens permitted under
Section 7.2. The Borrower and its Subsidiaries have received all deeds,
assignments, waivers, consents, non-disturbance and recognition or similar
agreements, bills of sale and other documents, and have duly effected all
recordings, filings and other actions necessary to establish, protect and
perfect the Borrower's and its Subsidiaries' right, title and interest in and to
all such property.

         (b) All Permits required to have been issued or appropriate to enable
all real property owned or leased by the Borrower or any of its Subsidiaries to
be lawfully occupied and used for all of the purposes for which they are
currently occupied and used have been lawfully issued and are in full force and
effect, other than those which in the aggregate would not have a Material
Adverse Effect.

         (c) None of the Borrower or any of its Subsidiaries has received any
notice, or has any knowledge, of any pending, threatened or contemplated
condemnation proceeding affecting any real property owned or leased by the
Borrower or any of its Subsidiaries or any part thereof, except those which, in
the aggregate, would not have a Material Adverse Effect.

                                       26
<PAGE>   32

         SECTION 4.20. RANKING. The Obligations do and will rank pari passu in
priority of payment with the Borrower's obligations under the Indenture. No
Indebtedness of the Borrower issued directly or indirectly by the Borrower or
any of its Subsidiaries will at any time rank senior in priority to the Term
Loans or the Obligations.

                                   ARTICLE V

                               REPORTING COVENANTS

         As long as any of the Obligations or the Commitment remains
outstanding, the Borrower agrees with the Lender that:

         SECTION 5.1. FINANCIAL STATEMENTS. The Borrower shall furnish to the
Lender the following:

         (a) Monthly Reports. Within 30 days after the end of each month
commencing with the month ending April 30, 2000 (i) a consolidated income
statement and balance sheet of the Borrower and its Subsidiaries, and (ii)
income statements for each of the Borrower's properties, in each case for such
month and for the portion of the year ending on the last day of such month and
in the case of each income statement with a comparison of each item to the
budget delivered pursuant to Section 5.1(e).

         (b) Quarterly Reports. Within 45 days after the end of each fiscal
quarter of the Borrower, (i) quarterly consolidated financial statements,
including balance sheet, income statement and cash flow statement, for the
Borrower and its Subsidiaries, (ii) quarterly balance sheets, income statements
and cash flow statements for each of the Borrower's Subsidiaries and (iii)
quarterly balance sheets for each of the Borrower's properties.

         (c) Annual Reports. Within 90 days after the end of each Fiscal Year,
the Borrower's 10-K filed with the Securities and Exchange Commission, or if the
Borrower is no longer subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, the annual audited consolidated financial
statements of the Borrower and its Subsidiaries, certified with respect to such
consolidated statements by independent certified public accountants acceptable
to the Lender.

         (d) Occupancy Reports. Within 5 Business Days after each Sunday (or if
the Borrower changes the end of its week to another day of the week, such day of
the week), occupancy reports for each of the Borrower's properties for the
preceding week, detailing the number of residents and units occupied.

         (e) Budgets. No later than November 30 of the year immediately
preceding the year that is the subject of the budget, annual budgets, including
separate capital expenditure budgets, for the Borrower and each of its
properties

         (f) Other. Within 30 days after the end of each month, monthly updates
of the capital expenditure budgets delivered to the Lender for each property of
the Borrower with a comparison to the respective original budget previously
delivered to the Lender.

                                       27
<PAGE>   33

         (g) Management Letters etc. Within five Business Days after receipt
thereof by the Borrower, copies of each management letter, exception report or
similar letter or report received by the Borrower from its independent certified
public accountants.

         (h) Compliance Certificate. Together with each delivery of any
financial statement pursuant to clauses (a) and (b) of this Section 5.1, a
certificate of a Responsible Officer of the Borrower (each, a "Compliance
Certificate") stating that no Default or Event of Default has occurred and is
continuing or, if a Default or an Event of Default has occurred or is
continuing, stating the nature thereof and the action which the Borrower
proposes to take with respect thereto.

         (i) Additional Information. Promptly, from time to time, such other
information regarding the operations, including information regarding specific
product categories and lines of business of the Borrower and it Subsidiaries,
business affairs and financial condition of the Borrower or any of its
Subsidiaries, or compliance with the terms of any Loan Document, as the Lender
may reasonably request.

         SECTION 5.2. DEFAULT NOTICES. As soon as practicable, and in any event
within five Business Days after a Responsible Officer of the Borrower has
knowledge of the existence of any Default, Event of Default or other event which
has had a Material Adverse Effect or which has any reasonable likelihood of
causing or resulting in a Material Adverse Change, the Borrower shall give the
Lender notice specifying the nature of such Default or Event of Default or other
event, including the anticipated effect thereof, which notice, if given by
telephone, shall be promptly confirmed in writing on the next Business Day.

         SECTION 5.3. LITIGATION. Promptly after the commencement thereof, the
Borrower shall give the Lender written notice of the commencement of any action,
suit and proceedings before any domestic or foreign Governmental Authority or
arbitrator, affecting the Borrower or any of its Subsidiaries, which in the
reasonable judgment of the Borrower or such Subsidiary, expose the Borrower or
such Subsidiary to liability ("Potential Liability") in an amount of $500,000 or
more (or any similar or related action, suits or proceedings that involve
Potential Liability aggregating $500,000 or more in cash in any twelve month
period) and which, if adversely determined, would have a Material Adverse
Effect; provided, however, that claims for which an insurer of the Borrower or
such Subsidiary, as the case may be, has acknowledged coverage shall not be
included in such aggregate amounts to the extent of such coverage.

