Document:

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                                                                    EXHIBIT 10.4

                                 LOAN AGREEMENT

        THIS LOAN AGREEMENT (this "Agreement") is made as of the 29th day of
March, 2001, by and between DIVERSICARE PINEDALE, LLC, a Delaware limited
liability company (together with its successors and assigns, the "Borrower"),
and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together
with its successors and assigns, the "Lender").

                                R E C I T A L S:

        1. Borrower has requested that the Lender make a loan to Borrower in the
principal sum of $2,913,000.00 (the "Loan").

        2. Lender has agreed to make the Loan on the terms and conditions
hereinafter set forth.

                               A G R E E M E N T:

        NOW, THEREFORE, it is hereby agreed as follows:

                                    ARTICLE I
                 DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.

        1.1 As used in this Agreement, the following terms shall have the
following meanings unless the context hereof shall otherwise indicate:

            "Accounts" means any rights of Borrower arising from the operation
of the Facility to payment for goods sold or leased or for services rendered,
not evidenced by an Instrument, including, without limitation, (i) all accounts
arising from the operation of the Facility , (ii) all moneys and accounts held
by Lender pursuant to Section 4.12 of this Agreement, and (iii) all rights to
payment from Medicare or Medicaid programs, or similar state or federal
programs, boards, bureaus or agencies and rights to payment from patients,
residents, private insurers, and others arising from the operation of the
Facility, including rights to payment pursuant to Reimbursement Contracts.
Accounts shall include the proceeds thereof (whether cash or noncash, moveable
or immoveable, tangible or intangible) received from the sale, exchange,
transfer, collection or other disposition or substitution thereof.

            "Actual Management Fees" means actual management fees paid or
incurred in connection with operation of the Facility.

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            "Affiliate" means, with respect to any Person, (i) each Person that
controls, is controlled by or is under common control with such Person, (ii)
each Person that, directly or indirectly, owns or controls, whether beneficially
or as a trustee, guardian or other fiduciary, any of the Stock of such Person,
and (iii) each of such Person's officers, directors, members, joint venturers
and partners.

            "Assignment of Leases and Rents" means that certain Assignment of
Leases and Rents of even date herewith executed by Borrower in favor of Lender.

            "Assumed Management Fees" means assumed management fees of five
percent (5%) of net patient revenues of the Facility (after Medicare and
Medicaid contractual adjustments).

            "Business Day" means a day on which commercial banks are not
authorized or required by law to close in New York, New York.

            "Closing Date" means the date on which all or any part of the Loan
is disbursed by the Lender to or for the benefit of Borrower.

            "Collateral" means, collectively, the Property, Improvements,
Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money,
Permits (to the full extent assignable), Reimbursement Contracts, and all
Proceeds, all whether now owned or hereafter acquired, and including
replacements, additions, accessions, substitutions, and products thereof and
thereto, and all other property which is or hereafter may become subject to a
Lien in favor of Lender as security for any of the Loan Obligations.

            "Combined Debt Service Coverage" shall mean the combined Debt
Service Coverage of Borrower and the Related Borrower.

            "Commitment Letter" means the commitment letter issued by Lender to
Borrower dated December 15, 2000.

            "Cross-Collateralization and Cross-Default Agreement" means that
certain Cross-Collateralization and Cross-Default Agreement of even date
herewith executed by and among Borrower, Related Borrower and Lender.

            "Debt Service Coverage" means a ratio in which the first number is
the sum of net pre-tax income of the Borrower from the operations of the
Facility as set forth in the quarterly statements provided to Lender (without
deduction for Actual Management Fees paid or incurred), calculated based upon
the preceding twelve (12) months (or such lesser period as shall have elapsed
following the closing of the Loan), plus interest expense, to the extent
deducted in determining net income, plus non-cash expenses or allowances for
depreciation and amortization of the Facility for said period, less either
Assumed Management Fees or Actual Management Fees, as applicable, and the second
number is the sum of the scheduled principal amounts due (even if not paid) on
the Loan (excluding the amount of any prepayment made during such period) for
the applicable period plus

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the interest expense on such Loan for the applicable period. In calculating
"pre-tax income", Extraordinary Income and Extraordinary Expenses shall be
excluded.

            "Debt Service Reserve Fund Agreement" means that certain Debt
Service Reserve Fund Escrow and Security Agreement of even date herewith between
Lender and Borrower.

            "Default" means the occurrence or existence of any event which, but
for the giving of notice or expiration of time or both, would constitute an
Event of Default.

            "Default Rate" shall have the meaning given to that term in the
Note.

            "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 Property and/or the
Improvements.

            "Equipment" means all beds, linen, televisions, carpeting,
telephones, cash registers, computers, lamps, glassware, rehabilitation
equipment, restaurant and kitchen equipment, and other fixtures and equipment of
Borrower located on, attached to or used or useful in connection with any of the
Property or the Facility and all renewals and replacements thereof and
substitutions therefor; provided, however, that with respect to any items which
are leased for the benefit of the Facility and not owned by Borrower, the
Equipment shall include the leasehold interest only of Borrower together with
any options to purchase any of said items and any additional or greater rights
with respect to such items which Borrower may hereafter acquire, but the
foregoing shall not be construed to mean that such leasing shall be permitted
hereunder and under the other Loan Documents.

            "Event of Default" means any "Event of Default" as defined in
Article VII hereof.

            "Extraordinary Income and Extraordinary Expenses" means material
items of a character significantly different from the typical or customary
business activities of Borrower which would not be expected to recur frequently
and which would not be considered as recurring factors in any evaluation of the
ordinary operating processes of Borrower's business, and which would be treated
as extraordinary income or extraordinary expenses under GAAP.

            "Exhibit" means an Exhibit to this Agreement, unless the context
refers to another document, and each such Exhibit shall be deemed a part of this
Agreement to the same extent as if it were set forth in its entirety wherever
reference is made thereto.

            "Facility" means the facility known as "Pinedale Nursing and
Rehabilitation Center," presently a 130-bed licensed skilled nursing facility
located on the Property, as it may now or hereafter exist, together with any
other general or specialized care facilities, if any (including any Alzheimer's
care unit, subacute, and any facility), now or hereafter operated on the
Property.

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            "GAAP" means, as in effect from time to time, generally accepted
accounting principles consistently applied as promulgated by the American
Institute of Certified Public Accountants.

            "General Intangibles" means all intangible personal property of
Borrower arising out of or connected with the Property or the Facility and all
renewals and replacements thereof and substitutions therefor (other than
Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement
Contracts), including, without limitation, things in action, contract rights and
other rights to payment of money.

            "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 Property
and/or the Improvements or the use, operation or improvement of the Property.

            "Guarantor" means Advocat Inc., a Delaware corporation.

            "Guaranty Agreement" means that certain Guaranty Agreement of even
date herewith from Guarantor to Lender.

            "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 storage tanks, whether empty or containing any substance; any
substance the presence of which on the 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.

            "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 Property and/or the Improvements.
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 1801, and their state analogs.

            "Improvements" means all buildings, structures and improvements of
every nature whatsoever now or hereafter situated on the Property, including,
but not limited to, all gas and electric fixtures, radiators, heaters, engines
and machinery, boilers, ranges, elevators and motors, plumbing and heating
fixtures, carpeting and other floor coverings, water heaters, awnings and

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storm sashes, and cleaning apparatus which are or shall be attached to the
Property or said buildings, structures or improvements.

            "Indebtedness" means any (i) obligations for borrowed money, (ii)
obligations, payment for which is being deferred by more than thirty (30) days,
representing the deferred purchase price of property other than accounts payable
arising in connection with the purchase of inventory customary in the trade and
in the ordinary course of Borrower's business, (iii) obligations, whether or not
assumed, secured by Liens or payable out of the proceeds or production from the
Accounts and/or property now or hereafter owned or acquired, and (iv) the amount
of any other obligation (including obligations under financing leases) which
would be shown as a liability on a balance sheet prepared in accordance with
GAAP.

            "Instruments" means all instruments, chattel paper, documents or
other writings obtained from or in connection with the operation of the Property
or the Facility (including, without limitation, all ledger sheets, computer
records and printouts, data bases, programs, books of account and files relating
thereto).

            "Intercreditor Agreement" shall mean that certain Amended and
Restated Intercreditor Agreement of even date herewith by and among Lender,
Borrower and AmSouth Bank.

            "Inventory" means all inventories of food, beverages and other
comestibles held by Borrower for sale or use at or from the Property or the
Facility, and soap, paper supplies, medical supplies, drugs and all other such
goods, wares and merchandise held by Borrower for sale to or for consumption by
guests, patients or residents of the Property or the Facility and all such other
goods returned to or repossessed by Borrower.

            "Lien" means any voluntary or involuntary mortgage, security deed,
deed of trust, lien, pledge, assignment, security interest, title retention
agreement, financing lease, levy, execution, seizure, judgment, attachment,
garnishment, charge, lien or other encumbrance of any kind, including those
contemplated by or permitted in this Agreement and the other Loan Documents.

            "Loan" means the Loan in the principal sum of $2,913,000.00 made by
Lender to Borrower as of the date hereof.

            "Loan Documents" means, collectively, this Agreement, the Assignment
of Leases and Rents, the Note, the Debt Service Reserve Fund Agreement, the
Guaranty Agreement, the Mortgage, the Subordination Agreement, the
Cross-Collateralization and Cross-Default Agreement and the Intercreditor
Agreement, together with any and all other documents executed by Borrower or
others, evidencing, securing or otherwise relating to the Loan.

            "Loan Obligations" means the aggregate of all principal and interest
owing from time to time under the Note and all expenses, charges and other
amounts from time to time owing under the Note, this Agreement, or the other
Loan Documents and all covenants, agreements and other obligations from time to
time owing to, or for the benefit of, Lender pursuant to the Loan Documents.

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            "Management Agreement" means that certain Management Agreement dated
December 1, 2000 by and between Manager and Borrower, obligating the Manager to
operate and manage the Facility.

            "Manager" means Diversicare Management Services, a Tennessee
corporation, and any successor manager of the Facility approved by Lender in
writing.

            "Maturity Date" means April 1, 2006.

            "Medicaid" means that certain program of medical assistance, funded
jointly by the federal government and the States, for impoverished individuals
who are aged, blind and/or disabled, and/or members of families with dependent
children, which program is more fully described in Title XIX of the Social
Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated
thereunder.

            "Medicare" means that certain federal program providing health
insurance for eligible elderly and other individuals, under which physicians,
hospitals, skilled nursing homes, home health care and other providers are
reimbursed for certain covered services they provide to the beneficiaries of
such program, which program is more fully described in Title XVIII of the Social
Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated
thereunder.

            "Money" means all monies, cash, rights to deposit or savings
accounts or other items of legal tender obtained from or for use in connection
with the operation of the Facility.

            "Mortgage" means that certain Mortgage and Security Agreement, of
even date herewith from the Borrower in favor of or for the benefit of Lender
and covering the Property.

            "Note" means the Promissory Note of even date herewith in the
principal amount of the Loan payable by Borrower to the order of Lender.

            "O&M Program" means a written program of operations and maintenance
established or approved in writing by Lender relating to any Hazardous Materials
in, on or under the Property or Improvements.

            "Permits" means all licenses, permits and certificates used or
necessary in connection with the ownership, operation, use or occupancy of the
Property and/or the Facility, including, without limitation, business licenses,
state health department licenses, food service licenses, licenses to conduct
business, certificates of need and all such other permits, licenses and rights,
obtained from any governmental, quasi-governmental or private person or entity
whatsoever concerning ownership, operation, use or occupancy.

            "Permitted Encumbrances" has the meaning given to that term in
Section 5.2 hereof.

            "Person" means any natural person, firm, trust, corporation,
partnership, limited liability company, trust and any other form of legal
entity.

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            "Proceeds" means all proceeds (including proceeds of insurance and
condemnation) from the sale, exchange, transfer, collection, loss, damage,
disposition, substitution or replacement of any of the Collateral.

            "Property" means the real estate located in Newport, Jackson County,
Arkansas, which is more particularly described in Exhibit "A" hereto, upon which
the Facility is located, and which, concurrent with the Closing Date, will be
owned by the Borrower.

            "Reimbursement Contracts" means all third party reimbursement
contracts for the Facility which are now or hereafter in effect with respect to
residents or patients qualifying for coverage under the same, including
Medicare, Medicaid and private insurance agreements, and any successor program
or other similar reimbursement program and/or private insurance agreements.

            "Related Borrower" means Diversicare Windsor House, LLC, a Delaware
limited liability company.

            "Related Facility" means Windsor House of Huntsville located in
Huntsville, Alabama.

            "Rents" means all rent and other payments of whatever nature from
time to time payable pursuant to leases of the Property or the Facility, or for
retail space or other space at the Property (including, without limitation,
rights to payment earned under leases for space in the Improvements for the
operation of ongoing retail businesses such as newsstands, barbershops, beauty
shops, physicians' offices, pharmacies and specialty shops).

            "Single-Purpose Entity" means a Person which owns no interest or
property other than the Collateral.

            "Stock" means all shares, options, warrants, general or limited
partnership interests, membership interests, participating or other equivalents
(regardless of how designated) in a corporation, limited liability company,
partnership or any equivalent entity, whether voting or nonvoting, including,
without limitation, common stock, preferred stock, or any other "equity
security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended).

            "Subordination Agreement" means that certain Subordination of
Management Agreement of even date herewith by and among Borrower, Manager, and
Lender.

        1.2 Singular terms shall include the plural forms and vice versa, as
applicable, of the terms defined.

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        1.3 Terms contained in this Agreement shall, unless otherwise defined
herein or unless the context otherwise indicates, have the meanings, if any,
assigned to them by the Uniform Commercial Code in effect in the State of
Alabama.

        1.4 All accounting terms used in this Agreement shall be construed in
accordance with GAAP, except as otherwise specified.

        1.5 All references to other documents or instruments shall be deemed to
refer to such documents or instruments as they may hereafter be extended,
renewed, modified, or amended and all replacements and substitutions therefor.

        1.6 All references herein to "Medicaid" and "Medicare" shall be deemed
to include any successor program thereto.

                                   ARTICLE II
                                TERMS OF THE LOAN

        2.1 THE LOAN. Borrower has agreed to borrow the Loan from Lender, and
Lender has agreed to make the Loan to Borrower, subject to Borrower's compliance
with and observance of the terms, conditions, covenants, and provisions of this
Agreement and the other Loan Documents, and Borrower has made the covenants,
representations, and warranties herein and therein as a material inducement to
Lender to make the Loan.

        2.2 SECURITY FOR THE LOAN. The Loan will be evidenced, secured and
guaranteed by the Loan Documents.

                                   ARTICLE III
                    BORROWER'S REPRESENTATIONS AND WARRANTIES

        To induce Lender to enter into this Agreement, and to make the Loan to
Borrower, Borrower represents and warrants to Lender as follows:

        3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized and
validly existing Delaware limited liability company, has the power to own its
properties and to carry on its business as is now being conducted, and is duly
qualified to do business and is in good standing in every jurisdiction in which
the character of the properties owned by it or in which the transaction of its
business makes its qualification necessary.

        3.2 POWER AND AUTHORITY. Borrower has full power and authority to borrow
the indebtedness evidenced by the Note and to incur the Loan Obligations
provided for herein, all of which have been authorized by all proper and limited
liability company action on the part of

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Borrower. All consents, approvals, authorizations, orders or filings of or with
any court or governmental agency or body, if any, required for the execution,
delivery and performance of the Loan Documents by the Borrower have been
obtained or made.

        3.3 DUE EXECUTION AND ENFORCEMENT. Each of the Loan Documents to which
Borrower is a party constitutes a valid and legally binding obligation of
Borrower, enforceable in accordance with its respective terms (except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium, or other laws relating to the rights of creditors
generally and by general principles of equity) and does not violate, conflict
with, or constitute any default under any law, government regulation, decree,
judgment, Borrower's articles of organization/incorporation, partnership
agreement or operating agreement, as applicable, or any other agreement or
instrument binding upon Borrower.

        3.4 SINGLE PURPOSE ENTITY. Borrower is a Single Purpose Entity.

        3.5 PENDING MATTERS.

            a. Operations; Financial Condition. No action or investigation is
pending or, to the best of Borrower's knowledge, threatened before or by any
court or administrative agency which might result in any material adverse change
in the financial condition, operations or prospects of Borrower or any lower
reimbursement rate under the Reimbursement Contracts. The Borrower is not in
violation of any agreement, the violation of which might reasonably be expected
to have a material adverse effect on its business or assets, and the Borrower is
not in violation of any order, judgment, or decree of any court, or any material
violation of any statute or governmental regulation, to which it is subject.

            b. Condemnation or Casualty. There are no proceedings pending, or,
to the best of Borrower's knowledge, threatened, to acquire through the exercise
of any power of condemnation, eminent domain or similar proceeding any part of
the Property, the Improvements or any interest therein, or to enjoin or
similarly prevent or restrict the use of the Property or the operation of the
Facility in any manner. None of the Improvements is subject to any unrepaired
casualty or other damage.

        3.6 FINANCIAL STATEMENTS ACCURATE. All financial statements heretofore
or hereafter provided by Borrower are and will be true and complete in all
material respects as of their respective dates and fairly present the respective
financial condition of Borrower, and there are no material liabilities, direct
or indirect, fixed or contingent, as of the respective dates of such statements
which are not reflected therein or in the notes thereto or in a written
certificate delivered with such statements. The financial statements of the
Borrower have been prepared in accordance with GAAP. There has been no material
adverse change in the financial condition, operations, or prospects of Borrower
since the dates of such statements except as fully disclosed in writing with the
delivery of such statements. All financial statements of the operations of the
Facility heretofore or hereafter provided to Lender are and will be true and
complete in all material respects as of their respective dates.