         SECTION 5.4. SEC FILINGS; PRESS RELEASES. Promptly after the sending or
filing thereof, the Borrower shall send the Lender copies of (a) all reports
which the Borrower sends to its security holders generally, (b) all reports and
registration statements which the Borrower or any of its Subsidiaries files with
the Securities and Exchange Commission or any national securities exchange or
the National Association of Securities Dealers, Inc., (c) all press releases and
(d) all other statements concerning material changes or developments in the
business of the Borrower made available by the Borrower to the public.

         SECTION 5.5. LABOR RELATIONS. Promptly after becoming aware of the
same, the Borrower shall give the Lender written notice of (a) any material
labor dispute to which the Borrower or any of its Subsidiaries is or may become
a party, including any strikes, lockouts or other disputes relating to any of
such Person's facilities, and (b) any Worker Adjustment and Retraining
Notification Act or related liability incurred with respect to the closing of
any facility of any of such Person.

                                       28
<PAGE>   34

         SECTION 5.6. TAX RETURNS. Upon the request of the Lender, the Borrower
will provide copies of all federal, state, local tax returns and reports filed
by the Borrower or any of its Subsidiaries in respect of taxes measured by
income (excluding sales, use and like taxes).

         SECTION 5.7. ERISA MATTERS. The Borrower shall notify the Lender:

         (a) promptly and in any event within 30 days after the Borrower, any of
its Subsidiaries or any ERISA Affiliate knows or has reason to know that any
ERISA Event has occurred;

         (b) promptly and in any event within 10 days after the Borrower, any of
its Subsidiaries or any ERISA Affiliate knows or has reason to know that a
request for a minimum funding waiver under Section 412 of the Code has been
filed with respect to any Title IV Plan or Multiemployer Plan, a written
statement of a Responsible Officer of the Borrower describing such ERISA Event
or waiver request and the action, if any, which the Borrower, its Subsidiaries
and ERISA Affiliates propose to take with respect thereto and a copy of any
notice filed with the PBGC or the IRS pertaining thereto;

         (c) simultaneously with the date that the Borrower, any of its
Subsidiaries or any ERISA Affiliate files a notice of intent to terminate any
Title IV Plan, if such termination would require material additional
contributions in order to be considered a standard termination within the
meaning of Section 4041(b) of ERISA, a copy of each notice.

         SECTION 5.8. ENVIRONMENTAL MATTERS. The Borrower shall provide the
Lender promptly and in any event within 10 days of the Borrower or any
Subsidiary learning of any of the following, written notice of any of the
following:

         (a) that the Borrower or any Subsidiary is or may be liable to any
Person as a result of a Release or threatened Release which could reasonably be
expected to subject the Borrower and any Subsidiary in the aggregate for all
matters covered by this Section 5.8 to total Environmental Liabilities and Costs
of $500,000 or more in cash in any twelve-month period;

         (b) the receipt by the Borrower or any Subsidiary of notification that
any real or personal property of such Person is subject to any Environmental
Lien;

         (c) the receipt by the Borrower or any Subsidiary of any notice of
violation of or potential liability under, or knowledge by a Responsible Officer
of the Borrower or such Subsidiary that there exists a condition which could
reasonably be expected to result in a violation of or liability under any
Environmental Law, except for violations and liabilities the consequence of
which in the aggregate would have no reasonable likelihood of subjecting the
Borrower and the Subsidiaries in the aggregate for all matters covered by this
Section 5.8 to total Environmental Liabilities and Costs of $500,000 or more in
cash in any twelve-month period;

         (d) the commencement of any judicial or administrative proceeding or
investigation alleging a violation of or liability under any Environmental Law,
which in the aggregate, if adversely determined, would have a reasonable
likelihood of subjecting the Borrower and its Subsidiaries collectively in the
aggregate for all matters covered by this Section 5.8 to total Environmental
Liabilities and Costs of $500,000 or more in cash in any twelve-month period;

                                       29
<PAGE>   35

         (e) any proposed acquisition of stock, assets or real estate, or any
proposed leasing of property, or any other action by the Borrower or any
Subsidiary other than those the consequences of which in the aggregate have
reasonable likelihood of subjecting the Borrower and its Subsidiaries in the
aggregate for all matters covered by this Section 5.8 to total Environmental
Liabilities and Costs of $500,000 or less in cash in any twelve-month period;

         (f) any proposed action by the Borrower or any Subsidiary in response
to any proposed change in Environmental Laws, either of which, in the aggregate,
have a reasonable likelihood of requiring the Borrower or any Subsidiary to
obtain additional environmental, health or safety Permits or make additional
capital improvements to obtain compliance with Environmental Laws that in the
aggregate would cost $500,000 or more in cash in any twelve-month period or
subject the Borrower and the Subsidiaries in the aggregate for all matters
covered by this Section 5.8 to additional total Environmental Liabilities and
Costs of $500,000 or more in cash in any twelve-month period; and

         (g) upon written request by the Lender, a report providing an update of
the status of any environmental, health or safety compliance, hazard or
liability issue identified in any notice or report delivered pursuant to this
Agreement.

         SECTION 5.9. OTHER INFORMATION. The Borrower will provide the Lender
with such other information respecting the business, properties, condition,
financial or otherwise, or operations of the Borrower or any of its Subsidiaries
as the Lender may from time to time reasonably request.

                                   ARTICLE VI

                              AFFIRMATIVE COVENANTS

         As long as any of the Obligations or the Commitment remains
outstanding, the Borrower agrees with the Lender that:

         SECTION 6.1. PRESERVATION OF CORPORATE EXISTENCE, ETC. The Borrower
shall, and shall cause each Subsidiary to, preserve and maintain its corporate
existence, rights (charter and statutory) and franchises, unless the Borrower in
good faith determines only with respect to any Subsidiary, that such
preservation of such Subsidiary is no longer desirable in the conduct of its
business.

         SECTION 6.2. COMPLIANCE WITH LAWS, ETC. The Borrower shall, and shall
cause each of its Subsidiaries to, comply with all applicable Requirements of
Law, Contractual Obligations and Permits, except where the failure so to comply
would not in the aggregate have a Material Adverse Effect.

         SECTION 6.3. CONDUCT OF BUSINESS. The Borrower shall, and shall cause
each of its Subsidiaries to, (a) conduct its business in the ordinary course and
(b) use its reasonable efforts, in the ordinary course and consistent with past
practice, to preserve its business and the goodwill and business of the
customers, advertisers, suppliers and others having business relations with the
Borrower or any of its Subsidiaries, except in each case where the failure to
comply with the covenants in each of clauses (a) and (b) above would not in the
aggregate have a Material Adverse Effect.

                                       30
<PAGE>   36

         SECTION 6.4. PAYMENT OF TAXES, ETC. The Borrower shall, and shall cause
each of its Subsidiaries to, pay and discharge before the same shall become
delinquent, all lawful governmental claims, taxes, assessments, charges, levies
and judgments, except where contested in good faith, by proper proceedings and
adequate reserves therefor have been established on the books of the Borrower or
the appropriate Subsidiary in conformity with GAAP.

         SECTION 6.5. MAINTENANCE OF INSURANCE. The Borrower shall (i) maintain,
and cause to be maintained for each of its Subsidiaries insurance with
responsible and reputable insurance companies or associations in such amounts
and covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower or such Subsidiary operates (provided that the Borrower shall be
entitled to implement a self-insurance program consistent with industry
standards for similarly situated companies), and such other insurance as may be
reasonably requested by the Lender.

         SECTION 6.6. ACCESS. The Borrower shall from time to time, permit the
Lender, or any agents or representatives thereof, within five Business Days
after written notification of the same (except that during the continuance of an
Event of Default, no such notice shall be required) to (a) examine and make
copies of and abstracts from the records and books of account of the Borrower
and each of its Subsidiaries, (b) visit the properties of the Borrower and each
of its Subsidiaries, (c) discuss the affairs, finances and accounts of the
Borrower and each of its Subsidiaries with any of their respective officers or
directors, and (d) communicate directly with the Borrower's independent
certified public accountants, except where any such communication as
contemplated by this Section 6.6 would cause the Borrower to waive any
accountant-client privilege under Section 7527 of the Code. The Borrower shall
authorize its independent certified public accountants to disclose to the Lender
any and all financial statements and other information of any kind, as the
Lender reasonably requests from the Borrower and which such accountants may have
with respect to the business, financial condition, results of operations or
other affairs of the Borrower or any of its Subsidiaries, except where any such
disclosure as contemplated by this Section 6.6 would cause the Borrower to waive
any accountant-client privilege under Section 7527 of the Code.

         SECTION 6.7. KEEPING OF BOOKS. The Borrower shall, and shall cause each
of its Subsidiaries to keep, proper books of record and account, in which full
and correct entries shall be made in conformity with GAAP of all financial
transactions and the assets and business of the Borrower and each such
Subsidiary.

         SECTION 6.8. MAINTENANCE OF PROPERTIES, ETC. The Borrower shall, and
shall cause each of its Subsidiaries to, maintain and preserve, (a) all of its
properties which are necessary in the conduct of its business in good working
order and condition, (b) all rights, permits, licenses, approvals and privileges
(including all Permits) which are used or useful or necessary in the conduct of
its business, and (c) all registered patents, trademarks, trade names,
copyrights and service marks with respect to its business; except where the
failure to so maintain and preserve in the aggregate would have no Material
Adverse Effect.

         SECTION 6.9. APPLICATION OF PROCEEDS. The Borrower shall use the entire
amount of the proceeds of the Term Loans as provided in Section 4.13.

         SECTION 6.10. ENVIRONMENTAL. The Borrower shall, and shall cause each
of its Subsidiaries to, comply in all material respects with Environmental Laws
and, without limiting

                                       31
<PAGE>   37

the foregoing, the Borrower shall, at its sole cost and expense, upon receipt of
any notification or otherwise obtaining knowledge of any Release or other event
that has any reasonable likelihood of causing the Borrower and its Subsidiaries
to incur Environmental Liabilities and Costs in excess of $500,000 in cash in
any twelve-month period, (i) conduct or pay for consultants to conduct, tests or
assessments of environmental conditions at such operations or properties,
including the investigation and testing of subsurface conditions and (ii) take
such Remedial Action, investigational or other action as required by
Environmental Laws or as any Governmental Authority requires or as is
appropriate and consistent with good business practice to address the Release or
event.