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        3.7 COMPLIANCE WITH FACILITY LAWS. The Facility is duly licensed and is
currently operated as a 130-bed skilled care nursing home under the applicable
laws of the state where the Property is located. Borrower is the lawful owner of
all Permits for the Facility, including, without limitation, the Certificate of
Need issued by the Arkansas State Health Planning and Development Agency or the
Nursing Home License issued by the Arkansas State Board of Health, if
applicable, which (a) are in full force and effect, (b) constitute all of the
permits, licenses and certificates required for the use, operation and occupancy
thereof, (c) have not been pledged as collateral for any other loan or
Indebtedness, (d) are held free from restrictions or any encumbrance which would
materially adversely affect the use or operation of the Facility, and (e) are
not provisional, probationary or restricted in any way. The Borrower and Manager
as well as the operation of the Facility are in compliance in all material
respects with the applicable provisions of nursing home and/or assisted living
facility laws, rules, regulations and published interpretations to which the
Facility is subject. No waivers of any laws, rules, regulations, or requirements
(including, but not limited to, minimum foot requirements per bed) are required
for the Facility to operate at the current licensed bed capacity. All
Reimbursement Contracts are in full force and effect with respect to the
Facility, and Borrower and Manager are in good standing with all the respective
agencies governing such applicable nursing home licenses, program certification,
and Reimbursement Contracts. Borrower and Manager are current in the payment of
all so-called provider specific taxes or other assessments with respect to such
Reimbursement Contracts. Borrower will maintain or cause Manager to maintain
(without allowing to lapse) the Certificate of Need, if applicable, and any
required Permits. In the event Lender acquires the Facility through foreclosure
or otherwise, neither Lender nor a subsequent manager, a subsequent lessee or
any subsequent purchaser (through foreclosure or otherwise) must obtain a
Certificate of Need prior to applying for and receiving a license to operate the
Facility and certification to receive Medicare and Medicaid payments (and its
successor programs) for patients having coverage thereunder provided that no
service or bed complement is changed.

        3.8 MAINTAIN BED CAPACITY. Neither Borrower nor the Manager has granted
to any third party the right to reduce the number of licensed beds in the
Facility or to apply for approval to transfer the right to any and all of the
licensed Facility beds to any other location.

        3.9 MEDICARE AND MEDICAID COMPLIANCE. The Facility is in compliance with
all requirements for participation in Medicare and Medicaid, including without
limitation, the Medicare and Medicaid Patient Protection Act of 1987. The
Facility is in conformance in all material respects with all insurance,
reimbursement and cost reporting requirements and has a current provider
agreement which is in full force and effect under Medicare and Medicaid.

        3.10 THIRD-PARTY PAYORS. There is no threatened or pending revocation,
suspension, termination, probation, restriction, limitation, or nonrenewal
affecting Borrower, Manager or the Facility or any participation or provider
agreement with any third-party payor, including Medicare, Medicaid, Blue Cross
and/or Blue Shield, and any other private commercial insurance managed care and
employee assistance program (such programs, the "Third-Party Payors' Programs")
to which Borrower or Manager presently is subject. All Medicare, Medicaid and
private insurance cost reports and financial reports submitted by Borrower or
Manager are and will be materially accurate and complete and have not been and
will not be misleading in any material respects. No cost reports for the
Facility remain "open" or unsettled, except as otherwise disclosed.

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        3.11 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower nor Manager
nor the Facility is currently the subject of any proceeding by any governmental
agency, and no notice of any violation has been received from a governmental
agency that would, directly or indirectly, or with the passage of time:

             a. Have a material adverse impact on Borrower's ability to accept
and/or retain patients or result in the imposition of a fine, a sanction, a
lower rate certification or a lower reimbursement rate for services rendered to
eligible patients;

             b. Modify, limit or annul or result in the transfer, suspension,
revocation or imposition of probationary use of any of the Permits; or

             c. Affect Borrower's continued participation in the Medicare or
Medicaid programs or any other Third-Party Payors' Programs, or any successor
programs thereto, at current rate certifications.

        3.12 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge,
except as disclosed in the Condition of Property Survey prepared for Lender in
connection with the Loan the Facility and the use thereof complies in all
material respects with all applicable local, state and federal building codes,
fire codes, zoning codes, use restrictions, health care, health care facility
and other similar regulatory requirements (the "Physical Plant Standards"), and
no waivers of Physical Plant Standards exist at the Facility.

        3.13 PLEDGES OF RECEIVABLES. With the exception of the pledge of certain
Accounts more specifically described in the Intercreditor Agreement, the
Borrower has not pledged its Accounts as collateral security for any loan or
indebtedness other than the Loan.

        3.14 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed all
federal, state, and local tax returns which it is required to file and has paid,
or made adequate provision for the payment of, all taxes which are shown
pursuant to such returns or are required to be shown thereon or to assessments
received by Borrower, including, without limitation, provider taxes. All such
returns are complete and accurate in all respects. Borrower has paid or made
adequate provision for the payment of all applicable water and sewer charges,
government assessments, ground rents (if applicable) and Taxes (as defined in
the Mortgage) with respect to the Property.

        3.15 TITLE TO COLLATERAL. Borrower has good and marketable title to all
of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning
violation, or encumbrance, except Permitted Encumbrances, which Permitted
Encumbrances do not and will not materially interfere with the security intended
to be provided by the Mortgage or the current use or operation of the Property
and or the current ability of the Facility to generate net operating income
sufficient to service the Loan. Except as shown on the current as-built survey
for the Facility provided by the Borrower to Lender in connection with the Loan
(the "Survey"), all Improvements situated on the Property are situated wholly
within the boundaries of the Property.

        3.16 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien
against the real and personal property described therein, prior to all other
liens or encumbrances, including those

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which may hereafter accrue, excepting only "Permitted Encumbrances", which
Permitted Encumbrances do not and will not materially and adversely affect (a)
the ability of the Borrower to pay in full the principal of and interest on the
Note when due, (b) the security (and its value) intended to be provided by the
Mortgage or (c) the current use of the Property and the Improvements.

        3.17 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of Borrower's
principal place of business and chief executive office is set forth on Exhibit
"B" hereto.

        3.18 DISCLOSURE. All information furnished or to be furnished by
Borrower to Lender in connection with the Loan or any of the Loan Documents, is,
or will be at the time the same is furnished, accurate and correct in all
material respects and complete insofar as completeness may be necessary to
provide Lender with true and accurate knowledge of the subject matter.

        3.19 TRADE NAMES. The Facility, which operates under the trade name
Pinedale Nursing and Rehabilitation Center, has not changed its name, been known
by any other name, or been a party to a merger, reorganization or similar
transaction within the last two (2) years. Borrower and Diversicare Leasing
Corp., its sole member, have owned the Facility for the last four (4) years.

        3.20 ERISA. Borrower is in compliance with all applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").

        3.21 OWNERSHIP. The ownership interests of the Persons comprising the
Borrower and each of the respective interests in the Borrower are correctly and
accurately set forth on Exhibit "C" hereto.

        3.22 COMPLIANCE WITH APPLICABLE LAWS. The Facility and its operations
and the Property comply in all material respects with all covenants and
restrictions of record and applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act (to the
extent required) and the regulations thereunder, and all laws, ordinances, rules
and regulations relating to zoning, setback requirements and building codes and
there are no waivers of any building codes currently in existence for the
Facility.

        3.23 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C. ss. 548,
and the borrowing of the Loan will not render Borrower insolvent for purposes
of 11 U.S.C. ss. 548.

        3.24 OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness,
secured or unsecured, direct or contingent (including any guaranties), other
than (a) the Loan, and (b) indebtedness which represents trade payables or
accrued expenses incurred in the ordinary course of business of owning and
operating the Property; and (c) indebtedness more particularly described as the
Intercreditor Agreement; no other debt will be secured (senior, subordinate or
pari passu) by the Property.

                                       12
<PAGE>   13

        3.25 OTHER OBLIGATIONS. Borrower has no material financial obligation
under any indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which Borrower is a party or by which Borrower or the Property
is otherwise bound, other than obligations incurred in the ordinary course of
the operation of the Property and other than obligations under the Mortgage, the
Intercreditor Agreement and the other Loan Documents.

        3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into this
Agreement or any of the other Loan Documents with the actual intent to hinder,
delay, or defraud any creditor and (2) has received reasonably equivalent value
in exchange for its obligations under the Loan Documents. Giving effect to the
transactions contemplated by the Loan Documents, to the best of Borrower's
knowledge the fair saleable value of Borrower's assets exceeds and will,
immediately following the execution and delivery of the Loan Documents, be
greater than Borrower's probable liabilities, including the maximum amount of
its contingent liabilities or its debts as such debts become absolute and
mature. Borrower's assets do not and, immediately following the execution and
delivery of the Loan Documents will not, constitute unreasonably small capital
to carry out its business as conducted or as proposed to be conducted. Borrower
does not intend to, and does not believe that it will, incur debts and
liabilities (including, without limitation, contingent liabilities and other
commitments) beyond its ability to pay such debts as they mature (taking into
account the timing and amounts to be payable on or in respect of obligations of
Borrower).

        3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full force and
effect and there are no defaults (either monetary or nonmonetary) by the Manager
or the Borrower thereunder.

        3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its
representations and warranties and covenants contained herein are true and
correct as of the date hereof and shall survive closing of the Loan.

                                   ARTICLE IV
                        AFFIRMATIVE COVENANTS OF BORROWER

        Borrower agrees with and covenants unto the Lender that until the Loan
Obligations have been paid in full, Borrower shall:

        4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and punctually
pay or cause to be paid the principal and interest of the Note in accordance
with its terms and duly and punctually pay and perform or cause to be paid or
performed all Loan Obligations hereunder and under the other Loan Documents.

        4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a limited
liability company, and, in each jurisdiction in which the character of the
property owned by it or in which the transaction of its business makes
qualification necessary, maintain good standing.

                                       13
<PAGE>   14

        4.3 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make accurate
provision for the payment of all current tax liabilities of all kinds
(including, without limitation, federal and state income taxes, franchise taxes,
payroll taxes, provider taxes (to the extent necessary to participate in and
receive maximum funding pursuant to Reimbursement Contracts) and Taxes (as
defined in the Mortgage)), all required withholding of income taxes of
employees, all required old age and unemployment contributions, and all required
payments to employee benefit plans, and pay the same when they become due.

        4.4 INSURANCE. Maintain the following insurance coverages with respect
to the Property and the Facility:

            a. Insurance against loss or damage by fire, casualty and other
hazards as now are or subsequently may be covered by an "all risk" policy or a
policy covering "special" causes of loss, with such endorsements as Lender may
from time to time reasonably require and which are customarily required by
institutional lenders of similar properties similarly situated, including,
without limitation, building ordinance law, lightning, windstorm, civil
commotion, hail, riot, strike, water damage, sprinkler leakage, collapse,
malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling
objects and weight of snow, ice or sleet, and covering the Facility in an amount
equal to 100% of the full insurable replacement value of the Facility (exclusive
of footings and foundations below the lowest basement floor) without deduction
for depreciation. The determination of the replacement cost amount shall be
adjusted annually to comply with the requirements of the insurer issuing the
coverage or, at Lender's election, by reference to such indexes, appraisals or
information as Lender determines in its reasonable discretion, and, unless the
insurance required by this paragraph shall be effected by blanket and/or
umbrella policies in accordance with the requirements of this Agreement, the
policy shall include inflation guard coverage that ensures that the policy
limits will be increased over time to reflect the effect of inflation. Each
policy shall, subject to Lender's approval, contain (i) a replacement cost
endorsement, without deduction for depreciation, (ii) either an agreed amount
endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance
or law coverage or enforcement endorsement if the Improvements or the use of the
Property constitutes any legal nonconforming structures or uses, and shall
provide for deductibles in such amounts as Lender may permit in its sole
discretion.

            b. Commercial general liability insurance under a policy containing
"Comprehensive General Liability Form" of coverage (or a comparably worded form
of coverage) and the "Broad Form CGL" endorsement (or a policy which otherwise
incorporates the language of such endorsement), providing coverage on an
occurrence (not "claims made") basis, which policy shall include, without
limitation, coverage against claims for personal injury, bodily injury, death
and property damage liability with respect to the Facility and the operations
related thereto, whether on or off the Property, and the following coverages:
Employee as Additional Insured, Product Liability/Completed Operations; Broad
Form Contractual Liability, Independent Contractor, Personal Injury and
Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000
per person), Broad Form Cross Suits Liability Endorsement, where applicable,
hired and

                                       14
<PAGE>   15

non-owned automobile coverage (including rented and leased vehicles), and, if
any alcoholic beverages shall be sold, manufactured or distributed in the
Facility, liquor liability coverage, all of which shall be in such amounts as
Lender may from time to time reasonably require, but not less than One Million
Dollars ($1,000,000) per occurrence, Two Million Dollars ($2,000,000) in the
aggregate and with umbrella coverage not less than Three Million Dollars
($3,000,000). If such policy shall cover more than one property, such limits
shall apply on a "per location" basis. If any elevators, health club facilities
or swimming pools are located at the Facility, the foregoing amounts shall be
increased to Three Million Dollars ($3,000,000), Six Million Dollars
($6,000,000) and Ten Million Dollars ($10,000,000), respectively. Such liability
policy shall delete the contractual exclusion under the personal injury
coverage, if possible, and if available, shall include the following
endorsements: Notice of Accident, Knowledge of Occurrence, and Unintentional
Error and Omission.

            c. Professional liability insurance coverage in an amount equal to
not less than One Million Dollars ($1,000,000) per occurrence and Three Million
Dollars ($3,000,000) in the aggregate and insuring Borrower for acts occurring
prior to the date of the Loan.

            d. Business interruption insurance, which may be in the form of
Blanket Earnings and Extra Expense Coverage, (i) covering the same perils of
loss as are required to be covered by the property insurance required under
Section 4.4(a) above, (ii) in an amount equal to the projected annual net income
from the Facility plus carrying costs and extraordinary expenses of the Property
for a period of twelve (12) months, based upon Borrower's reasonable estimate
thereof as approved by Lender, (iii) including either an agreed amount
endorsement or a waiver of any co-insurance provisions, so as to prevent
Borrower, Lender and any other insured thereunder from being a co-insurer, and
(iv) providing that any covered loss thereunder shall be payable to Lender.

            e. During any period of new construction on the Premises, a
so-called "Builder's All-Risk Completed Value" or "Course of Construction"
insurance policy in non-reporting form for any improvements under construction,
including, without limitation, for demolition and increased cost of construction
or renovation, in an amount equal to 100% of the estimated replacement cost
value on the date of completion, including "soft cost" coverage, and Workers'
Compensation Insurance covering all persons engaged in such construction, in an
amount at least equal to the minimum required by law. In addition, each
contractor and subcontractor shall be required to provide Lender with a
certificate of insurance for (i) workers' compensation insurance covering all
persons engaged by such contractor or subcontractor in such construction in an
amount at least equal to the minimum required by law, and (ii) general liability
insurance showing minimum limits of at least $5,000,000, including coverage for
products and completed operations. Each contractor and subcontractor also shall
cover Borrower and Lender as an additional insured under such liability policy
and shall indemnify and hold Borrower and Lender harmless from and against any
and all claims, damages, liabilities, costs and expenses arising out of,
relating to or otherwise in connection with its performance of such
construction.

                                       15
<PAGE>   16

            f. If the Facility contains steam boilers, steam pipes, steam
engines, steam turbines or other high pressure vessels, insurance covering the
major components of the central heating, air conditioning and ventilating
systems, boilers, other pressure vessels, high pressure piping and machinery,
elevators and escalators, if any, and other similar equipment installed in the
Improvements, in an amount equal to one hundred percent (100%) of the full
replacement cost of the Facility, which policies shall insure against physical
damage to and loss of occupancy and use of the Improvements arising out of an
accident or breakdown covered thereunder.

            g. Flood insurance with a deductible not to exceed Three Thousand
Dollars ($3,000), or such greater amount as may be satisfactory to Lender in its
sole discretion, and in an amount equal to the full insurable value of the
Facility or the maximum amount available, whichever is less, from the "flood
pool", if the Facility is located in an area designated by the Secretary of
Housing and Urban Development or the Federal Emergency Management Agency as
having special flood hazards.

            h. Workers' compensation insurance or other similar insurance which
may be required by governmental authorities or applicable legal requirements in
an amount at least equal to the minimum required by law, and employer's
liability insurance with a limit of Five Hundred Thousand Dollars ($500,000) per
accident and per disease per employee, and Five Hundred Thousand Dollars
($500,000) in the aggregate for disease arising in connection with the operation
of the Property.

            i. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender and which
are customarily required by institutional lenders to similar properties,
similarly situated, including, without limitation, coverages against other
insurable hazards (including, by way of example only, earthquake, sinkhole and
mine subsidence), which at the time are commonly insured against and generally
available.