                                  ARTICLE VII

                               NEGATIVE COVENANTS

         As long as any of the Obligations or the Commitment remains
outstanding, the Borrower agrees with the Lender that:

         SECTION 7.1. INDEBTEDNESS. The Borrower shall not, and shall not permit
any Subsidiary to, create, incur, assume or issue, directly or indirectly,
guarantee or in any manner become, directly or indirectly, liable for or with
respect to the payment of any Indebtedness except for (each of which shall be
given independent effect):

         (a) Indebtedness under this Agreement;

         (b) Indebtedness of the Borrower in respect of the Indenture;

         (c) Non-Recourse Indebtedness;

         (d) Unsecured Indebtedness existing on the date hereof as set forth on
Schedule 7.1 (the "Existing Indebtedness");

         (e) Indebtedness secured directly or indirectly by the assets or
properties of the Borrower or any of its Subsidiaries;

         (f) Indebtedness of a Subsidiary to the Borrower or a wholly-owned
Subsidiary of the Borrower so long as such Indebtedness is held by the Borrower
or a wholly-owned Subsidiary of the Borrower and is subject to no Lien (other
than any Lien permitted by Section 7.2) held by any Person other than the
Borrower or a wholly-owned Subsidiary of the Borrower; provided that if as of
any date any Person other than the Borrower or a wholly-owned Subsidiary of the
Borrower owns or holds any such Indebtedness or holds a Lien (other than any
Lien permitted by Section 7.2) in respect of such Indebtedness such date shall
be deemed an incurrence of Indebtedness not permitted under this Agreement
unless such Indebtedness is otherwise permitted under Section 7.1(c) or (h);

         (g) Indebtedness of the Borrower to a wholly-owned Subsidiary of the
Borrower for so long as such Indebtedness is held by a wholly-owned Subsidiary
of the Borrower, provided that (a) such Indebtedness is unsecured and
subordinated, pursuant to a written agreement, to Borrower's obligations under
this Agreement and the Note and (b) if as of any date any Person other than a
wholly-owned Subsidiary of the Borrower owns or holds any such Indebtedness or
any Person holds a Lien (other than Liens permitted under Section 7.2) in

                                       32
<PAGE>   38

respect of such Indebtedness, such debt shall be deemed an incurrence of
Indebtedness not permitted under this Agreement unless such Indebtedness is
otherwise permitted under Section 7.1(c) or (h);

         (h) Indebtedness in respect of performance, completion, surety or
appeal bonds provided in the ordinary course of business of the Borrower or any
Subsidiary;

         (i) Refinancing of Indebtedness permitted by clause (d) or (e) of this
Section 7.1; provided, however, that any such refinancing of Existing
Indebtedness is in an aggregate principal amount not greater than the principal
amount of, and is on terms no less favorable to the Borrower or such Subsidiary
than, the Existing Indebtedness being refinanced; and

         (j) All Capital Lease Obligations.

         SECTION 7.2. LIMITATION ON LIENS. Neither the Borrower or any
Subsidiary shall create, incur, assume or suffer to exist any Lien of any kind
upon any of its property or assets now owned or hereafter acquired by it, except
for:

         (a) Liens existing on the Closing Date and disclosed on Schedule 7.2;

         (b) Liens securing Indebtedness to the extent such Indebtedness is
permitted under Section 7.1 other than (i) Existing Indebtedness or (ii)
Indebtedness permitted under Section 7.1(f) or (g);

         (c) Liens to secure the payment of all or a part of the purchase price
of assets or property acquired after the Closing Date, provided that (i) the
aggregate principal amount of Indebtedness secured by such Liens shall not
exceed the fair market value (or, if less, the cost) of the assets or property
so acquired; (ii) the incurrence of Indebtedness secured by such Liens shall be
permitted by this Agreement; and (iii) such Liens do not encumber any other
assets or property of the Borrower (other than additions thereof) or any
Subsidiary and shall attach to such assets or property within 60 days of the
acquisition of such assets or property;

         (d) Liens securing Indebtedness which is incurred to refinance
Indebtedness which has been secured by a Lien permitted under this Agreement and
is permitted to be refinanced under this Agreement, provided that such Liens do
not extend to or cover any property or assets of the Borrower or any of its
Subsidiaries not securing the Indebtedness so refinanced;

         (e) Liens securing Indebtedness of a Subsidiary to the Borrower or a
wholly-owned Subsidiary of the Borrower provided such Lien is held by the
Borrower or a wholly-owned Subsidiary of the Borrower; and

         (f) Permitted Encumbrances.

         SECTION 7.3. LIMITATION ON RESTRICTED PAYMENTS.

         (a) Subject to Section 7.3(b), the Borrower shall not make, and shall
not permit any Subsidiary to directly or indirectly, make, any Restricted
Payment.

         (b) The provisions of Section 7.3(a) shall not prohibit:

                                       33
<PAGE>   39

                  (i) the retirement of any shares of Stock of the Borrower or
subordinated Indebtedness by conversion into, or by an exchange for, shares of
Stock of the Borrower that are not Disqualified Capital Stock or out of the Net
Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary
of the Borrower) of Stock (other than Disqualified Capital Stock) of the
Borrower; and

                  (ii) the redemption or retirement of subordinated Indebtedness
of the Borrower in exchange for, by conversion into, or out of the Net Cash
Proceeds of, a substantially concurrent sale of subordinated Indebtedness of the
Borrower (other than to a Subsidiary) that is contractually subordinated in
right of payment to the Term Loans and that is permitted to be incurred under
Section 7.1.

         SECTION 7.4. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Borrower
shall not, and shall not permit, cause or suffer any Subsidiary to, conduct any
business or enter into any transaction or series of transactions with or for the
benefit of any of their respective Affiliates (each an "Affiliate Transaction"),
except in good faith and on terms that are no less favorable to the Borrower or
such Subsidiary, as the case may be, than those that could have been obtained in
a comparable transaction on an arms' length basis from a Person not an Affiliate
of the Borrower of such Subsidiary. Notwithstanding the foregoing, the
restrictions set forth in this Section 7.4 shall not apply (a) to any customary
directors' fees and consulting fees, collective bargaining agreements and
compensation paid to the Borrower's employees, (b) to the transactions
contemplated by the Warrant Documents or (c) to any transaction between the
Borrower and any Subsidiary or between Subsidiaries, in the ordinary course of
business.

         SECTION 7.5. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES. The Borrower shall not, and shall not permit any
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective or enter into any agreement with any Person that would
cause, any consensual encumbrance or restriction of any kind on the ability of
any Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Stock or any other interest or participation in, or
measured by, its profits owed by, or pay any Indebtedness owed to, the Borrower
or a Subsidiary, (b) make any loans or advances to the Borrower or any
Subsidiary or (c) transfer any of its properties or assets to the Borrower or to
any Subsidiary, except, in each case, for such encumbrances or restrictions
existing under or contemplated by or by reason of (i) this Agreement, (ii) any
restrictions existing under or contemplated by agreements in effect on the
Closing Date, (iii) any restrictions, with respect to a Subsidiary that is not a
Subsidiary of the Borrower on the Closing Date, in existence at the time such
Person becomes a Subsidiary of the Borrower (but not created in contemplation of
such Person becoming a Subsidiary), or (iv) any restrictions existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (i), (ii) or (iii) above, provided, however, that the terms
and conditions of any such restrictions under this clause (iv) are not
materially less favorable to the Lender than those under or pursuant to the
agreement being replaced or the agreement evidencing the Indebtedness
refinanced.

         SECTION 7.6. LIMITATION ON ISSUANCE OF PREFERRED STOCK BY SUBSIDIARIES.
The Borrower shall not cause or permit any Subsidiary, directly or indirectly,
to issue shares of such Subsidiary's Preferred Stock or warrants, rights or
options to acquire shares of such Subsidiary's Preferred Stock, except to the
Borrower or a Subsidiary.

                                       34
<PAGE>   40

         SECTION 7.7. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Borrower
covenants (to the extent permitted by law) that it will not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay or extension law or any usury law or other law that would prohibit
or forgive the Borrower from paying all or any portion of the principal of or
interest on the Term Loans as contemplated herein, wherever enacted, now or at
any time hereafter in force, or that may affect the covenants or the performance
of this Agreement, and (to the extent permitted by law) the Borrower hereby
expressly waives all benefit or advantage of any such law, and covenants that it
will not hinder, delay or impede the execution of any power herein granted to
the Lender, but will suffer and permit the execution of every such power as
though no such law had been enacted.

         SECTION 7.8. LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. The
Borrower shall not, and shall not permit any Subsidiary to, make any Investments
in any Person, except: (i) Investments by the Borrower in any Subsidiary and
Investments in the Borrower or any Subsidiary by a Subsidiary; (ii) Investments
by the Borrower or any Subsidiary in any joint venture or partnership, the sole
purpose of which is to own or hold real property located in the United States;
(iii) Cash Equivalents; and (iv) in accordance with obligations and agreements
in existence on the Closing Date and set forth on Schedule 7.8.

         SECTION 7.9. CERTAIN CHANGES. The Borrower will not, and will not
permit any Subsidiary to, (i) materially change its accounting treatment and
reporting practices or tax reporting treatment, except as required by GAAP or
any Requirement of Law and disclosed to the Lender, (ii) enter into or engage in
any business except as conducted on the Closing Date, (iii) enter into any
disposition of any substantial amount of unearned revenues or any substantial
forward sale or (iv) merge or consolidate with any Persons other than a
Subsidiary, except that (A) any Subsidiary may merge or consolidate with or into
any other Subsidiary and (B) any wholly owned Subsidiary may merge or
consolidate with the Borrower, provided however that the Borrower is the
surviving corporation of such merger or consolidation.

         SECTION 7.10. COMPLIANCE WITH ERISA. The Borrower will not, and will
not permit any of its Subsidiaries to, or cause or permit any ERISA Affiliate
to, cause or permit to occur (a) an event which could result in the imposition
of a Lien under Section 412 of the Code or Section 302 or 4068 of ERISA or (b)
an ERISA Event that would have a Material Adverse Effect.

         SECTION 7.11. ENVIRONMENTAL. The Borrower will not, and will not permit
any of its Subsidiaries to, dispose of any Contaminant in violation of any
Environmental Law; provided, however, that the Borrower shall not be deemed in
violation of this Section 7.11 if, as the consequence of all such Releases, the
Borrower and the Subsidiaries would not incur Environmental Liabilities and
Costs in excess of $500,000 in cash in any twelve-month period.

                                  ARTICLE VIII

                                EVENTS OF DEFAULT

         SECTION 8.1. EVENTS OF DEFAULT. Each of the following events shall be
an Event of Default:

         (a) the Borrower shall fail to pay any principal of any Term Loan when
the same becomes due and payable; or

                                       35
<PAGE>   41

         (b) the Borrower shall fail to pay any interest on any Term Loan, any
fee under any of the Loan Documents or any other Obligation (other than one
referred to in clause (a) above) and such non-payment continues for a period of
three Business Days after the due date therefor; or

         (c) any representation or warranty contained herein or in any Loan
Document shall have been inaccurate or untrue in any material respect when made;
or

         (d) the Borrower shall fail to perform or observe (i) any term,
covenant or agreement contained in Section 5.2, 6.1, 6.6, 7.1, 7.2, 7.3, 7.4,
7.5, 7.6, 7.7, 7.8 or 7.9 of this Agreement or any material term, covenant or
agreement in the Warrant; or (ii) any other term, covenant or agreement
contained in this Agreement or in any other Loan Document if such failure under
this clause (ii) shall remain unremedied for 30 days after the earlier of the
date on which (A) a Responsible Officer of the Borrower becomes aware of such
failure or (B) written notice thereof shall have been given to the Borrower by
the Lender; or