            All insurance required under this Section 4.4 shall have a term of
not less than one year and shall be in the form and amount and with deductibles
as, from time to time, shall be reasonably acceptable to Lender, under valid and
enforceable policies issued by financially responsible insurers either licensed
to transact business in the State where the Facility is located, or obtained
through a duly authorized surplus lines insurance agent or otherwise in
conformity with the laws of such State, with (a) a rating of not less than the
third (3rd) highest rating category by either Standard & Poor's Ratings Group,
Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch
Investors Service, Inc. or any successors thereto, or (b) an A:V rating in
Best's Key Rating Guide; provided, however, that if the initial principal
balance of the Loan is greater than Seven Million Five Hundred Thousand Dollars
($7,500,000.00), such insurer must, in lieu of such Best's rating, have a long
term senior debt rating of at least "A" by Standard & Poor's Ratings Group.
Originals or certified copies of all insurance policies shall be delivered to
and held by Lender. All such policies shall name Lender as an additional
insured, shall provide for loss payable solely to Lender and shall contain: (i)
standard "non-contributory mortgagee" endorsement or its equivalent relating,
inter alia, to recovery by Lender notwithstanding the negligent or willful acts

                                       16
<PAGE>   17

or omissions of Borrower and notwithstanding (a) occupancy or use of the
Facility for purposes more hazardous than those permitted by the terms of such
policy, (b) any foreclosure or other action taken by Lender pursuant to the
Mortgage upon the occurrence of an Event of Default, or (c) any change in title
or ownership of the Facility; and (ii) a provision that such policies shall not
be canceled or amended, including, without limitation, any amendment reducing
the scope or limits of coverage, or failed to be renewed, without at least
thirty (30) days prior written notice to Lender in each instance. With respect
to insurance policies which require payment of premiums annually, not less than
thirty (30) days prior to the expiration dates of the insurance policies
obtained pursuant to this Agreement, Borrower shall pay such amount, except to
the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not
less than thirty (30) days prior to the expiration dates of the insurance
policies obtained pursuant to this Agreement, originals or certified copies of
renewals of such policies (or certificates evidencing such renewals) bearing
notations evidencing the payment of premiums or accompanied by other evidence
satisfactory to Lender of such payment, which premiums shall not be paid by
Borrower through or by any financing arrangement, shall be delivered by Borrower
to Lender. Borrower shall not carry separate insurance, concurrent in kind or
form or contributing in the event of loss, with any insurance required under
this Section 4.4. If the limits of any policy required hereunder are reduced or
eliminated due to a covered loss, Borrower shall pay the additional premium, if
any, in order to have the original limits of insurance reinstated, or Borrower
shall purchase new insurance in the same type and amount that existed
immediately prior to the loss.

            If Borrower fails to maintain and deliver to Lender the original
policies or certificates of insurance required by this Agreement, Lender may, at
its option, procure such insurance and Borrower shall pay or, as the case may
be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender,
with interest thereon at the Default Rate from the date paid by Lender to the
date of repayment and such sum shall constitute a part of the Loan Obligations.

            The insurance required by this Agreement may, at the option of
Borrower, be effected by blanket and/or umbrella policies issued to Borrower or
to an Affiliate of Borrower covering the Facility and the properties of such
Affiliate; provided that, in each case, the policies otherwise comply with the
provisions of this Agreement and allocate to the Facility, from time to time,
the coverage specified by this Agreement, without possibility of reduction or
coinsurance by reason of, or damage to, any other property (real or personal)
named therein. If the insurance required by this Agreement shall be effected by
any such blanket or umbrella policies, Borrower shall furnish to Lender original
policies or certified copies thereof, with schedules attached thereto showing
the amount of the insurance provided under such policies which is applicable to
the Facility.

               Neither Lender nor its agents or employees shall be liable for
any loss or damage insured by the insurance policies required to be maintained
under this Agreement; it being understood that (i) Borrower shall look solely to
its insurance company for the recovery of such loss or damage, (ii) such
insurance company shall have no rights of subrogation against Lender, its agents
or employees, and (iii) Borrower shall use its best efforts to procure from such
insurance

                                       17
<PAGE>   18

company a waiver of subrogation rights against Lender. If, however, such
insurance policies do not provide for a waiver of subrogation rights against
Lender (whether because such a waiver is unavailable or otherwise), then
Borrower hereby agrees, to the extent permitted by law and to the extent not
prohibited by such insurance policies, to waive its rights of recovery, if any,
against Lender, its agents and employees, whether resulting from any damage to
the Facility, any liability claim in connection with the Facility or otherwise.
If any such insurance policy shall prohibit Borrower from waiving such claims,
then Borrower must obtain from such insurance company a waiver of subrogation
rights against Lender.

            If loss or damage to the Facility is equal to or less than $25,000
and there shall exist no Default or Event of Default at the time, the insurance
proceeds shall be made available to the Borrower for the sole purpose of the
repair and restoration of the Facility, to the same quality and condition as
existed prior to such loss or damage.

            If the loss or damage insured by the casualty insurance required to
be maintained under this Agreement exceeds $25,000, Lender may make the net
proceeds of insurance or condemnation (after payment of Lender's reasonable
costs and expenses) available to Borrower for Borrower's repair, restoration and
replacement of the Improvements, Equipment and Inventory damaged or taken on the
following terms and subject to Borrower's satisfaction of the following
conditions:

            a. The aggregate amount of all such proceeds shall not exceed the
aggregate amount of all such Loan Obligations.

            b. At the time of such loss or damage and at all times thereafter
while Lender is holding any portion of such proceeds, there shall exist no
Default or Event of Default;

            c. The Improvements, Equipment, and Inventory for which loss or
damage has resulted shall be capable of being restored to its preexisting
condition and utility in all material respects with a value equal to or greater
than that which existed prior to such loss or damage and such restoration shall
be capable of being completed prior to the earlier to occur of (i) the
expiration of business interruption insurance as determined by an independent
inspector or (ii) the Maturity Date;

            d. Within thirty (30) days from the date of such loss or damage
Borrower shall have given Lender a written notice electing to have the proceeds
applied for such purpose;

            e. Within sixty (60) days following the date of notice under the
preceding subparagraph (c) and prior to any proceeds being disbursed to
Borrower, Borrower shall have provided to Lender all of the following:

                                       18
<PAGE>   19

                (i)     complete plans and specifications for restoration,
                        repair and replacement of the Improvements, Equipment
                        and Inventory damaged to the condition, utility and
                        value required by (b) above,

                (ii)    if loss or damage exceeds $100,000, fixed-price or
                        guaranteed maximum cost bonded construction contracts
                        for completion of the repair and restoration work in
                        accordance with such plans and specifications,

                (iii)   builder's risk insurance for the full cost of
                        construction with Lender named under a standard
                        mortgagee loss-payable clause,

                (iv)    such additional funds as in Lender's reasonable opinion
                        are necessary to complete such repair, restoration and
                        replacement, and

                (v)     copies of all permits and licenses necessary to complete
                        the work in accordance with the plans and
                        specifications;

            f. Lender may, at Borrower's expense, retain an independent
inspector to review and approve plans and specifications and completed
construction and to approve all requests for disbursement, which approvals shall
be conditions precedent to release of proceeds as work progresses;

            g. No portion of such proceeds shall be made available by Lender for
architectural reviews or for any other purposes which are not directly
attributable to the cost of repairing, restoring or replacing the Improvements,
Equipment and Inventory for which a loss or damage has occurred unless the same
are covered by such insurance;

            h. Borrower shall diligently pursue such work and shall complete
such work prior to the earlier to occur of the expiration of business
interruption insurance or the Maturity Date;

            i. The Facility continues to achieve the Debt Service Coverage
requirements set forth in Section 4.12 below;

            j. Each disbursement by Lender of such proceeds and deposits shall
be funded subject to conditions and in accordance with disbursement procedures
which a commercial construction lender would typically establish in the exercise
of sound banking practices and shall be made only upon receipt of disbursement
requests on an AIA G702/703 form (or similar form approved by Lender) signed and
certified by Borrower and, if required by the Lender, its architect and general
contractor with appropriate invoices and lien waivers as required by Lender;

            k. Lender shall have a first lien security interest in all building
materials and completed repair and restoration work and in all fixtures and
equipment acquired with such

                                       19
<PAGE>   20

proceeds, and Borrower shall execute and deliver such mortgages, deeds of trust,
security agreements, financing statements and other instruments as Lender shall
request to create, evidence, or perfect such lien and security interest; and

            l. In the event and to the extent such proceeds are not required or
used for the repair, restoration and replacement of the Improvements, Equipment
and Inventory for which a loss or damage has occurred, or in the event Borrower
fails to timely make the election to have insurance proceeds applied to the
restoration of the Improvements, Equipment, or Inventory, or, having made such
election, fails to timely comply with the terms and conditions set forth herein,
or, if the conditions set forth herein for such application are otherwise not
satisfied, then Lender shall be entitled without notice to or consent from
Borrower to apply such proceeds, or the balance thereof, at Lender's option
either (i) to the full or partial payment or prepayment of the Loan Obligations
(without premium) in the manner aforesaid, or (ii) to the repair, restoration
and/or replacement of all or any part of such Improvements, Equipment and
Inventory for which a loss or damage has occurred.

            Borrower appoints Lender as Borrower's attorney-in-fact to cause the
issuance of or an endorsement of any insurance policy to bring Borrower into
compliance herewith and, as limited above, at Lender's sole option, to make any
claim for, receive payment for, and execute and endorse any documents, checks or
other instruments in payment for loss, theft, or damage covered under any such
insurance policy; however, in no event will Lender be liable for failure to
collect any amounts payable under any insurance policy.

        4.5 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause the
Manager to provide to Lender, at its address set forth in Section 8.7 and at
GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite 305,
Birmingham, Alabama 35209, the following financial statements and information on
a continuing basis during the term of the Loan:

            a. Within one hundred twenty (120) days after the end of each fiscal
year of the Facility and the Borrower (if different from the Facility) and the
Guarantor, respectively, unaudited financial statements of the operations of the
Facility, unaudited and consolidating financial statements of the Borrower and
audited financial statements of the Guarantor, respectively, prepared by a
nationally recognized accounting firm or independent certified public accountant
acceptable to Lender, which statements shall be prepared in accordance with
GAAP, and shall include a balance sheet and a statement of income and expenses
for the year then ended, certified by a financial officer of Borrower and the
Guarantor, to be true and correct.

            b. Within one hundred twenty (120) days after the end of each fiscal
year of the Manager, unaudited and consolidating financial statements of the
Manager prepared by a nationally recognized accounting firm or independent
certified public accountant acceptable to Lender, which statements shall be
prepared in accordance with GAAP, and shall include a balance sheet and a
statement of income and expenses for the year then ended, and, shall be
certified as true and correct in all material respects by a financial officer of
the Manager.

                                       20
<PAGE>   21

            c. Within forty-five (45) days after the end of each fiscal quarter
of the Facility and Borrower (if different from the Facility), unaudited
financial statements of the operations of the Facility and Borrower prepared in
accordance with GAAP, which statements shall include a balance sheet and
statement of income and expenses for the quarter then ended, and shall be
certified as true and correct in all material respects by a financial officer of
Borrower to be true and correct.

            d. Within forty-five (45) days after the end of each fiscal quarter
of the Manager, unaudited interim financial statements of the Manager, prepared
in accordance with GAAP, which shall include a balance sheet and statement of
income and expenses for the quarter then ended, and shall be certified as true
and correct in all material respects by a financial officer of the Manager to be
true and correct.

            e. Within forty-five (45) days of the end of each calendar quarter,
a statement of the number of bed days available and the actual patient days
incurred for the quarter, together with quarterly census information of the
Facility as of the end of such quarter in sufficient detail to show patient-mix
(i.e., private, Medicare, Medicaid, and V.A.) on a daily average basis for such
year through the end of such quarter, certified by the chief financial officer
of Borrower or Manager to be true and correct. Such statements of the Facility
shall be accompanied by the Summary of Financial Statements and Census Data
attached hereto as Exhibit "D".

            f. Within forty-five (45) days after the end of each fiscal quarter
of the Facility, unaudited monthly financial statements of the operations of the
Facility, prepared in accordance with GAAP, which statements shall include a
balance sheet and statement of income and expenses for the month then ended,
certified by a financial officer of the Borrower or Manager to be true and
correct.

            g. Upon request by Lender, as soon as available, but in no event
more than thirty (30) days after the filing deadline, as may be extended from
time to time, copies of all federal, state and local tax returns of Borrower and
Guarantor, together with all supporting documentation and required schedules.

            h. Within twenty (20) days of filing or receipt, all Medicare and/or
Medicaid cost reports and any amendments thereto filed with respect to the
Facility, and all responses, audit reports, or other inquiries with respect to
such cost reports.

            i. Within ten (10) days of receipt, a copy of the Medicaid Rate
Calculation Worksheet (or the equivalent thereof) issued by the appropriate
Medicaid Agency for the Facility.

            j. Within ten (10) business days of receipt, any and all notices
(regardless of form) from any and all licensing and/or certifying agencies that
the Facility license and/or the Medicare and/or Medicaid certification of the
Facility is being downgraded to a substandard category, revoked, or suspended or
that any such action is pending or being considered.

                                       21
<PAGE>   22

            k. Upon Lender's request, evidence of payment by Borrower or Manager
of any applicable provider bed taxes or similar taxes, which taxes Borrower
agrees to pay.

            l. Within one hundred twenty (120) days of the Borrower's fiscal
year end, and more frequently if reasonably requested by Lender, an aged
accounts receivable report of the Facility in sufficient detail to show amounts
due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.)
by the account age classifications of 30 days, 60 days, 90 days, 120 days, and
over 120 days.

            m. Within forty-five (45) days after the end of each calendar
quarter, a statement of the number of patient days, if any, for which the
Facility has received the Medicare default rate for any applicable period. For
purposes herein, "default rate" shall have the meaning ascribed to it in that
certain applicable Medicare rate notification letter prepared in connection with
any review or survey of the Facility.

            The Lender reserves the right to require that the annual financial
statements of the Borrower and the Manager be audited and prepared by a
nationally recognized accounting firm or independent certified public accountant
acceptable to Lender if (i) an Event of Default exists, (ii) if required by
internal policy or by any investor in any securities backed in whole or in part
by the Loan or any rating agency rating such securities, or (iii) if Lender has
reasonable grounds to believe that the unaudited financial statements do not
accurately represent the financial condition of the Borrower, Guarantor or the
Manager, as the case may be.

            The Lender further reserves the right to require such other
financial information of Borrower, Guarantor, Manager and/or the Facility, in
such form and at such other times (including monthly or more frequently but not
more frequently than reasonable) as Lender shall deem reasonably necessary, and
Borrower agrees promptly to provide or to cause to be provided, such information
to Lender. All financial statements must be in the form and detail as Lender may
from time to time reasonably request.

            n. Within forty-five (45) days of the end of each calendar quarter,
a certificate of a financial officer of the Borrower confirming compliance with
the covenants and requirements set forth above.

        4.6 COMPLIANCE CERTIFICATE. (a) At the time of furnishing the quarterly
operating statements required under the foregoing Section, furnish to Lender a
compliance certificate in the form attached hereto as Exhibit "E" executed by
the chief financial officer, of the Borrower;

            (b) Upon Lender's written request, furnish Lender with a certificate
stating that Borrower has complied with and is in compliance with all terms,
covenants and conditions of the Loan Documents to which Borrower is a party and
that there exists no Default or Event of Default or, if such is not the case,
that one or more specified events have occurred, and that the

                                       22
<PAGE>   23

representations and warranties contained herein are true and correct with the
same effect as though made on the date of such certificate.

        4.7 BOOKS AND RECORDS. Keep and maintain at all times at the Facility or
the management agent's offices, and upon Lender's request shall make available
at the Facility, complete and accurate books of account and records (including
copies of supporting bills and invoices) adequate to reflect correctly the
results of the operation of the Facility, and copies of all written contracts,
leases (if any), and other instruments which affect the Property, which books,
records, contracts, leases (if any) and other instruments shall be subject to
examination and inspection at any reasonable time by Lender (upon reasonable
advance notice, which for such purposes only may be given orally, except in the
case of an emergency or following an Event of Default, in which case no advance
notice shall be required) provided, however, that if an Event of Default has
occurred and is continuing, Borrower shall deliver to Lender upon written demand
all books, records, contracts, leases (if any) and other instruments relating to
the Facility or its operation and Borrower authorizes Lender to obtain a credit
report on Borrower at any time.

        4.8 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause to be paid
all other Indebtedness now owing or hereafter incurred by Borrower in accordance
with the terms of such Indebtedness, except such Indebtedness owing to those
other than Lender which is being contested in good faith and with respect to
which any execution against properties of Borrower has been effectively stayed
and for which reserves and collateral for the payment and security thereof have
been established as determined by Lender in its sole discretion.

        4.9 RECORDS OF ACCOUNTS. Maintain all records, including records
pertaining to the Accounts of Borrower, at the chief executive office of
Borrower as set forth in this Agreement.

        4.10 CONDUCT OF BUSINESS. Conduct, or cause the Manager to conduct the
operation of the Facility at all times in a manner consistent with the level of
operation of the Facility as of the date hereof, including without limitation,
the following:

                (i)     to maintain the standard of care for the patients of the
                        Facility at all times at a level necessary to ensure
                        quality care for the patients of the Facility in
                        accordance with customary and prudent industry
                        standards;

                (ii)    to operate the Facility in a prudent manner and in
                        compliance with applicable laws and regulations relating
                        thereto and cause all Permits, Reimbursement Contracts,
                        and any other agreements necessary for the use and
                        operation of the Facility or as may be necessary for
                        participation in the Medicaid, Medicare, or other
                        applicable reimbursement programs to remain in effect
                        without reduction in the number of licensed beds or beds
                        authorized for use in the Medicaid, Medicare, or other
                        applicable reimbursement programs;

                                       23
<PAGE>   24

                (iii)   to maintain sufficient Inventory and Equipment of types
                        and quantities at the Facility to enable Borrower
                        adequately to perform operations of the Facility;

                (iv)    to keep all Improvements and Equipment located on or
                        used or useful in connection with the Facility in good
                        repair, working order and condition, reasonable wear and
                        tear excepted, and from time to time make all needed and
                        proper repairs, renewals, replacements, additions, and
                        improvements thereto to keep the same in good operating
                        condition;

                (v)     to maintain sufficient cash in the operating accounts of
                        the Facility in order to satisfy the working capital
                        needs of the Facility; and

                (vi)    to keep all required Permits current and in full force
                        and effect.

        4.11 PERIODIC SURVEYS. Furnish or cause Manager to furnish to Lender
within twenty (20) days of receipt a copy of any Medicare, Medicaid, or other
licensing agency survey or report and any statement of deficiencies and/or any
other report indicating that any action is pending or being considered to
downgrade the Facility to a substandard category, and within the time period
required by the particular agency for furnishing a plan of correction also
furnish or cause to be furnished to Lender a copy of the plan of correction
generated from such survey or report for the Facility, and correct or cause to
be corrected any deficiency, the curing of which is a condition of continued
licensure or for full participation in Medicaid, Medicare or other reimbursement
program pursuant to any Reimbursement Contract for existing patients or for new
patients to be admitted with Medicaid or Medicare coverage, by the date required
for cure by such agency (plus extensions granted by such agency).

        4.12 DEBT SERVICE COVERAGE REQUIREMENTS.

            a. Achieve (commencing with the closing of the Loan), and, within
forty-five (45) days after the end of each fiscal quarter of Borrower, provide
evidence satisfactory to the Lender of the achievement of, the following Debt
Service Coverage and Combined Debt Service Coverage ratios:

                (i)     a Debt Service Coverage, after deduction of Actual
                        Management Fees, of not less than 1.0 to 1.0, based on a
                        rolling twelve (12) month period, tested quarterly;

                (ii)    a Debt Service Coverage, after deduction of Assumed
                        Management Fees, of not less than 1.0 to 1.0, based on a
                        rolling twelve (12) month period, tested quarterly;

                                       24
<PAGE>   25

                (iii)   a Combined Debt Service Coverage after deduction of
                        Assumed Management Fees, of not less than 1.3 to 1.0,
                        based on a rolling twelve (12) month period, tested
                        quarterly.

            b. If Borrower fails to achieve or provide evidence of achievement
of the Debt Service Coverage for the Facility or the Combined Debt Service
Coverage, upon fifteen (15) days written notice to Borrower, Borrower will
deposit with Lender additional cash or other liquid collateral in an amount
which, when added to the first number of the Debt Service Coverage calculation,
would have resulted in the noncomplying Debt Service Coverage requirement having
been satisfied. If such failure continues for two (2) consecutive quarters, on
the third consecutive quarter, if Borrower again fails to achieve or provide
evidence of the achievement of the Debt Service Coverages required above, upon
fifteen (15) days written notice to Borrower, Borrower will deposit with Lender
additional cash or other liquid collateral (with credit for amounts currently
being held by Lender pursuant to the foregoing sentence), in an amount which, if
the same had been applied on the first day of the first quarter for which such
noncompliance of the Debt Service Coverage requirement occurred to reduce the
outstanding principal indebtedness of the Loan Obligations, would have resulted
in the noncomplying Debt Service Coverage requirement having been satisfied, and
Borrower agrees promptly to provide such additional cash or other liquid
collateral, which increased amount will be held by Lender for an additional two
(2) consecutive calendar quarters. Such additional Collateral will be held by
the Lender in a standard custodial account, and shall constitute additional
collateral for the Loan Obligations and an "Account" as defined in this
Agreement, and, upon the occurrence of an Event of Default, may be applied by
the Lender, in such order and manner as the Lender may elect, to the reduction
of the Loan Obligations. Borrower shall not be entitled to any interest earned
on such additional Collateral. Provided that there is no outstanding Default or
Event of Default, such additional Collateral which has not been applied to the
Loan Obligations will be released by the Lender at such time as Borrower
provides the Lender with evidence that the required Debt Service Coverage
requirements outlined above have been achieved and maintained (without regard to
any cash deposited pursuant to this Section 4.12) as of the end of each of two
(2) consecutive quarters.

        4.13 OCCUPANCY. Maintain or cause to be maintained at all times a daily
average annual occupancy for the Facility of seventy-five percent (75%) or
higher (based on the number of beds available at the Facility, with the minimum
number of beds available at the Facility remaining at or in excess of the number
of beds set forth in the Facility description at page 3, herein).

        4.14 CAPITAL EXPENDITURES. Maintain the Facility in good condition and
make minimum capital expenditures for the Facility in each fiscal year in the
amount of $300 per bed (which capital expenditures may include those necessary
for ordinary repairs and routine maintenance), and, within forty-five (45) days
of the end of such fiscal year, provide evidence thereof satisfactory to Lender.
In the event that Borrower shall fail to do so, Borrower shall, upon Lender's
written request, immediately establish and maintain a capital expenditures
reserve fund with Lender equal to the difference between the required amount per
bed and the amount per bed actually spent by the Borrower. Borrower grants to
Lender a right of setoff against all moneys in the capital expenditures

                                       25
<PAGE>   26

reserve fund, and Borrower shall not permit any other Lien to exist upon such
fund. The proceeds of such capital expenditures reserve fund will be disbursed
monthly upon Lender's receipt of satisfactory evidence that Borrower has made
the required capital expenditures. Upon Borrower's failure to adequately
maintain the Facility in good condition, Lender may, but shall not be obligated
to, make such capital expenditures and may apply the moneys in the capital
expenditures reserve fund for such purpose. To the extent there are insufficient
moneys in the capital expenditures reserve fund for such purposes, all funds
advanced by Lender to make such capital expenditures shall constitute a portion
of the Loan Obligations, shall be secured by the Mortgage and shall accrue
interest at the Default Rate until paid. Upon an Event of Default, Lender may
apply any moneys in the capital expenditures reserve fund to the Loan
Obligations, in such order and manner as Lender may elect. For any partial
fiscal year during which the Loan is outstanding, the required expenditure
amount shall be prorated by multiplying the total of the required amount per bed
[unit] by a fraction, the numerator of which is the number of days during such
year for which all or part of the Loan is outstanding and the denominator of
which is the number of days in such year.

        4.15 MANAGEMENT AGREEMENT. Maintain the Management Agreement in full
force and effect and timely perform all of Borrower's obligations thereunder and
enforce performance of all obligations of the Manager thereunder and not permit
the termination, amendment or assignment of the Management Agreement unless the
prior written consent of Lender is first obtained, which consent shall not be
unreasonably withheld. Borrower will enter and cause the Manager to enter into
the Subordination Agreement. Borrower will not enter into any other management
agreement without Lender's prior written consent, which consent shall not be
unreasonably withheld, which consent may be in the sole and absolute discretion
of Lender.

        4.16 UPDATED APPRAISALS. For so long as the Loan remains outstanding, if
any Event of Default shall occur hereunder, or if, in Lender's judgment, a
material depreciation in the value of the Property shall have occurred, then in
any such event, Lender may cause the Property to be appraised by an appraiser
selected by Lender, and in accordance with Lender's appraisal guidelines and
procedures then in effect, and Borrower agrees to cooperate in all respects with
such appraisals and furnish to the appraisers all requested information
regarding the Property and the Facility. Borrower agrees to pay all reasonable
costs incurred by Lender in connection with such appraisal which costs shall be
secured by the Mortgage and shall accrue interest at the Default Rate until
paid.

        4.17 COMPLY WITH COVENANTS AND LAWS. Comply, in all material respects,
with all applicable covenants and restrictions of record and all laws,
ordinances, rules and regulations and keep the Facility and the Property in
compliance with all applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act and
regulations promulgated thereunder, and laws, ordinances, rules and regulations
relating to zoning, health, building codes, setback requirements, Medicaid and
Medicare laws and keep the Permits for the Facility in full force and effect.

                                       26
<PAGE>   27

        4.18 TAXES AND OTHER CHARGES. Subject to Borrower's right to contest the
same as set forth in Section 9(c) of the Mortgage, pay all taxes, assessments,
charges, claims for labor, supplies, rent, and other obligations which, if
unpaid, might give rise to a Lien against property of Borrower, except Liens to
the extent permitted by this Agreement.

        4.19 COMMITMENT LETTER. Provide all items and pay all amounts required
by the Commitment Letter. If any term of the Commitment Letter shall conflict
with the terms of this Agreement, this Agreement shall govern and control. As to
any matter contained in the Commitment Letter, and as to which no mention is
made in this Agreement or the other Loan Documents, the Commitment Letter shall
continue to be in effect and shall survive the execution of this Agreement and
all other Loan Documents.

        4.20 NOTICE OF FEES OR PENALTIES. Immediately notify Lender, upon
Borrower's knowledge thereof, of the assessment by any state or any Medicare,
Medicaid, health or licensing agency of any fines or penalties against Borrower,
Manager or the Facility.

        4.21 DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service Reserve
Fund Agreement, establish and maintain a debt service reserve fund with Lender
equal to approximately three (3) months of debt service payments with respect to
the Note as reasonably estimated by Lender, rounded upward to the nearest
$1,000.00.

        4.22 INTENTIONALLY DELETED.

        4.23 INTENTIONALLY DELETED.

        4.24 LOAN CLOSING CERTIFICATION. Immediately notify Lender, in writing,
in the event any representation, warranty or covenant contained herein or in
that certain Loan Closing Certification, executed by Borrower for the benefit of
Lender of even date herewith, becomes untrue or there shall have been any
material adverse change in any such representation, warranty or covenant.

                                    ARTICLE V
                         NEGATIVE COVENANTS OF BORROWER

        Until the Loan Obligations have been paid in full, Borrower shall not:

        5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its
interest in the Permits, or Reimbursement Contracts (including rights to payment
thereunder) pertaining to the Facility, or assign, transfer, or remove or permit
any other person to assign, transfer, or remove any records pertaining to the
Facility including, without limitation, patient records, medical and clinical
records (except for removal of such patient records as directed by the patients
owning such records or by governmental or judicial order or direction), without
Lender's prior written consent, which consent may be granted or refused in
Lender's sole discretion.

                                       27
<PAGE>   28

        5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to exist any
Lien upon or with respect to the Facility or any of its properties, rights,
income or other assets relating thereto, including, without limitation, the
Collateral, whether now owned or hereafter acquired, other than the following
permitted Liens ("Permitted Encumbrances"):

            a. Liens at any time existing in favor of the Lender;

            b. Liens which are listed in Exhibit "F" attached hereto;

            c. Inchoate Liens arising by operation of law for the purchase of
labor, services, materials, equipment or supplies, provided payment shall not be
delinquent and, if such Lien is a lien upon any of the Property or Improvements,
such Lien must be fully disclosed to Lender and bonded off and removed from the
Property and Improvements within thirty (30) days of its creation in a manner
satisfactory to Lender;

            d. Liens incurred in the ordinary course of business in connection
with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of tenders,
statutory obligations, leases and contracts (other than for money borrowed or
for credit received with respect to property acquired) entered into in the
ordinary course of business as presently conducted or to secure obligations for
surety or appeal bonds;

            e. Liens for current year's taxes, assessments or governmental
charges or levies not yet due and payable;

            f. Liens in favor of AmSouth Bank as described and set forth in the
Intercreditor Agreement, as amended;

            g. Liens securing purchase money loans not to exceed $300,000 in the
aggregate at any one time outstanding; and

            h. Intra-Borrower Loans more particularly described in the Cross-
Collateralization and Cross-Default Agreement.

        5.3 MERGER, CONSOLIDATION, ETC. Except as otherwise provided in the
Mortgage, consummate any merger, consolidation or similar transaction, or sell,
assign, lease or otherwise dispose of (whether in one transaction or in a series
of transactions), all or substantially all of its assets (whether now or
hereafter acquired), without the prior written consent of the Lender, which
consent may be granted or refused in Lender's sole discretion.

        5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS; INDEBTEDNESS.

                                       28
<PAGE>   29

            a. Dissolve or terminate or materially amend the terms of its
certificate of incorporation, articles of organization, operating agreement or
partnership agreement, as applicable, the terms of which require Borrower to be
a Single-Purpose Entity;

            b. enter into any transaction of merger or consolidation, or
liquidate or dissolve itself (or suffer any liquidation or dissolution), or
acquire by purchase or otherwise all or substantially all the business or assets
of, or any Stock or other evidence of beneficial ownership of, any Person;

            c. guarantee or otherwise become liable on or in connection with any
obligation of any other Person, except for indebtedness to AmSouth Bank
described in the Intercreditor Agreement, as amended;

            d. at any time own any encumbered asset other than (i) the
Collateral, and (ii) incidental personal property necessary for the operation of
the Property;

            e. at any time be engaged directly or indirectly, in any business
other than the ownership, management and operation of the Collateral;

            f. enter into any contract or agreement with any general partner,
principal, member or Affiliate of Borrower or any Affiliate of any general
partner, principal or member of Borrower (other than the Management Agreement)
except upon terms and conditions that are intrinsically fair and substantially
similar to those that would be available on an arm's-length basis with third
parties other than an Affiliate;

            g. incur, create or assume any indebtedness, secured or unsecured,
direct or contingent (including guaranteeing any obligation), other than (i) the
Loan, (ii) indebtedness which represents trade payables or accrued expenses
incurred in the ordinary course of business of owning and operating the Property
and (iii) the indebtedness to AmSouth Bank described and set forth in the
Intercreditor Agreement, as amended; no other debt will be secured (senior,
subordinate or pari passu) by the Property;

            h. make any loans or advances to any third party (including any
Affiliate);

            i. become insolvent or fail to pay its debts from its assets as the
same shall become due;

            j. fail to do all things necessary to preserve its existence as a
Single-Purpose Entity, and will not, nor will any partner, limited or general,
member or shareholder thereof, amend, modify or otherwise change its partnership
certificate, partnership agreement, articles of organization, operating
agreement, articles of incorporation or by-laws in a manner which adversely
affects Borrower's existence as a Single-Purpose Entity;

                                       29
<PAGE>   30

            k. fail to conduct and operate its business as presently conducted
and operated;

            l. fail to maintain books and records and bank accounts separate
from those of its Affiliates, including its members, general partners or
shareholders, as applicable;

            m. fail to at all times hold itself out to the public as a legal
entity separate and distinct from any other entity (including any Affiliate
thereof, including the general partner or any member or shareholder of Borrower
or any Affiliate of the general partner or any member or shareholder of
Borrower, as applicable);

            n. Intentionally Deleted;

            o. fail to maintain adequate capital for the normal obligations
reasonably foreseeable in a business of its size and character and in light of
its contemplated business operations;

            p. seek the dissolution or winding up, in whole or in part, of
Borrower;

            q. commingle the funds and other assets of Borrower with those of
any general partner, any member, any shareholder, any Affiliate or any other
Person, except for daily sweeps to a master account for Borrower and its
Affiliates from which necessary operating funds will be disbursed to a control
account in the name of Borrower;

            r. fail to maintain its assets in such a manner that it is not
costly or difficult to segregate, ascertain or identify its individual assets
from those of any Affiliate or any other Person; and

            s. hold itself out to be responsible for the debts or obligations of
any other Person, other than with respect to the indebtedness to AmSouth
described and set forth in the Intercreditor Agreement, as amended.

        5.5 CHANGE OF BUSINESS. Make any material change in the nature of its
business as it is being conducted as of the date hereof.

        5.6 CHANGES IN ACCOUNTING. Change its methods of accounting, unless such
change is permitted by GAAP, and provided such change does not have the effect
of curing or preventing what would otherwise be an Event of Default or Default
had such change not taken place.

        5.7 ERISA FUNDING AND TERMINATION. Permit (a) the funding requirements
of ERISA with respect to any employee plan to be less than the minimum required
by ERISA at any time, or (b) any employee plan to be subject to involuntary
termination proceedings at any time.

                                       30
<PAGE>   31

        5.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction (other than
the Management Agreement) with any Affiliate of Borrower other than in the
ordinary course of its business and on fair and reasonable terms no less
favorable to Borrower than those it could obtain in a comparable arms-length
transaction with a Person not an Affiliate.

        5.9 TRANSFER OF OWNERSHIP INTERESTS. Except for the pledge of membership
interests to secure the indebtedness to AmSouth Bank as otherwise provided in
the Mortgage, permit a change in the ownership interests of the Persons
comprising the Borrower unless the written consent of the Lender is first
obtained, which consent may be granted or refused in Lender's sole discretion.

        5.10 CHANGE OF USE. Alter or change the use of the Facility or permit
any management agreement, other than the Management Agreement, or lease for the
Facility or enter into any operating lease for the Facility, unless Borrower
first notifies Lender and provides Lender a copy of the proposed lease agreement
or management agreement, obtains Lender's written consent thereto, which consent
may be withheld in Lender's sole discretion, and obtains and provides Lender
with a subordination agreement in form satisfactory to Lender, as determined by
Lender in its sole discretion, from such manager or lessee subordinating to all
rights of Lender.

        5.11 PLACE OF BUSINESS. Change its chief executive office or its
principal place of business without first giving Lender at least thirty (30)
days prior written notice thereof and promptly providing Lender such information
and amendatory financing statements as Lender may request in connection
therewith.