         (e) (i) the Borrower or any of its Subsidiaries shall fail to make any
payment or payments on any Indebtedness (other than the Obligations) of the
Borrower or any such Subsidiary (or any Guaranty Obligation in respect of
Indebtedness of any other Person) having an aggregate principal amount for all
such Indebtedness of $5,000,000 or more, when the same becomes due and payable
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) or (ii) any such Indebtedness shall become or be declared to be due
and payable, or required to be prepaid or repurchased (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof; or

         (f) the Borrower or any of its Subsidiaries shall generally not pay its
debts as such debts become due, or shall admit in writing its inability to pay
its debts generally, or shall make a general assignment for the benefit of
creditors, or any proceeding shall be instituted by or against the Borrower or
any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a custodian, receiver,
trustee or other similar official for it or for any substantial part of its
property and, in the case of any such proceedings instituted against the
Borrower or any of its Subsidiaries (but not instituted by it), either such
proceedings shall remain undismissed or unstayed for a period of 30 days or any
of the actions sought in such proceedings shall occur; or the Borrower or any of
its Subsidiaries shall take any corporate action to authorize any of the actions
set forth above in this subsection (f); or

         (g) one or more judgments or orders (or other similar process)
involving, in any single case or in the aggregate, an amount in excess of
$500,000 in the case of a money judgment, to the extent not covered by insurance
shall be rendered against one or more of the Borrower or any of its Subsidiaries
unless enforcement of such judgment shall have been stayed by reason of a
pending appeal or otherwise; or

         (h) an ERISA Event shall occur and the amount of all liabilities and
deficiencies resulting therefrom, whether or not assessed, exceeds $500,000 in
the aggregate; or

         (i) one or more of the Borrower and the Subsidiaries shall have entered
into one or more consent or settlement decrees or agreements or similar
arrangements with a

                                       36
<PAGE>   42

Governmental Authority or one or more judgments, orders, decrees or similar
actions shall have been entered against one or more of the Borrower and its
Subsidiaries based on or arising from the violation of or pursuant to any
Environmental Law, or the generation, storage, transportation, treatment,
disposal or Release of any Contaminant and, in connection with all the
foregoing, the Borrower and the Subsidiaries are likely to incur Environmental
Liabilities and Costs in excess of $500,000 in the aggregate in cash in any
twelve-month period that were not reflected in the Financial Statements
delivered pursuant to Section 4.4; or

         (j) an event that results in a Material Adverse Change shall occur.

         SECTION 8.2. REMEDIES. (a) Upon the occurrence of any Event of Default,
all or any one or more of the rights, powers and other remedies available to the
Lender against the Borrower under this Agreement or any other Loan Document, or
at law or in equity may be exercised by the Lender at any time, including
without limitation, the Lender may (i) by notice to the Borrower declare that
all or any portion of the Commitment be terminated, whereupon the obligation of
the Lender to make any Term Loan shall immediately terminate, and/or (ii) by
notice to the Borrower, declare the Term Loans, all interest thereon and all
other amounts and Obligations payable under this Agreement to be forthwith due
and payable, whereupon the Term Loans, all such interest and all such amounts
and Obligations shall become and be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower; provided, however, that upon the
occurrence of the Event of Default specified in Section 8.1(f), (A) the
Commitment of the Lender to make Term Loans shall automatically be terminated
and (B) the Term Loans, all such interest and all such amounts and Obligations
shall automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.

         (b) The rights, powers and remedies of the Lender under this Agreement
shall be cumulative and not exclusive of any other right, power or a remedy
which the Lender may have against the Borrower or any other Person pursuant to
this Agreement or the other Loan Documents or existing at law or in equity or
otherwise. The Lender's rights, powers and remedies may be pursued singly,
concurrently or otherwise, at such time and in such order as the Lender may
determine in the Lender's discretion. No delay or omission to exercise any
remedy, right or power accruing upon an Event of Default shall impair any such
remedy, right or power or shall be construed as a waiver thereof, but any such
remedy, right or power may be exercised from time to time and as often as may be
deemed expedient. A waiver of any Default or Event of Default shall not be
construed to be a waiver of any subsequent Default or Event of Default or to
impair any remedy, right or power consequent thereon.

         SECTION 8.3. RESCISSION. If at any time after acceleration of the
maturity of the Loans, the Borrower shall pay all arrears of interest and all
payments on account of principal of the Term Loans which shall have become due
otherwise than by acceleration (with interest on principal and, to the extent
permitted by law, on overdue interest, at the rates specified herein) and all
Events of Default and Defaults (other than non-payment of principal of and
accrued interest on the Term Loans due and payable solely by virtue of
acceleration) shall be remedied or waived pursuant to Section 9.1, then upon the
written consent of the Lender and written notice to the Borrower, the
termination of the Commitment and/or the acceleration and its consequences may
be rescinded and annulled; but such action shall not affect any subsequent Event
of Default or Default or impair any right or remedy consequent thereon. The
provisions of the preceding

                                       37
<PAGE>   43

sentence are intended merely to bind the Lender to a decision which may be made
at the election of the Lender; they are not intended to benefit the Borrower and
do not give the Borrower the right to require the Lender to rescind or annul any
acceleration hereunder, even if the conditions set forth herein are met.

                                   ARTICLE IX

                                  MISCELLANEOUS

         SECTION 9.1. AMENDMENTS, WAIVERS, ETC. No amendment or waiver of any
provision of this Agreement or any other Loan Document nor consent to any
departure by the Borrower therefrom shall in any event be effective unless the
same shall be in writing and signed by the parties hereto, and then any such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.