        5.12 ACQUISITIONS. Directly or indirectly, purchase, lease, manage, own,
operate, or otherwise acquire any property or other assets (or any interest
therein) which are not used in connection with the operation of the Facility.

        5.13 INTENTIONALLY DELETED.

                                   ARTICLE VI
                              ENVIRONMENTAL HAZARDS

        6.1 PROHIBITED ACTIVITIES AND CONDITIONS. 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 6.2, Borrower shall not cause
or permit any of the following:

            a. The presence, use, generation, release, treatment, processing,
storage, handling, or disposal-of any Hazardous Materials in, on or under the
Property or any Improvements;

            b. The transportation of any Hazardous Materials to, from, or across
the Property;

                                       31
<PAGE>   32

            c. Any occurrence or condition on the Property or in the
Improvements or any other property of Borrower that is adjacent to the Property,
which occurrence or condition is or may be in violation of Hazardous Materials
Laws; or

            d. Any violation of or noncompliance with the terms of any
Environmental Permit with respect to the Property, the Improvements or any
property of Borrower that is adjacent to the Property.

The matters described in clauses (a) through (d) above are referred to
collectively in this Article VI as "Prohibited Activities and Conditions" and
individually as a "Prohibited Activity and Condition."

        6.2 EXCLUSIONS. Notwithstanding any other provision of Article VI to the
contrary, "Prohibited Activities and Conditions" shall not include the safe and
lawful use and storage of quantities of (i) pre-packaged supplies, medical
waste, cleaning materials and petroleum products customarily used in the
operation and maintenance of comparable Facilities, (ii) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by occupants of the Facility; and (iii) petroleum products
used in the operation and maintenance of motor vehicles from time to time
located on the Property's parking areas or stored underground or above ground
storage tanks used in the operation of the Facility, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Hazardous Materials Laws.

        6.3 PREVENTIVE ACTION. Borrower shall take all appropriate steps
(including the inclusion of appropriate provisions in any Leases approved by
Lender which are executed after the date of this Agreement) to prevent its
employees, agents, contractors, tenants and occupants of the Facility from
causing or permitting any Prohibited Activities and Conditions.

        6.4 O & M PROGRAM COMPLIANCE. 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 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 Loan
Obligations.

        6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to Lender that, except as previously disclosed by
Borrower to Lender in writing or in the Phase I Environmental Report prepared
for Lender by ESA1 in connection with the Loan (the "Environmental Report"):

            a. Borrower has not at any time caused or permitted any Prohibited
Activities and Conditions.

                                       32
<PAGE>   33

            b. No Prohibited Activities and Conditions exist or, to best
knowledge of Borrower, have existed.

            c. The Property and the Improvements do not now contain any
underground storage tanks, and, to the best of Borrower's knowledge after
reasonable and diligent inquiry, the Property and the Improvements have not
contained any underground storage tanks in the past. If there is an underground
storage tank located on the Property or the Improvements which has been
previously disclosed by Borrower to Lender in writing, that tank complies with
all requirements of Hazardous Materials Laws, except as disclosed in the
Environmental Report.

            d. 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 Property
and the Improvements in accordance with Hazardous Materials Laws now in effect
and all such Environmental Permits are in full force and effect. No event has
occurred with respect to the Property and/or Improvements that constitutes, or
with the passing of time or the giving of notice would constitute, noncompliance
with the terms of any Environmental Permit.

            e. 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 Property and/or the Improvements and allege, arise
out of, or relate to any Prohibited Activity and Condition.

            f. 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 Property, the
Improvements or any other property of Borrower that is adjacent to the Property.
The representations and warranties in this Article VI 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 Loan
Obligations have been paid in full.

        6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify Lender in
writing of any and all of the following that may occur:

            a. Borrower's discovery of any Prohibited Activity and Condition.

            b. 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 and
Conditions or any other environmental, health or safety matters affecting the
Property, the Improvements or any other property of Borrower that is adjacent to
the Property.

            c. Any representation or warranty in this Article VI which becomes
untrue at any time after the date of this Agreement.

                                       33
<PAGE>   34

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

        6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of any
environmental inspections, tests or audits required by Lender in connection with
any foreclosure or deed in lieu of foreclosure, or, if required by Lender, as a
condition of Lender's consent to any "Transfer" (as defined in the Mortgage), or
required by Lender following a reasonable determination by Lender that
Prohibited Activities and 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 Loan Obligations.

        6.8 REMEDIAL WORK. If any investigation, site monitoring, containment,
clean-up, restoration or other remedial work ("Remedial Work") is necessary to
comply with any Hazardous Materials Laws or order of any Governmental Authority
that has or acquires jurisdiction over the Property, the Improvements or the
use, operation or improvement of the Property under any Hazardous Materials
Laws, Borrower shall, by the earlier of (1) the applicable deadline required by
Hazardous Materials Laws 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 such work by the time required
by applicable Hazardous Materials Laws. 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 Loan Obligations.

        6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. 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
and Condition.

        6.10 INDEMNITY.

            a. Borrower shall hold harmless, defend and indemnify (i) Lender,
(ii) any successor owner or holder of the Note, (iii) the officers, directors,
partners, agents, shareholders, employees and trustees of any of the foregoing,
and (iv) the heirs, legal representatives, successors and assigns of each of the
foregoing (together, the "Indemnitees") against all proceedings, claims,
damages, losses, expenses, penalties and costs (whether initiated or sought by
any Governmental Authority 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,
except to the extent the same relate solely to Hazardous Materials first
introduced to the Property or any part thereof by anyone other than Borrower
following foreclosure of the Mortgage (or the delivery and acceptance of a deed
in lieu of such foreclosure) of the sale or transfer of the Property or any part
thereof by Borrower (with Lender's consent subject to the Mortgage):

                                       34
<PAGE>   35

               1. Any breach of any representation or warranty of Borrower in
this Article VI.

               2. Any failure by Borrower to perform any of its obligations
under this Article VI.

               3. The existence or alleged existence of any Prohibited Activity
and Condition.

               4. The presence or alleged presence of Hazardous Materials in,
on, or around under the Property, the Improvements or any property of Borrower
that is adjacent to the Property, or

               5. Actual or alleged violation of any Hazardous Materials Laws.

            b. Counsel selected by Borrower to defend Indemnitees shall be
subject to the approval of those Indemnitees. Notwithstanding anything contained
herein, any Indemnitee may elect to defend any claim or legal or administrative
proceeding at the Borrower's expense if such Indemnitee has reason to believe
that its interests are not being adequately represented or diverge from other
interests being represented by such counsel (but Borrower shall be obligated to
bear the expense of at most only one such separate counsel). Nothing contained
herein shall prevent an Indemnitee from employing separate counsel in any such
action at any time and participating in the defense thereof at its own expense.

            c. 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 any Indemnitee, as determined by such Indemnitee
in its sole discretion.

            d. The liability of Borrower to indemnify the Indemnitees shall not
be limited or impaired by any of the following, or by any failure of Borrower or
any guarantor to receive notice of or consideration for any of the following:

               1. Any amendment or modification of any Loan Document.

               2. Any extensions of time for performance required by any of the
Loan Documents.

               3. The accuracy or inaccuracy of any representations and
warranties made by Borrower under this Agreement or any other Loan Document.

                                       35
<PAGE>   36

               4. The release of Borrower or any other person, by Lender or by
operation of law, from performance of any obligation under any of the Loan
Documents.

               5. The release or substitution in whole or in part of any
security for the Loan Obligations.

               6. Lender's failure to properly perfect any lien or security
interest given as security for the Loan Obligations.

            e. 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 Article VI.

               2. Reimburse Indemnitees for any expenses paid or incurred in
connection with any matters against which Indemnitees are entitled to be
indemnified under this Article VI.

               3. Reimburse Indemnitees for any and all expenses, including fees
and costs of attorneys and expert witnesses, paid or incurred in connection with
the enforcement by Indemnitees of their rights under this Article VI, or in
monitoring and participating in any legal or administrative proceeding.

            f. In any circumstances in which the indemnity under this Article VI
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 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.

            g. The provisions of this Article VI shall be in addition to any and
all other obligations and liabilities that Borrower may have under the
applicable law or under the other Loan Documents, and each Indemnitee shall be
entitled to indemnification under this Article VI without regard to whether
Lender or that Indemnitee has exercised any rights against the Property and/or
the Improvements 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
Article VI shall be joint and several. The obligations of Borrower to indemnify
the Indemnitees under this Article VI shall survive any repayment or discharge
of the Loan Obligations, any foreclosure proceeding, any foreclosure sale, any
delivery of any deed in lieu of foreclosure, and any release of record of the
lien of the Mortgage.

                                       36
<PAGE>   37

                                   ARTICLE VII
                         EVENTS OF DEFAULT AND REMEDIES

        7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:

            a. The failure by Borrower to pay any installment of principal,
interest, or other payments required under the Note, within ten (10) days after
the same becomes due; or

            b. Borrower's violation of any covenant set forth in Article V
hereof; or

            c. Borrower's failure to deliver or cause to be delivered the
financial statements and information set forth in Section 4.5 above within the
times required and such failure is not cured within thirty (30) days following
Lender's written notice to Borrower thereof; or

            d. The failure of Borrower properly and timely to perform or observe
any covenant or condition set forth in this Agreement (other than those
specified in (a), (b) and (c) of this Section) or any other Loan Documents which
is not cured within any applicable cure period as set forth herein or, if no
cure period is specified therefor, is not cured within thirty (30) days of
Lender's notice to Borrower of such Default; provided, however, that if such
default cannot be cured within such thirty (30) day period, such cure period
shall be extended for an additional sixty (60) days, as long as Borrower is
diligently and in good faith prosecuting said cure to completion.

            e. The filing by Borrower or Guarantor or Manager of a voluntary
petition, or the adjudication of any of the aforesaid Persons, or the filing by
any of the aforesaid Persons of any petition or answer seeking or acquiescing,
in any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief for itself under any present or future federal,
state or other statute, law or regulation relating to bankruptcy, insolvency or
other relief for debtors, or if any of the aforesaid Persons should seek or
consent to or acquiesce in the appointment of any trustee, receiver or
liquidator for itself or of all or any substantial part of its property or of
any or all of the rents, revenues, issues, earnings, profits or income thereof,
or the mailing of any general assignment for the benefit of creditors or the
admission in writing by any of the aforesaid Persons of its inability to pay its
debts generally as they become due; or

            f. The entry by a court of competent jurisdiction of an order,
judgment, or decree approving a petition filed against Borrower or Guarantor or
Manager which petition seeks any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency, or other relief for debtors, which order, judgment or
decree remains unvacated and unstayed for an aggregate of sixty (60) days
(whether or not consecutive) from the date of entry thereof, or the appointment
of any trustee, receiver or liquidator of any of the aforesaid Persons or of all
or any substantial part of its properties or of any or all of the rents,
revenues, issues, earnings,

                                       37
<PAGE>   38

profits or income thereof, which appointment shall remain unvacated and unstayed
for an aggregate of sixty (60) days (whether or not consecutive); or

            g. Unless otherwise permitted hereunder or under any other Loan
Documents, the sale, transfer, lease, assignment, or other disposition,
voluntarily or involuntarily, of the Collateral, or any part thereof, or, except
for Permitted Encumbrances as described in Section 5.2 above, any further
encumbrance of the Collateral, unless the prior written consent of Lender is
obtained; or

            h. The failure of Borrower to take the corrective measures required
in this Agreement within the time periods specified following Lender's demand
because the Debt Service Coverage for the Facility has not been met; or

            i. Any certificate, statement, representation, warranty or audit
heretofore or hereafter furnished by or on behalf of Borrower or Guarantor or
Manager pursuant to or in connection with this Agreement (including, without
limitation, representations and warranties contained herein or in any Loan
Documents) or as an inducement to Lender to make the Loan to Borrower, (i)
proves to have been false in any material respect at the time when the facts
therein set forth were stated or certified, or (ii) proves to have omitted any
substantial contingent or unliquidated liability or claim against Borrower, or
(iii) on the date of execution of this Agreement there shall have been any
material adverse change in any of the facts previously disclosed by any such
certificate, statement, representation, warranty or audit, which change shall
not have been disclosed to Lender in writing at or prior to the time of such
execution; or

            j. The failure of Borrower to correct or cause the Manager to
correct, within the time deadlines set by any applicable Medicare, Medicaid or
licensing agency, any deficiency which would result in the following actions by
such agency with respect to the Facility:

               1. a termination of any Reimbursement Contract or any Permit; or

               2. a ban on new admissions generally or on admission of patients
otherwise qualifying for Medicare or Medicaid coverage; or

            k. The Borrower, Manager or the Facility should be assessed fines or
penalties by any state or any Medicare, Medicaid, health or licensing agency
having jurisdiction over such Persons or the Facility in excess of $50,000; or

            l. A final judgment shall be rendered by a court of law or equity
against Borrower or Manager or Guarantor in excess of $100,000, and the same
shall remain undischarged for a period of thirty (30) days, unless such judgment
is either (i) fully covered by collectible insurance and such insurer has within
such period acknowledged such coverage in writing, or (ii) although not fully
covered by insurance, enforcement of such judgment has been effectively stayed,
such judgment is being contested or appealed by appropriate proceedings and
Borrower or

                                       38
<PAGE>   39

Guarantor or Manager, as the case may be, has established reserves adequate for
payment in the event such Person is ultimately unsuccessful in such contest or
appeal and evidence thereof is provided to Lender; or

            m. The occurrence of any material adverse change in the financial
condition or prospects of Borrower or Guarantor or Manager, or the existence of
any other condition which, in Lender's reasonable determination, constitutes a
material impairment of any such Person's ability to operate the Facility or of
such Person's ability to perform their respective obligations under the Loan
Documents, and is not remedied within thirty (30) days after written notice.

            Notwithstanding anything in this Section, all requirements of notice
shall be deemed eliminated if Lender is prevented from declaring an Event of
Default by bankruptcy or other applicable law. The cure period, if any, shall
then run from the occurrence of the event or condition of Default rather than
from the date of notice.

        7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing
Events of Default, the Lender may, at its option:

            a. Intentionally Deleted.

            b. Declare the entire unpaid principal of the Loan Obligations to
be, and the same shall thereupon become, immediately due and payable, without
presentment, protest or further demand or notice of any kind, all of which are
hereby expressly waived.

            c. Proceed to protect and enforce its rights by action at law
(including, without limitation, bringing suit to reduce any claim to judgment),
suit in equity and other appropriate proceedings including, without limitation,
for specific performance of any covenant or condition contained in this
Agreement.

            d. Exercise any and all rights and remedies afforded by the laws of
the United States, the states in which any of the Property or other Collateral
is located or any other appropriate jurisdiction as may be available for the
collection of debts and enforcement of covenants and conditions such as those
contained in this Agreement and the Loan Documents.

            e. Exercise the rights and remedies of setoff and/or banker's lien
against the interest of Borrower in and to every account and other property of
Borrower which is in the possession of the Lender or any person who then owns a
participating interest in the Loan, to the extent of the full amount of the
Loan.

            f. Exercise its rights and remedies pursuant to any other Loan
Documents.

                                       39
<PAGE>   40

                                  ARTICLE VIII
                                  MISCELLANEOUS

        8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this
Agreement or any of the other Loan Documents is intended to be exclusive of any
other remedy or remedies, and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing in law or in equity. Exercise of or omission to exercise any right of
the Lender shall not affect any subsequent right of Lender to exercise the same.
No course of dealing between Borrower and Lender or any delay on the Lender's
part in exercising any rights shall operate as a waiver of any of the Lender's
rights. No waiver of any Default under this Agreement or any of the other Loan
Documents shall extend to or shall affect any subsequent or other then existing
Default or shall impair any rights, remedies or powers of Lender.

        8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees and expenses
(including actual attorneys' fees and expenses of counsel for Lender) in
connection with the Loan, the Note, the preparation of this Agreement and the
other Loan Documents (including any amendments hereafter made), and in
connection with any modifications thereto and the recording of any of the Loan
Documents. If, at any time, a Default occurs or Lender becomes a party to any
suit or proceeding in order to protect its interests or priority in any
Collateral for any of the Loan Obligations or its rights under this Agreement or
any of the Loan Documents, or if Lender is made a party to any suit or
proceeding by virtue of the Loan, this Agreement or any Collateral and as a
result of any of the foregoing, the Lender employs counsel to advise or provide
other representation with respect to this Agreement, or to collect the balance
of the Loan Obligations, or to take any action in or with respect to any suit or
proceeding relating to this Agreement, any of the other Loan Documents, any
Collateral, Borrower, Manager, or any guarantor or to protect, collect, or
liquidate any of the security for the Loan Obligations, or attempt to enforce
any security interest or lien granted to the Lender by any of the Loan
Documents, then in any such events, all of the actual attorney's fees arising
from such services, including attorneys' fees for preparation of litigation and
in any appellate or bankruptcy proceedings, and any expenses, costs and charges
relating thereto shall constitute additional obligations of Borrower to the
Lender payable on demand of the Lender. Without limiting the foregoing, Borrower
has undertaken the obligation for payment of, and shall pay, all recording and
filing fees, revenue or documentary stamps or taxes, intangibles taxes, and
other taxes, expenses and charges payable in connection with this Agreement, any
of the Loan Documents, the Loan Obligations, or the filing of any financing
statements or other instruments required to effectuate the purposes of this
Agreement, and should Borrower fail to do so, Borrower agrees to reimburse
Lender for the amounts paid by Lender, together with penalties or interest, if
any, incurred by Lender as a result of underpayment or nonpayment. Such amounts
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall bear interest at the Default Rate from the date advanced
until repaid.

        8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's failure to do
so, the Lender may make any payment or do any act on Borrower's behalf that
Borrower or others are inquired to do to remain in compliance with this
Agreement or any of the other Loan Documents, and Borrower agrees to reimburse
the Lender, on demand, for any payment made or expense incurred by Lender
pursuant to the foregoing authorization, including, without limitation,
attorneys' fees, and until so repaid any sums advanced by Lender shall
constitute a portion of the Loan Obligations, shall be

                                       40
<PAGE>   41

secured by the Mortgage and shall bear interest at the Default Rate from the
date advanced until repaid.

        8.4 INDEMNIFICATION. Except to the extent caused solely by the gross
negligence or willful misconduct or illegal activity of the Indemnified Parties,
Borrower shall, at its sole cost and expense, protect, defend, indemnify and
hold harmless the Indemnified Parties from and against any and all claims,
suits, liabilities (including, without limitation, strict liabilities), actions,
proceedings, obligations, debts, damages, losses, costs, expenses, diminutions
in value, fines, penalties, charges, fees, judgments, awards, amounts paid in
settlement, punitive damages, foreseeable and unforeseeable consequential
damages, of whatever kind or nature (including but not limited to reasonable
attorneys' fees and other costs of defense) imposed upon or incurred by or
asserted against Lender by reason of (a) ownership of the Note, the Mortgage,
the Property or any interest therein or receipt of any Rents; (b) any amendment
to, or restructuring of, the Loan Obligations and/or any of the Loan Documents;
(c) any and all lawful action that may be taken by Lender in connection with the
enforcement of the provisions of the Mortgage or the Note or any of the other
Loan Documents, whether or not suit is filed in connection with same, or in
connection with Borrower, any guarantor and/or any partner, joint venturer,
member or shareholder thereof becoming a party to a voluntary or involuntary
federal or state bankruptcy, insolvency or similar proceeding; (d) any accident,
injury to or death of persons or loss of or damage to property occurring in, on
or about the Property, the Improvements or any part thereof or on the adjoining
sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways;
(e) any use, nonuse or condition in, on or about the Property, the Improvements
or any part thereof or on the adjoining sidewalks, curbs, adjacent property or
adjacent parking areas, streets or ways; (f) any failure on the part of
Borrower, or any guarantor to perform or comply with any of the terms of this
Agreement or any of the other Loan Documents; (g) any claims by any broker,
person or entity claiming to have participated in arranging the making of the
Loan evidenced by the Note; (h) any failure of the Property to be in compliance
with any applicable laws; (i) performance of any labor or services or the
furnishing of any materials or other property with respect to the Property, the
Improvements or any part thereof; (j) the failure of any person to file timely
with the Internal Revenue Service an accurate Form 1099-b, statement for
recipients of proceeds from real estate, broker and barter exchange
transactions, which may be required in connection with the Mortgage, or to
supply a copy thereof in a timely fashion to the recipient of the proceeds of
the transaction in connection with which the Loan is made; (k) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents; (l) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (m) the violation of any requirements of the
Employee Retirement Income Security Act of 1974, as amended; (n) any fines or
penalties assessed or any corrective costs incurred by Lender if the Facility or
any part of the Property is determined to be in violation of any covenants,
restrictions of record, or any applicable laws, ordinances, rules or
regulations; or (o) the enforcement by any of the Indemnified Parties of the
provisions of this Section 8.4. Any amounts payable to Lender by reason of the
application of this Section 8.4 shall become immediately due and payable and
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall accrue interest at the Default Rate. The obligations and
liabilities of Borrower under this Section 8.4 shall survive any termination,
satisfaction, assignment,

                                       41
<PAGE>   42

entry of a judgment of foreclosure or exercise of a power of sale or delivery of
a deed in lieu of foreclosure of the Mortgage except to the extent such
obligations and liabilities arise solely out of events or circumstances first
occurring after any termination, satisfaction, foreclosure or delivery of a deed
in lieu of foreclosure of the Mortgage or the transfer or sale of the Property
by the Borrower with Lender's consent subject to the Mortgage. For purposes of
this Section 8.4, the term "Indemnified Parties" means Lender and any Person who
is or will have been involved in the origination of the Loan, any Person who is
or will have been involved in the servicing of the Loan, any Person in whose
name the encumbrance created by the Mortgage is or will have been recorded, any
Person who may hold or acquire or will have held a full or partial interest in
the Loan (including, without limitation, any investor in any securities backed
in whole or in part by the Loan) as well as the respective directors, officers,
shareholder, partners, members, employees, agents, servants, representatives,
contractors, subcontractors, affiliates, subsidiaries, participants, successors
and assigns of any and all of the foregoing (including, without limitation, any
other Person who holds or acquires or will have held a participation or other
full or partial interest in the Loan or the Property, whether during the term of
the Mortgage or as a part of or following a foreclosure of the Loan and
including, without limitation, any successors by merger, consolidation or
acquisition of all or a substantial portion of Lender's assets and business).

        8.5 HEADINGS. The headings of the Sections of this Agreement are for
convenience of reference only, are not to be considered a part hereof, and shall
not limit or otherwise affect any of the terms hereof.

        8.6 SURVIVAL OF COVENANTS. All covenants, agreements, representations
and warranties made herein and in certificates or reports delivered pursuant
hereto shall be deemed to have been material and relied on by Lender,
notwithstanding any investigation made by or on behalf of Lender, and shall
survive the execution and delivery to Lender of the Note and this Agreement.

        8.7 NOTICES, ETC. Any notice or other communication required or
permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below) with receipt acknowledged by the recipient thereof, (b) three
(3) Business Days following the date deposited in the U.S. mail, certified or
registered, with return receipt requested, or (c) one (1) Business Day following
the date deposited with Federal Express or other national overnight carrier, and
in each case addressed as follows:

        If to Borrower:

               Diversicare Pinedale, LLC
               c/o Advocat Inc.
               277 Mallory Station Road, Suite 130
               Franklin, Tennessee 37067
               Attn: CFO

                                       42
<PAGE>   43

        If to Lender:

               GMAC Commercial Mortgage Corporation
               200 Witmer Road
               Horsham, Pennsylvania  19044
               Attn:  Servicing Department

        with a copy to:

               Kay K. Bains, Esq.
               Walston, Wells, Anderson & Bains, LLP
               505 20th Street North, Suite 500
               Birmingham, Alabama 35203

Either party may change its address to another single address by notice given as
herein provided, except any change of address notice must be actually received
in order to be effective.

        8.8 BENEFITS. All of the terms and provisions of this Agreement shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns. No Person other than Borrower or Lender shall be
entitled to rely upon this Agreement or be entitled to the benefits of this
Agreement.

        8.9 PARTICIPATION. Borrower acknowledges that Lender may, at its option,
sell participation interests in the Loan or to other participating banks or
Lender may (but shall not be obligated to) assign its interest in the Loan to
its affiliates or to other assignees (the "Assignee") to be included as a pool
of properties to be financed in a proposed Real Estate Mortgage Investment
Conduit (REMIC). Borrower agrees with each present and future participant in the
Loan or Assignee of the Loan that if an Event of Default should occur, each
present and future participant or Assignee shall have all of the rights and
remedies of Lender with respect to any deposit due from the Borrower. The
execution by a participant of a participation agreement with Lender, and the
execution by the Borrower of this Agreement, regardless of the order of
execution, shall evidence an agreement between Borrower and said participant in
accordance with the terms of this Section. If the Loan is assigned to the
Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will
be responsible for the due diligence, documentation, preparation and execution
of certain documents required in connection with the offering of interests in
the REMIC. Borrower agrees that Lender may, at its sole option and without
notice to or consent of the Borrower, assign its interest in the Loan to the
Assignee for inclusion in the REMIC and, in such event, Borrower agrees to
provide the Assignee with such information as may be reasonably required by the
Underwriter in connection therewith or by an investor in any securities backed
in whole or in part by the Loan or any rating agency rating such securities.
Borrower irrevocably waives any and all right it may have under applicable law
to prohibit such disclosure, including, but

                                       43
<PAGE>   44

not limited to, any right of privacy, and consents to the disclosure of such
information to the Underwriter, to potential investors in the REMIC, and to such
rating agencies.

        8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the
instruments referred to herein supersede and incorporate all representations,
promises, and statements, oral or written, made by Lender in connection with the
Loan. This Agreement may not be varied, altered, or amended except by a written
instrument executed by an authorized officer of the Lender. This Agreement may
be executed in any number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall together constitute
one and the same instrument.

        8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and
provisions set forth in this Loan Agreement and the other Loan Documents and in
the event of any irreconcilable conflict between the terms of the other Loan
Documents and the terms of this Loan Agreement, the terms of this Loan Agreement
shall control; provided, however, that in the event there is any apparent
conflict between any particular term or provision which appears in both this
Loan Agreement and the other Loan Documents, and it is possible and reasonable
for the terms of both this Loan Agreement and the Loan Documents to be performed
or complied with, then, notwithstanding the foregoing, both the terms of this
Loan Agreement and the other Loan Documents shall be performed and complied
with.

        8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY,
INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TENNESSEE AND THE
PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL
JURISDICTION IN THE STATE OF TENNESSEE OR ARKANSAS, FOR THE ENFORCEMENT OF ANY
AND ALL OBLIGATIONS UNDER THE LOAN DOCUMENTS.

        8.13 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT
THAT THEY MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO
THIS AGREEMENT OR THE LOAN OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR
RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT
TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF
EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE
CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES
WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT
OR OTHERWISE. BORROWER AND LENDER AGREE THAT EITHER PARTY MAY FILE A COPY OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE

                                       44
<PAGE>   45

KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF EITHER PARTY HERETO TO
IRREVOCABLY WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO
MAKE THE LOAN AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE
OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND
LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE
SITTING WITHOUT A JURY.

        8.14 ASSUMPTIONS. The Loan will be assumable one time only during the
term of the Loan subject to Lender's prior written approval and the payment of
an assumption fee of one percent (1%) of the outstanding principal balance of
the Loan. Lender's approval shall be based, among other things, upon the
transferee's financial strength and experience in owning and operating
properties similar to the Facility (but in no event may a transferee be a
non-United States entity). Lender may condition the consent required to the
transfer and assumption upon (i) the modification of the Loan Documents, (ii)
the assumption of the Loan Documents as modified, by the proposed transferee,
(iii) the payment of the transfer fee referred to above, (iv) the payment by
Borrower of all of Lender's out-of-pocket expenses, including, without
limitation, all of Lender's attorneys' fees, (v) the approval by a Rating Agency
of the proposed transferee, (vi) the proposed transferee's continued compliance
with the Single-Purpose Entity requirements set forth above, and (vii) such
other conditions as Lender may reasonably require at the time of such consent is
sought.

        8.15 INTEREST LIMITATION. Notwithstanding anything to the contrary
contained herein or in the Mortgage or in any other of the Loan Documents, the
effective rate of interest on the obligation evidenced by the Note shall not
exceed the lawful maximum rate of interest permitted to be paid. Without
limiting the generality of the foregoing, in the event that the interest charged
under the Note results in an effective rate of interest higher than that
lawfully permitted to be paid, then such charges shall be reduced by the sum
sufficient to result in an effective rate of interest permitted and any amount
which would exceed the highest lawful rate already received and held by the
Lender shall be applied to a reduction of principal and not to the payment of
interest. Borrower agrees that for the purpose of determining highest rate
permitted by law, any non principal payment (including, without limitation, late
fees and other fees) shall be deemed, to the extent permitted by law, to be an
expense, fee or premium rather than interest. This provision shall control every
other provision of the Note and the other Loan Documents with respect to the
charging, collecting and payment of interest on the indebtedness evidenced by
the Note.

              [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

                                       45
<PAGE>   46

        IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be properly executed, by their respective duly authorized
representatives, as of the date first above written.

WITNESS:                            BORROWER:

                                    DIVERSICARE PINEDALE, LLC, a Delaware
                                    limited liability company

------------------------------
                                    By: Diversicare Leasing Corp., a Tennessee
                                        corporation, its sole member

------------------------------
[Print Name]                            By:
                                            ------------------------------------
                                            James F. Mills, Jr., Senior Vice
                                            President

WITNESS:                            LENDER:

                                    GMAC COMMERCIAL MORTGAGE
                                    CORPORATION, a California corporation

------------------------------

------------------------------      --------------------------------------------
[Print Name]                        James C. Thompson, Senior Vice President

<PAGE>   47

                                   EXHIBIT "A"

                               [LEGAL DESCRIPTION]

<PAGE>   48

                                   EXHIBIT "B"

                        BORROWER'S CHIEF EXECUTIVE OFFICE

                         Diversicare Windsor House, LLC
                         c/o Advocat Inc.
                         277 Mallory Station Road, Suite 130
                         Franklin, Tennessee 37067
                         Attn: CFO

                     BORROWER'S PRINCIPAL PLACES OF BUSINESS

                         Diversicare Pinedale, LLC
                         c/o Advocat Inc.
                         1311 North Pecan Street
                         Newport, Arkansas 72112

<PAGE>   49

                                   EXHIBIT "C"

                               OWNERSHIP INTERESTS

             DIVERSICARE LEASING CORP.------100% MEMBERSHIP INTEREST

<PAGE>   50

                                   EXHIBIT "D"

                         SUMMARY OF FINANCIAL STATEMENTS
                                 AND CENSUS DATA

Facility Name: Pinedale Nursing and Rehabilitation Center
Report Date:  ___________________________________________________

<TABLE>
<CAPTION>
                             QUARTER        QUARTER            QUARTER         12 MONTH
                             ENDING         ENDING             ENDING           ENDING
                             (DATE)         (DATE)             (DATE)           (DATE)
CENSUS DATA

<S>                          <C>            <C>                <C>              <C>
Total Number
of Beds [UNITS]:             _______        _______            _______          _______

Number of Days in
  Period:                    _______        _______            _______          _______

Total Patient Days
  Available:                 _______        _______            _______          _______

Patient Utilization
  Days:
    Medicaid                 _______        _______            _______          _______
    Private                  _______        _______            _______          _______
    Medicare                 _______        _______            _______          _______
    Other                    _______        _______            _______          _______

Total Utilization
  Days:                      _______        _______            _______          _______

CASH FLOW ANALYSIS

Total Routine Patient
Revenue:                     _______        _______            _______          _______

Total Net
Revenues:                    _______        _______            _______          _______

Total
Expenses:                    _______        _______            _______          _______
</TABLE>

<PAGE>   51

<TABLE>
<S>                          <C>            <C>                <C>              <C>
Pre-Tax
Income:                      _______        _______            _______          _______
ADD BACK

Depreciation and
  Amortization:              _______        _______            _______          _______

Interest on
  Mortgage:                  _______        _______            _______          _______

Facility Lease
Expense (if
applicable):                 _______        _______            _______          _______

Management
Fees:                        _______        _______            _______          _______

Extraordinary
Items:                       _______        _______            _______          _______

Net Operating
Income:                      _______        _______            _______          _______
</TABLE>

        I hereby certify the above to be true and correct. Dated this ____ day
of ________________, 200_.

                                          By: _______________________________

                                          Its: ______________________________

<PAGE>   52

                                   EXHIBIT "E"

                             COMPLIANCE CERTIFICATE

GMAC Commercial Mortgage Corporation
2200 Woodcrest Place, Suite 305
Birmingham, Alabama  35209

        RE:     Loan Agreement dated __________, 2001 (together with amendments,
                if any, the "Loan Agreement") by and between GMAC Commercial
                Mortgage Corporation, as Lender, and Diversicare Pinedale, LLC,
                as Borrower

The undersigned officer of the above named Borrower, does hereby certify that
for the quarterly financial period ending ____________________:

1.  No Default or Event of Default has occurred or exists except ______________.

2.  The Debt Service Coverage after deduction of Actual Management Fees for the
    preceding twelve (12) months (or such lesser period as shown have elapsed
    following the closing of the Loan) through the end of such period was:

    Required:   _____ to 1.0
    Actual:     _____ to 1.0

    The manner of calculation is attached.

3.  The Debt Service Coverage after deduction of Assumed Management Fees for the
    preceding twelve (12) months (or such lesser period as shall have elapsed
    following the closing of the Loan) through the end of such period was:

    Required:   _____ to 1.0
    Actual:     _____ to 1.0

    The manner of calculation is attached.

4.  The Combined Debt Service Coverage for the Facility and Related Facility
    after deduction of Assumed Management Fees for the preceding twelve (12)
    months (or such lesser period as shall have elapsed following the closing of
    the Loan) through the end of such period was:

    Required: 1.30 to 1.0
    Actual:   ____ to 1.0

<PAGE>   53

    The manner of this calculation is attached.

5.  The fiscal year to date average daily occupant for the Facility:

    Required: Not less than ___0%
    Actual: __________

6.  The capital expenditures per bed was:

    Required: $______ per bed.
    Actual:   $______ per bed.

    Evidence of such capital expenditures is attached.

7.  All representations and warranties contained in the Loan Agreement and other
    Loan Documents are true and correct in all material respects as though given
    on the date hereof, except ________________________________________________.

8.  All information provided herein is true and correct.

9.  Capitalized terms not defined herein shall have the meanings given to such
    terms in the Loan Agreement.

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

Dated this the _____ day of _____________________________.