         SECTION 9.2. ASSIGNMENTS AND PARTICIPATIONS. The Lender may sell,
transfer, negotiate or assign all or any portion of its rights and obligations
hereunder (including all of its rights and obligations with respect to the Term
Loans). In addition to the foregoing, the Lender may assign, as collateral or
otherwise, any of its rights under this Agreement (including rights to payments
of principal or interest on the Term Loans) to any Person.

         SECTION 9.3. COSTS AND EXPENSES.

         The Borrower agrees upon demand to pay, or reimburse the Lender for,
all of the Lender's reasonable internal and external audit, legal, filing,
document duplication and reproduction and investigation expenses and for all
other reasonable out-of-pocket costs and expenses of every type and nature
(including, without limitation, the reasonable fees, expenses and disbursements
of the Lender's counsel, Weil, Gotshal & Manges LLP, local legal counsel,
auditors, accountants, appraisers, printers, insurance and environmental
advisers, and other consultants and agents) incurred by the Lender in connection
with (i) the preparation, negotiation, execution and interpretation of this
Agreement (including, without limitation, the satisfaction or attempted
satisfaction of any of the conditions set forth in Article III), the Loan
Documents, and any proposal letter or commitment letter issued in connection
therewith and the making of the Term Loans hereunder; (ii) the ongoing
administration of this Agreement and the Term Loans and with respect to the
Lender's rights and responsibilities hereunder and under the other Loan
Documents; (iii) the protection, collection or enforcement of any of the
Obligations or the enforcement of any of the Loan Documents; (iv) the
commencement, defense or intervention in any court proceeding relating in any
way to the Obligations, this Agreement or any of the other Loan Documents; (v)
the response to, and preparation for, any subpoena or request for document
production with which the Lender is served or deposition or other proceeding in
which the Lender is called to testify, in each case, relating in any way to the
Obligations, this Agreement or any of the other Loan Documents; (vi) any
amendments, consents, waivers, assignments, restatements, or supplements to any
of the Loan Documents and the preparation, negotiation, and execution of the
same; (vii) in connection with any refinancing or restructuring of the credit
arrangements provided hereunder in the nature of a "work-out" or in any
insolvency or bankruptcy proceeding; and (viii) in taking any other action in or
with respect to any suit or proceeding (bankruptcy or otherwise) described
above.

                                       38
<PAGE>   44

         SECTION 9.4. INDEMNITIES.

         (a) The Borrower shall indemnify and hold harmless the Lender and its
affiliates and each of the respective officers, directors, employees, agents,
advisors, attorneys and representatives of each (each, an "Indemnified Party")
from and against any and all claims, damages, losses liabilities and expenses
(including, without limitation, reasonable fees and disbursements of counsel),
joint or several, that may be incurred by or asserted or awarded against any
Indemnified Party, in each case arising out of or in connection with or relating
to any investigation, litigation or proceeding or the preparation of any defense
with respect thereto, arising out of or in connection with or relating to the
Term Loans, the Loan Documents (excluding the Warrants) or the transactions
contemplated thereby, or any use made or proposed to be made with the proceeds
of the Term Loans, whether or not such investigation, litigation or proceeding
is brought by the Borrower, any of its shareholders or creditors, an Indemnified
Party or any other person, or an Indemnified Party is otherwise a party thereto
and whether or not the transactions contemplated hereby are consummated, except
to the extent such claim, damage loss, liability or expense is found in a final
non-appealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party's gross negligence or willful misconduct. No
Indemnified Party shall have any liability (whether direct or indirect, in
contract, tort or otherwise) to the Borrower or any of its shareholders or
creditors for or in connection with the transactions contemplated hereby, except
to the extent such liability is found in a final non-appealable judgement by a
court of competent jurisdiction to have resulted from such Indemnified Party's
gross negligence or willful misconduct. In no event, however, shall any
Indemnified Party be liable on any theory of liability for any special,
indirect, consequential or punitive damages and the Borrower hereby waives,
releases and agrees (for itself and on behalf of its Subsidiaries) not to sue
upon any such claim for any such damages, whether or not accrued and whether or
not known or suspected to exist in its favor.

         (b) The Borrower agrees that any indemnification or other protection
provided to any Indemnitee pursuant to this Agreement (including pursuant to
this Section 9.4) or any other Loan Document shall (i) survive payment in full
of the Obligations and (ii) inure to the benefit of any Person who was at any
time an Indemnitee under this Agreement or any other Loan Document.

         SECTION 9.5. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default each of the Lender, Prometheus Assisted
Living L.L.C., LF Strategic Realty Investors II L.P., LFSRI II Alternative
Partnership L.P., LFSRI II-CADIM Alternative Partnership L.P. and Lazard Freres
Real Estate Investors L.L.C. is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by the Lender or its Affiliates to
or for the credit or the account of the Borrower against any and all of the
Obligations now or hereafter existing whether or not the Lender shall have made
any demand under this Agreement or any other Loan Document and although such
Obligations may be unmatured. The Lender agrees promptly to notify the Borrower
after any such set-off and application made by the Lender or its Affiliates;
provided, however, that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Lender under this
Section 9.5 are in addition to the other rights and remedies (including other
rights of set-off) which such Lender may have.