<PAGE>   54

                                   EXHIBIT "F"

                             PERMITTED ENCUMBRANCES

            [Insert Schedule B exceptions in Title Insurance Policy]<PAGE>   1
                                                                    EXHIBIT 10.5

THIS INSTRUMENT WAS PREPARED
BY, AND UPON RECORDING SHOULD
BE RETURNED TO:

Kay K. Bains, Esq.
Walston, Wells, Anderson & Bains, LLP
505 20th Street North, Suite 500
Birmingham, AL 35203
205-251-9600

--------------------------------------------------------------------------------

STATE OF ARKANSAS             )
COUNTY OF JACKSON             )

                         MORTGAGE AND SECURITY AGREEMENT

        THIS MORTGAGE AND SECURITY AGREEMENT (this "Instrument"), is made as of
the 29th day of March, 2001, by and between DIVERSICARE PINEDALE, LLC, a
Delaware limited liability company ("Mortgagor"), whose address is 277 Mallory
Station Road, Suite 130, Franklin, Tennessee 37067, and GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation (together with its successors and assigns,
"Mortgagee"), whose address is 200 Witmer Road, Horsham, Pennsylvania 19044.

                                    RECITALS

        A. Mortgagor is indebted to Mortgagee for money loaned in the principal
sum of Two Million Nine Hundred Thirteen Thousand and No/100 Dollars
($2,913,000.00) (the "Loan"), as is evidenced by that certain Promissory Note of
even date herewith from Mortgagor, payable to the order of Mortgagee in
installments of principal and/or interest thereon, such final installment being
due on April 1, 2006.

        B. As a condition precedent to making the Loan, Mortgagee has required
that Mortgagor execute this Instrument as security for the Loan and the other
Indebtedness (as hereinafter defined).

                                GRANTING CLAUSES

        NOW, THEREFORE, for and in consideration of the Indebtedness, and to
secure the prompt payment thereof, Mortgagor does hereby irrevocably grant,
bargain, sell, convey, assign, transfer, mortgage, pledge and set over unto
Mortgagee, its successors and assigns forever, and grants to Mortgagee a
security interest in and to, the Mortgaged Property (as hereinafter defined).

<PAGE>   2

        TO HAVE AND TO HOLD the Mortgaged Property and all parts thereof unto
Mortgagee, its successors and assigns forever, subject however to the terms and
conditions herein:

        PROVIDED, HOWEVER, that if Mortgagor shall pay to Mortgagee the entire
Indebtedness, at the times and in the manner stipulated herein, in the Note (as
hereinafter defined) and in the other Loan Documents (as hereinafter defined),
all without any deduction or credit for taxes or other similar charges paid by
Mortgagor, and shall cause all other obligated parties to, keep, perform, and
observe all and singular the covenants and promises herein, in the Note and in
each of the other Loan Documents to be kept, performed, and observed, all
without fraud or delay, then this Instrument, and all the properties, interests,
and rights hereby granted, bargained, and sold shall cease, terminate, and be
void, but shall otherwise remain in full force and effect.

                                    AGREEMENT

        AND Mortgagor and Mortgagee 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:

           (a) "1933 ACT" has the meaning given to that term in Section 13.

           (b) "ACCOUNTS" means any rights of Mortgagor arising from the
operation of the Facility to payment for goods sold or leased or for services
rendered, not evidenced by an Instrument, including, without limitation, (i) all
accounts arising from the operation of the Facility, (ii) all moneys and
accounts, if any, held by Mortgagee pursuant to this Instrument or any other
Loan Document, and (iii) all rights to payment from Medicare or Medicaid
programs or similar state or federal programs, boards, bureaus or agencies, and
rights to payment from patients, residents, private insurers, and others arising
from the operation of the Facility, including rights to payment pursuant to
Reimbursement Contracts. Accounts shall include the Proceeds thereof.

           (c) "AFFILIATE" means, with respect to any Person, (i) each Person
that controls, is controlled by or is under common control with such Person,
(ii) each Person that, directly or indirectly, owns or controls, whether
beneficially or as a trustee, guardian or other fiduciary, any of the Stock of
such Person, and (iii) each of such Person's officers, directors, members, joint
venturers and partners.

           (d) "APPURTENANT RIGHTS" means all air rights, development rights,
zoning rights, easements, rights-of-way, strips and gores of land, vaults,
streets, roads, alleys, tenements, passages, sewer rights, waters, water
courses, water rights and powers, minerals, flowers, shrubs, crops, trees,
timber and other emblements now or hereafter appurtenant to, or used or useful
in connection with, or located on, under or above the Land, or any part or
parcel thereof, and all ground leases, estates, rights, titles, interests,
privileges, liberties, tenements, hereditaments and appurtenances, reversions,
and remainders whatsoever, in any way belonging, relating or appertaining to the
Land, or any part thereof, now or hereafter.

                                       2
<PAGE>   3

            (e) "ASSIGNMENT OF LEASES AND RENTS" means that certain Assignment
of Leases and Rents of even date herewith executed by Mortgagor for the benefit
of Mortgagee.

           (f) "ASSIGNMENT OF LICENSES" means that certain Assignment of
Licenses, Permits and Contracts of even date herewith executed by Mortgagor for
the benefit of Mortgagee.

           (g) "BUSINESS DAY" means a day, other than Saturday, Sunday or legal
holidays, when Mortgagee is open for business.

           (h) "COLLATERAL AGREEMENTS" means collectively, as applicable, the
Debt Service Reserve Escrow and Security Agreement of even date herewith by and
between Mortgagor and Mortgagee.

           (i) "CONDEMNATION" has the meaning given to that term in Section 12.

           (j) "CONTRACTS" means all license agreements, operating contracts,
and all management, service, employment, supply and maintenance contracts and
agreements, and any other agreements, licenses or contracts of any nature
whatsoever now or hereafter obtained or entered into by Mortgagor with respect
to the acquisition, construction, renovation, expansion, ownership, occupancy,
use, operation, maintenance and administration of the Facility and/or the
Mortgaged Property, including, without limitation, (i) any and all contracts,
authorizations, agreements and/or consents executed by, or on behalf of any
patient or other Person seeking services from Mortgagor pursuant to which
Mortgagor provides or furnishes skilled nursing care and related services at the
facility, including the consent to treatment and assignment of payment of
benefits by third party and (ii) any and all contracts between Mortgagor and any
resident of the Facility giving the resident certain rights of occupancy in the
Facility and providing for certain services to such resident.

           (k) "CROSS COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT" means that
certain Cross Collateralization and Cross-Default Agreement of even date
herewith executed by Mortgagor, Mortgagee and Diversicare of Windsor House, LLC.

           (l) "DEFAULT RATE" has the meaning given to that term in the Note.

           (m) "EQUIPMENT" means all beds, linen, televisions, carpeting,
telephones, cash registers, computers, lamps, glassware, rehabilitation
equipment, restaurant and kitchen equipment, and other fixtures and equipment of
Mortgagor located on, attached to or used or useful in connection with any of
the Mortgaged Property or the Facility and all renewals and replacements thereof
and substitutions therefor; provided, however, that with respect to any items
which are leased for the benefit of the Facility and not owned by Mortgagor, the
Equipment shall include the leasehold interest only of Mortgagor together with
any options to purchase any of said items and any additional or greater rights
with respect to such items which Mortgagor may hereafter acquire, but the
foregoing shall not be construed to mean that such leasing shall be permitted
hereunder and under the other Loan Documents.

           (n) "EVENT OF DEFAULT" means the occurrence of any event listed in
Section 14.

                                       3
<PAGE>   4

           (o) "FACILITY" means the facility known as "Pinedale Nursing and
Rehabilitation Center," presently a 130-bed licensed skilled nursing facility
located on the Land, as it may now or hereafter exist, together with any other
general or specialized care facilities, if any (including any Alzheimer's care
unit, subacute, and any skilled nursing facility), now or hereafter operated on
the Land.

           (p) "FIXTURES" means all property which is now or hereafter so
attached to the Land or the Improvements as to constitute a fixture under
applicable law and all renewals and replacements thereof and substitutions
therefor, including, without limitation: 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; and exercise equipment.

           (q) "GENERAL INTANGIBLES" means all intangible personal property of
Mortgagor arising out of or connected with the Mortgaged Property or the
Facility and all renewals and replacements thereof and substitutions therefor
(other than Accounts, Rents, Instruments, Inventory, Money, Permits and
Reimbursement Contracts), including, without limitation, things in action,
contract rights and other rights to payments of Money.

           (r) "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 and/or the Improvements or the use, operation or improvement of the
Mortgaged Property.

           (s) "GUARANTOR" means Advocat Inc., a Delaware corporation.

           (t) "GUARANTY AGREEMENT" means that certain Guaranty Agreement of
even date herewith executed by Guarantor for the benefit of Mortgagee.

           (u) "IMPOSITIONS" and "IMPOSITION DEPOSITS" have the meanings given
to those terms in Section 4.

           (v) "IMPROVEMENTS" means all buildings, structures and improvements
of every nature whatsoever now or hereafter situated on the Land, including but
not limited to, all gas and electric fixtures, radiators, heaters, engines and
machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures,
carpeting and other floor coverings, water heaters, awnings and storm sashes,
and cleaning apparatuses which are or shall be attached to the Land or said
buildings, structures or improvements.

                                       4
<PAGE>   5

           (w) "INDEBTEDNESS" means the aggregate of the principal of and
interest on the Note due and owing from time to time and all expenses, charges
and other amounts due and owing from time to time under the Note, the Loan
Agreement, this Instrument or any other Loan Document, including, without
limitation, prepayment premiums, late charges, default interest and advances to
protect the security of this Instrument under Section 7, if any.

           (x) "INSTRUMENTS" means all instruments, chattel paper, documents or
other writings obtained by Mortgagor from or in connection with the operation of
the Mortgaged Property or the construction and operation of the Facility
(including without limitation, all ledger sheets, computer records and
printouts, data bases, programs, books of account, trademarks or trade names,
utility contracts, maintenance and service contracts and files of Mortgagor
relating thereto).

           (y) "INVENTORY" means all inventories of food, beverages and other
comestibles owned and held by Mortgagor for sale or use at or from the Mortgaged
Property or the Facility, and soap, paper supplies, medical supplies, drugs and
all other such goods, wares and merchandise held by Mortgagor for sale to or for
consumption by residents, guests or patients of the Land or the Facility and all
such other goods returned to or repossessed by Mortgagor.

           (z) "LAND" means the land described in Exhibit "A" attached hereto
and incorporated herein.

           (aa) "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 the Mortgaged Property
and/or the Facility, or any portion of the Mortgaged Property and/or the
Facility and all modifications, extensions or renewals thereof.

           (ab) "LIEN" means any voluntary or involuntary mortgage, security
deed, deed of trust, lien, pledge, assignment, security interest, title
retention agreement, financing lease, levy, execution, seizure, judgment,
attachment, garnishment, charge, lien or other encumbrance of any kind,
including those contemplated by or permitted in this Instrument, the Loan
Agreement and the other Loan Documents.

           (ac) "LOAN" has the meaning given to that term in the recitals.

           (ad) "LOAN AGREEMENT" means that certain Loan Agreement of even date
herewith by and between Mortgagor and Mortgagee.

           (ae) "LOAN DOCUMENTS" means the Note, the Loan Agreement, this
Instrument, the Assignment of Leases and Rents, the Assignment of Licenses, the
Guaranty Agreement, all Collateral Agreements, O&M Programs, the Subordination
Agreement, the Cross-Collateralization and Cross-Default Agreement, and any
other documents now or in the future executed by Mortgagor, 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.

                                       5
<PAGE>   6

           (af) "MANAGED CARE PLANS" means any health maintenance organization,
preferred provider organization, individual practice association, competitive
medical plan, or similar arrangement, entity, organization, or Person.

           (ag) "MEDICAID" means that certain program of medical assistance,
funded jointly by the federal government and the States, for impoverished
individuals who are aged, blind and/or disabled, and/or members of families with
dependent children, which program is more fully described in Title XIX of the
Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations
promulgated thereunder.

           (ah) "MEDICARE" means that certain federal program providing health
insurance for eligible elderly and other individuals, under which physicians,
hospitals, skilled nursing homes, home health care, and other providers are
reimbursed for certain covered services they provide to the beneficiaries of
such program, which program is more fully described in Title XVIII of the Social
Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated
thereunder.

           (ai) "MONEY" means all monies, cash, rights to deposit or savings
accounts, or other items of legal tender obtained from or for use in connection
with the operation of the Facility.

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

                (i)      the Land;
                (ii)     all Appurtenant Rights;
                (iii)    all Equipment;
                (iv)     all Improvements;
                (v)      all Fixtures;
                (vi)     all Accounts;
                (vii)    all Contracts;
                (viii)   all General Intangibles;
                (ix)     all Permits (to the extent assignment is permitted by
                         law);
                (x)      all Money;
                (xi)     all Instruments;
                (xii)    all Inventory;
                (xiii)   all Reimbursement Contracts (to the extent assignment
                         is permitted by law);
                (xiv)    all Rents;
                (xv)     all Personalty;
                (xvi)    all Leases;
                (xvii)   all Proceeds;
                (xviii)  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 Mortgagor now or in the future,
                         including cash or securities deposited to secure
                         performance by parties of their obligations;

                                       6
<PAGE>   7

                (xix)    all Imposition Deposits;
                (xx)     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);
                (xxi)    all names under or by which any of the above Mortgaged
                         Property may be operated or known (other than the right
                         to the use of the name "Diverscare"), and all
                         trademarks, trade names, and goodwill relating to any
                         of the Mortgaged Property; and
                (xxii)   all renewals, replacements and Proceeds of any of the
                         foregoing and any substitutions therefor.

           (ak) "MORTGAGEE" means the entity identified as "Mortgagee" in the
first paragraph of this Instrument, or any subsequent holder of the Note.

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

           (am) "NOTE" means the note evidencing the Loan, including all
schedules, riders, allonges, endorsements, addenda or amendments together with
any renewals, replacements, substitutions, or extensions thereof.

           (an) "NOTICE" has the meaning given to that term in Section 24.

           (ao) "O&M PROGRAMS" has the meaning given to such term in the Loan
Agreement.

           (ap) "OPINION OF COUNSEL" means an opinion or opinions in writing
signed by independent legal counsel to Mortgagor, designated by Mortgagor, and
reasonably satisfactory to Mortgagee.

           (aq) "PARENT" means, with respect to a corporation, any other
corporation owning or controlling, directly or indirectly, fifty percent (50%)
or more of the voting stock of the corporation.

           (ar) "PERMITS" means all licenses, permits and certificates used or
necessary in connection with the construction, ownership, operation, use or
occupancy of the Mortgaged Property and/or the Facility, including, without
limitation, business licenses, state health department licenses, food service
licenses, licenses to conduct business, certificates of need and all such other
permits, licenses and rights, obtained from any governmental, quasi-governmental
or private person or entity whatsoever concerning ownership, operation, use or
occupancy.

           (as) "PERMITTED ENCUMBRANCES" has the meaning given to that term in
Section 5.2 of the Loan Agreement.

                                       7
<PAGE>   8

           (at) "PERSON" means any natural person, firm, trust, corporation,
partnership, limited liability company and any other form of legal entity.

           (au) "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.

           (av) "PRIOR LIEN" has the meaning given to that term in Section 26.

           (aw) "PROCEEDS" means all awards, payments, earnings, royalties,
issues, profits, liquidated claims and proceeds (including proceeds of insurance
and condemnation and any conveyance in lieu thereof), whether cash or noncash,
moveable or immoveable, tangible or intangible, from the sale, conversion
(whether voluntary or involuntary), exchange, transfer, collection, loss,
damage, condemnation, disposition, substitution or replacement of any of the
Mortgaged Property.

           (ax) "PROPERTY JURISDICTION" means the jurisdiction in which the
Mortgaged Property is located.

           (ay) "REIMBURSEMENT CONTRACTS" means all third-party reimbursement
contracts for the Facility which are now or hereafter in effect with respect to
residents or patients qualifying for coverage under the same, including Medicare
and Medicaid, Managed Care Plans and private insurance agreements, and any
successor program or other similar reimbursement program and/or private
insurance agreements, now or hereafter existing.

           (az) "RENTS" means all rent and other payments of whatever nature
from time to time payable pursuant to the Leases (including, without limitation,
rights to payment earned under leases for space in the Improvements for the
operation of ongoing retail businesses such as newsstands, barbershops, beauty
shops, physicians' offices, pharmacies and specialty shops).

           (ba) "SINGLE-PURPOSE ENTITY" means a Person which owns no interest or
property other than the Mortgaged Property.

           (bb) "STOCK" means all shares, options, warrants, general or limited
partnership interests, membership interests, participations or other equivalents
(regardless of how designated) in a corporation, limited liability company,
partnership or any equivalent entity, whether voting or nonvoting, including,
without limitation, common stock, preferred stock, or any other "equity
security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended).

                                       8
<PAGE>   9

           (bc) "SUBORDINATION AGREEMENT" means that certain Subordination of
Management Agreement of even date herewith by and among Borrower, Diversicare
Management Services, a Tennessee corporation, and Lender.

           (bd) "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.