         SECTION 9.6. NOTICES, ETC. All notices, demands, requests and other
communications provided for in this Agreement shall be given in writing, or by
any

                                       39
<PAGE>   45

telecommunication device capable of creating a written record, and addressed to
the party to be notified as follows:

         (a) if to the Borrower:

             ARV Assisted Living, Inc.
             245 Fischer Avenue, Suite D-1
             Costa Mesa, California  92626
             Attention:  Senior Vice President and Secretary
             Telecopy no: (714) 708-3537

             with a copy to:

             O'Melveny & Myers LLP
             610 Newport Center Drive, 17th Floor
             Newport Beach, CA 92660
             Attention:  Gary Singer, Esq.
             Telecopy no:  (949) 823-6994

                                       40
<PAGE>   46

         (b) if to the Lender:

             LFSRI II Assisted Living LLC
             c/o Lazard Freres Real Estate Investors L.L.C.
             30 Rockefeller Plaza
             New York, NY 10020
             Attention:  Chief Financial Officer and General Counsel
             Telecopy no:  (212) 332-5641 and (212) 332-1793

             with a copy to:

             Weil, Gotshal & Manges LLP
             767 Fifth Avenue
             New York, New York 10153-0119
             Attention:  Vanessa Spiro, Esq.
             Telecopy no:  (212) 310-8007

or at such other address as shall be notified in writing (i) in the case of the
Borrower, to the other parties and (ii) in the case of all other parties, to the
Borrower and the Lender. All such notices and communications shall be effective
upon personal delivery (if delivered by hand, including any overnight courier
service), when deposited in the mails (if sent by mail), or when properly
transmitted (if sent by a telecommunications device).

         SECTION 9.7. BINDING EFFECT. This Agreement shall become effective when
it shall have been executed by the Borrower and the Lender, and thereafter shall
be binding upon and inure to the benefit of the Borrower, the Lender and their
respective successors and assigns, except that the Borrower shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Lender.

         SECTION 9.8. GOVERNING LAW. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the law of the State of New York without regard
to the principles of conflict of laws thereof.

         SECTION 9.9. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS.

         (a) Any legal action or proceeding with respect to this Agreement or
any other Loan Document may be brought in the courts of the State of New York or
of the United States of America for the Southern District of New York, and, by
execution and delivery of this Agreement, the Borrower hereby accepts for itself
and in respect of its property, generally and unconditionally, the jurisdiction
of the aforesaid courts. The parties hereto hereby irrevocably waive any
objection, including any objection to the laying of venue or based on the
grounds of forum non conveniens, which of them may now or hereafter have to the
bringing of any such action or proceeding in such respective jurisdictions.

         (b) The Borrower hereby irrevocably consents to the service of any and
all legal process, summons, notices and documents in any suit, action or
proceeding brought in the United States of America arising out of or in
connection with this Agreement or any of the other

                                       41
<PAGE>   47

Loan Documents by mail (by registered or certified mail, postage prepaid) or
delivery of a copy of such process to the Borrower at its address specified in
Section 9.6. The Borrower agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.

         (c) Nothing contained in this Section 9.9 shall affect the right of the
Lender to serve process in any other manner permitted by law or commence legal
proceedings or otherwise proceed against the Borrower in any other jurisdiction.

         SECTION 9.10. WAIVER OF JURY TRIAL. Each of the Lender and the Borrower
irrevocably waives trial by jury in any action or proceeding with respect to
this Agreement or any other Loan Document.

         SECTION 9.11. MARSHALING; PAYMENTS SET ASIDE. The Lender shall not be
under any obligation to marshal any assets in favor of the Borrower or any other
party or against or in payment of any or all of the Obligations. To the extent
that the Borrower makes a payment or payments to the Lender or the Lender
exercises its rights of setoff, and such payment or payments or the proceeds of
such enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, receiver or any other party, then to the extent of such recovery, the
obligation or part thereof originally intended to be satisfied, and all right
and remedies therefor, shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not
occurred.

         SECTION 9.12. SECTION TITLES. The Section titles contained in this
Agreement are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.

         SECTION 9.13. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts and by different parties in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement. Signature
pages may be detached from multiple separate counterparts and attached to a
single counterpart so that all signature pages are attached to the same
document. Delivery of an executed signature page of this Agreement by facsimile
transmission shall be as effective as delivery of a manually executed
counterpart hereof. A set of copies of this Agreement signed by all parties
shall be lodged with the Borrower and the Lender.

         SECTION 9.14. ENTIRE AGREEMENT. This Agreement, together with all of
the other Loan Documents and all certificates and documents delivered hereunder
or thereunder, embodies the entire agreement of the parties and supersedes all
prior agreements and understandings relating to the subject matter hereof.

         SECTION 9.15. CONFIDENTIALITY. The Lender agrees to keep information
obtained by it pursuant hereto and the other Loan Documents confidential in
accordance with the Lender's customary practices and agrees that it will only
use such information in connection with the transactions contemplated by this
Agreement and not disclose any of such information other than (a) to the
Lender's employees, representatives and agents who are or are expected to be
involved in the evaluation of such information in connection with the
transactions contemplated by this Agreement and who are advised of the
confidential nature of such information, (b) to the extent such information
presently is or hereafter becomes available to the Lender on a non-confidential
basis from a source other than the Borrower, (c) to the extent disclosure is
required by law, regulation or judicial order or requested or required by bank
regulators or auditors, or (d) to assignees or pledgees or potential pledgees
who agree to be bound by the provisions of this Section 9.15.

                                       42
<PAGE>   48

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.

                                   ARV Assisted Living, Inc.

                                   By:
                                       -----------------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                              ----------------------------------

                                   LFSRI II Assisted Living LLC
                                   By LF Strategic Realty Investors II L.P.
                                   Its Managing Member
                                   By Lazard Freres Real Estate Investors L.L.C.
                                   Its General Partner

                                   By:
                                       -----------------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                              ----------------------------------

                                       43

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