           (be) "TRANSFER" shall mean the conveyance, assignment, sale,
transfer, mortgaging, collateral assignment, encumbrance, pledging, alienation,
hypothecation, granting of a security interest in, granting of options with
respect to, or other disposition of (directly or indirectly, voluntarily or
involuntarily, by operation of law or otherwise, and whether or not for
consideration or of record) all or any portion of any legal or beneficial
interest (i) in all or any portion of the Mortgaged Property; (ii) in the Stock
of any corporation which is Mortgagor, a member of Mortgagor (if Mortgagor is a
limited liability company), a partner of Mortgagor or, if applicable, a partner
of a general partner of Mortgagor; and (iii) in Mortgagor (or any trust of which
Mortgagor is a trustee), or, if Mortgagor is a limited or general partnership,
limited liability company, joint venture, trust, nominee trust, tenancy in
common or other unincorporated form of business association or form of ownership
interest, in any Person having a direct legal or beneficial ownership in
Mortgagor, excluding any legal or beneficial interest in any constituent limited
partner or member of Mortgagor but including the interest of such limited
partner or member itself and further including any legal or beneficial interest
in any constituent general partner of Mortgagor, if applicable, in any general
partner of any constituent general partner of Mortgagor, or, if Mortgagor is a
limited liability company, in any constituent corporate member of Mortgagor. The
term "Transfer" shall also include, without limitation, the following: an
installment sales agreement wherein Mortgagor agrees to sell the Mortgaged
Property or any part thereof or any interest therein for a price to be paid in
installments; an agreement by Mortgagor leasing all or a substantial part of the
Mortgaged Property to one or more Persons pursuant to a single transaction or
related transactions, or a sale, assignment or other transfer of, or the grant
of a security interest in, Mortgagor's right, title and interest in and to any
Leases or any Rent; any instrument subjecting the Mortgaged Property to a
condominium regime or transferring ownership to a cooperative corporation or
other form of multiple ownership or governance; the dissolution or termination
of Mortgagor, any general partner of Mortgagor, any general partner of any
general partner of Mortgagor, if applicable, or, if Mortgagor is a limited
liability company, any corporate member of Mortgagor; the issuance of new Stock
in any corporation which is Mortgagor, a member of Mortgagor (if Mortgagor is a
limited liability company), a partner of Mortgagor or, if applicable, a partner
of a general partner of Mortgagor; and the merger or consolidation with any
other Person of Mortgagor, any general partner of Mortgagor, any general partner
of any general partner of Mortgagor, if applicable, or, if Mortgagor is a
limited liability company, any corporate member of Mortgagor.

           (bf) "UCC COLLATERAL" has the meaning given to that term in
Section 2.

                                       9
<PAGE>   10

        2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also a
security agreement under the Uniform Commercial Code as adopted in the State of
Arkansas for any of the Mortgaged Property which, under applicable law, may be
subject to a security interest under the Uniform Commercial Code as adopted in
the State of Arkansas, whether acquired now or in the future, and all products
and cash and non-cash Proceeds thereof (collectively, "UCC Collateral"), and
Mortgagor hereby grants to Mortgagee a security interest in the UCC Collateral.
Mortgagor shall execute and deliver to Mortgagee promptly for the filing of such
financing statements and any extensions, renewals and amendments thereof, of any
termination statements and, upon Mortgagee's request, financing statements,
continuation statements and amendments, in such form as Mortgagee may require to
perfect or continue the perfection of this security interest. Mortgagor shall
pay all filing costs and all costs and expenses of any record searches for
financing statements that Mortgagee may require. Without the prior written
consent of Mortgagee, Mortgagor 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, Mortgagee shall have the remedies of a secured
party under the Uniform Commercial Code as adopted in the State of Arkansas, in
addition to all remedies provided by this Instrument or existing under
applicable law. In exercising any remedies, Mortgagee may exercise its remedies
against the UCC Collateral separately or together and in any order, without in
any way affecting the availability of Mortgagee's other remedies hereunder
and/or under applicable law.

        3. LEASES. Mortgagor shall not, without the prior written consent and
approval of Mortgagee which consent will not be unreasonably withheld, enter
into any Lease (except for admission of Facility patients or residents), or
enter into or permit any management agreement of or affecting any part of the
Mortgaged Property, except for the Management Agreement (as defined in the Loan
Agreement).

        4. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES.

           If (i) any reduction occurs in the Debt Reserve Fund below three (3)
months of debt service payments or upon evidence that Mortgagor has failed to
pay Taxes, insurance premiums or other similar charges affecting the Mortgaged
Property on a timely basis, (ii) Mortgagor does not establish a Debt Reserve
Fund on the Closing Date, or (iii) an Event of Default occurs under the Loan
Documents, then:

           (a) Mortgagor shall deposit with Mortgagee on the day monthly
installments of principal and/or interest, or both, are due under the Note (or
on another day designated in writing by Mortgagee), until the Indebtedness is
paid in full, an additional amount sufficient to accumulate with Mortgagee the
entire sum required to pay, when due (i) to the extent applicable, the yearly
water and sewer charges which may be levied on all or any part of the Mortgaged
Property, (ii) the premiums for fire and other hazard insurance, business
interruption insurance and such other insurance as Mortgagee may require under
the Loan Agreement, (iii) the yearly Taxes, and (iv) amounts for other charges
and expenses which Mortgagee 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 Mortgagee's interests, all as reasonably
estimated from time to time by Mortgagee, plus one-sixth of such estimate. The
amounts deposited under the preceding sentence

                                       10
<PAGE>   11

are collectively referred to in this Instrument as the "Imposition Deposits".
The obligations of Mortgagor 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 Mortgagee to pay each
Imposition before the last date upon which such payment may be made without any
penalty or interest charge being added plus one-sixth of such estimate.
Mortgagee shall maintain records indicating how much of the monthly Imposition
Deposits and how much of the aggregate Imposition Deposits held by Mortgagee are
held for the purpose of paying property taxes, insurance premiums and each other
obligation of Mortgagor for which Imposition Deposits are required. Any waiver
by Mortgagee of the requirement that Mortgagor remit Imposition Deposits to
Mortgagee may be revoked by Mortgagee, in Mortgagee's discretion, at any time
upon notice to Mortgagor.

           (b) Imposition Deposits shall be held in an institution (which may be
Mortgagee, if Mortgagee is such an institution) whose deposits or accounts are
insured or guaranteed by a federal agency. Mortgagee 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. Mortgagee shall apply the
Imposition Deposits to pay Impositions so long as no Event of Default has
occurred and is continuing. Unless applicable law requires, Mortgagee shall not
be required to pay Mortgagor any interest, earnings or profits on the Imposition
Deposits, but any interest, earnings or profits earned on the Imposition
Deposits shall belong to Grantor and shall be credited against future
installments of Imposition Deposits due. Mortgagor hereby pledges and grants to
Mortgagee a security interest in the Imposition Deposits as additional security
for all of Mortgagor's obligations under this Instrument and the other Loan
Documents. Any amounts deposited with Mortgagee under this Section 4 shall not
be trust funds, nor shall they operate to reduce the Indebtedness, unless
applied by Mortgagee for that purpose under Section 4(e).

           (c) Mortgagor shall direct the applicable Governmental Authority to
deliver the invoices and bills for all Impositions to Mortgagee. If Mortgagee
receives a bill or invoice for an Imposition, Mortgagee shall pay the Imposition
from the Imposition Deposits held by Mortgagee. Mortgagee shall have no
obligation to pay any Imposition to the extent it exceeds Imposition Deposits
then held by Mortgagee, unless Mortgagor challenges such Impositions in
accordance with Section 9(d), below. Mortgagee 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
Mortgagee for payment of a specific Imposition exceeds the amount reasonably
deemed necessary by Mortgagee plus one-sixth of such estimate, the excess shall
be credited against future installments of Imposition Deposits. If at any time
the amount of the Imposition Deposits held by Mortgagee for payment of a
specific Imposition is less than the amount reasonably estimated by Mortgagee to
be necessary plus one-sixth of such estimate, Mortgagor shall pay to Mortgagee
the amount of the deficiency within fifteen (15) days after notice from
Mortgagee.

                                       11
<PAGE>   12

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

        5. APPLICATION OF PAYMENTS. If at any time Mortgagee receives, from
Mortgagor or otherwise, any amount applicable to the Indebtedness which is less
than all amounts due and payable at such time, then Mortgagee may apply that
payment to amounts then due and payable in the manner set forth in the Note.
Neither Mortgagee's acceptance of an amount which is less than all amounts then
due and payable nor Mortgagee's application of such payment in the manner
authorized in the immediately preceding sentence 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, Mortgagor's obligations under this Instrument and the Note shall
remain unchanged.

        6. USE OF PROPERTY. Unless required by applicable law, Mortgagor shall
not (a) except for any change in use approved by Mortgagee, 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 part of the Facility to
commercial use, or (c) initiate or acquiesce in a change in the zoning
classification of the Mortgaged Property which would prohibit the continued use
of the Mortgaged Property as the same is being used at the time of this
Instrument.

        7. PROTECTION OF MORTGAGEE'S SECURITY.

           (a) If Mortgagor 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, Mortgagee's security
or Mortgagee'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 Mortgagee at Mortgagee's
option and upon notice to Mortgagor may make such appearances, disburse such
sums and take such actions as Mortgagee reasonably deems necessary to perform
such obligations of Mortgagor and to protect Mortgagee's interest, including (i)
disbursement of fees and out of pocket expenses of attorneys, accountants,
inspectors and consultants, (ii) entry upon the Mortgaged Property to make
repairs or secure the Mortgaged Property, (iii) procurement of the insurance
coverages required under the Loan Agreement, and (iv) payment of amounts which
Mortgagor has failed to pay under Section 9.

           (b) Any amounts disbursed by Mortgagee under this Section 7, or under
any other provision of this Instrument, or under any of the other Loan
Documents, that treats such disbursement as being made under this Section 7,
shall be added to, and become part of the Indebtedness, shall be immediately due
and payable and shall bear interest from the date of disbursement until paid at
the Default Rate.

                                       12
<PAGE>   13

           (c) Nothing in this Section 7 shall require Mortgagee to incur any
expense or take any action.

        8. INSPECTION. Mortgagee, 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, upon reasonable advance notice to Mortgagor (which
may be oral) except in an emergency or during the continuance of an Event of
Default. Grantor may have a representative present during such entry and
inspection and any such entry and inspection shall be subject to the right of
any patients/residents of the Mortgaged Property.

        9. TAXES; OPERATING EXPENSES.

           (a) Subject to the provisions of Section 9(c) and Section 9(d),
Mortgagor 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 9(c), Mortgagor shall pay or
cause to be paid 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 or lien imposed.

           (c) As long as no Event of Default has occurred and is continuing,
Mortgagor shall not be obligated to pay Taxes, insurance premiums or any other
individual Imposition to the extent that Imposition Deposits are held by
Mortgagee for the purpose of paying that specific Imposition. If an Event of
Default exists, Mortgagee may exercise any rights Mortgagee may have with
respect to Imposition Deposits without regard to whether Impositions are then
due and payable.

           (d) Mortgagor, 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 (i) Mortgagor notifies
Mortgagee of the commencement or expected commencement of such proceedings, (ii)
the Mortgaged Property is not in danger of being sold or forfeited, as
determined by Mortgagee, (iii) if requested by Mortgagee, Mortgagor deposits
with Mortgagee cash reserves or other collateral sufficient to pay the contested
Imposition, (iv) Mortgagor furnishes whatever security is required in the
proceedings or is reasonably requested by Mortgagee, which may include the
delivery to Mortgagee of the reserves established by Mortgagor to pay the
contested Imposition, as additional security, and (v) such contest operates to
suspend enforcement of such Imposition.

           (e) Upon request by Mortgagee for a specific Imposition Mortgagor
shall promptly deliver to Mortgagee a copy of all notices of, and invoices for,
Impositions, and if Mortgagor pays any Imposition directly, Mortgagor shall
promptly furnish to Mortgagee receipts evidencing such payments.

                                       13
<PAGE>   14

           (f) In the event of the passage of any law subsequent to the date of
this Instrument in any manner changing or modifying the laws now in force
governing the taxation of deeds of trust or mortgages or debts secured by deeds
of trust or mortgages or the manner of collecting any such taxes so as to
adversely affect Mortgagee (including, without limitation, a requirement that
internal revenue stamps be affixed to this Instrument or any of the other Loan
Documents), Mortgagor will promptly pay any such tax. If Mortgagor fails to make
such prompt payment, or if any law prohibits Mortgagor from making such payment
or would penalize Mortgagee if Mortgagor makes such payment, then the entire
unpaid balance of the Indebtedness shall, without notice, immediately become due
and payable at the sole option of Mortgagee. In no event, however, shall any
income taxes of Mortgagee or franchise taxes of Mortgagee measured by income, or
taxes in lieu of such income taxes or franchise taxes, be required to be paid by
Mortgagor.

        10. LIENS; ENCUMBRANCES. Mortgagor acknowledges that the existence of
any Lien on the Mortgaged Property, other than Permitted Encumbrances, whether
voluntary, involuntary or by operation of law, not discharged and released or
bonded off and removed from the Mortgaged Property within thirty (30) days of
its creation is a "Transfer" which constitutes an Event of Default as provided
under Section 14, and will subject Mortgagor to personal liability under the
Note.

        11.    PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY.
Mortgagor (a) shall not commit waste or permit impairment or deterioration of
the Mortgaged Property, (b) shall not abandon the Facility, (c) 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 Mortgagee may approve in writing, whether or not insurance proceeds
or condemnation awards are available to cover any costs of such restoration or
repair, except to the extent Mortgagee applies such insurance proceeds or
condemnation awards to reduce the Indebtedness, (d) shall keep the Mortgaged
Property in good repair, including the replacement of Personalty and Fixtures
with items of equal or better function and quality, (e) shall provide for
professional management of the Mortgaged Property by a manager satisfactory to
Mortgagee, in its sole discretion, under a contract approved by Mortgagee in
writing, and (f) shall give notice to Mortgagee of and, unless otherwise
directed in writing by Mortgagee, shall appear in and defend any action or
proceeding purporting to affect the Mortgaged Property, Mortgagee's security or
Mortgagee's rights under this Instrument. Mortgagor shall not (and shall not
permit any 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.

        12. CONDEMNATION.

            (a) Mortgagor shall promptly notify Mortgagee 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"). Mortgagor shall appear in and prosecute or defend
any proceeding relating to any Condemnation unless otherwise directed by
Mortgagee in writing. Mortgagor authorizes and appoints Mortgagee as
attorney-in-fact for Mortgagor to commence, appear in and prosecute, in
Mortgagee's or Mortgagor's name, any action

                                       14
<PAGE>   15

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 12 shall require Mortgagee to incur any expense or take any action.
Mortgagor hereby transfers and assigns to Mortgagee all right, title and
interest of Mortgagor 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) Subject to the provisions of Section 4.5 of the Loan Agreement,
Mortgagee, in its sole discretion, may apply such awards or proceeds, after the
deduction of Mortgagee's expenses incurred in the collection of such amounts, at
Mortgagee's option, to the restoration or repair of the Mortgaged Property or to
the payment of the Indebtedness, with the balance, if any, to Mortgagor. Unless
Mortgagee 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 4 of this Instrument or any
Collateral Agreement, or change the amount of such installments. Mortgagor
agrees to execute such further evidence of assignment of any awards or proceeds
as Mortgagee may require.

        13. TRANSFERS OF THE MORTGAGED PROPERTY OR BENEFICIAL INTERESTS IN
MORTGAGOR. Except as otherwise permitted under this Section 13, no Transfer of
any part of the Mortgaged Property or any beneficial interest of Mortgagor shall
be permitted without Mortgagee's prior written consent which may be withheld in
Mortgagee's sole and absolute discretion. Any transfer made in violation of this
Section shall constitute an Event of Default. Notwithstanding any provision of
this Section to the contrary, in no event shall a Transfer resulting in a change
of control of Mortgagor or the Mortgaged Property are permitted without
Mortgagee's prior written consent which may be withheld in Mortgagee's sole and
absolute discretion.

            The following Transfers shall be permitted, subject to Beneficiary's
prior written consent, which consent shall not be unreasonably withheld or
delayed, provided that (1) no such Transfer (in a series of one or more
transactions) shall result in a change in control of Grantor, (2) in no event
shall Grantor or, if Grantor is a limited partnership, the general partner of
Grantor (or the general partner of the general partner of Grantor) or, if
Grantor is a limited liability company, any corporate member of Grantor which is
a Single-Purpose Entity, cease to be a Single-Purpose Entity, and (3) in no
event shall any such Transfer result in the dissolution or termination of
Grantor, any general partner of Grantor or any general partner of any general
partner of Grantor, if applicable, or, if Grantor is a limited liability
company, any corporate member of Grantor:

            (1) Transfers of Stock in any corporation which is Grantor, any
general or limited partner or member of Grantor or any Person holding an
interest therein;

            (2) Transfers of limited partnership interests in any limited
partnership which is Grantor, any general or limited partner or member of
Grantor or any Person holding an interest therein; and

                                       15
<PAGE>   16

            (3) Transfers of membership interests in any limited liability
company which is Grantor, any general or limited partner or member of Grantor or
any Person holding an interest therein.

            (4) Notwithstanding any provision herein to the contrary, no
Transfer otherwise permitted under this Section 13 shall occur unless Grantor
shall have given Beneficiary not less than ten (10) Business Days prior notice
of the intended Transfer together with a certificate of the financial officer of
Grantor stating (i) the nature and size of the interest to be the subject of the
Transfer, (ii) the name and address of the Person to which such interest shall
be conveyed, sold or transferred unless such interest is to be conveyed, sold or
transferred pursuant to a registered public sale pursuant to applicable
securities laws, and (iii) that the proposed transaction is a bona fide sale,
transfer or conveyance solely for cash or equivalent consideration, if
applicable. Beneficiary reserves the right to condition any consent required
pursuant to this Section 13 with respect to a Transfer upon (A) the payment of
all expenses incurred by Beneficiary as set forth below and, in connection with
the Transfer of any fee interest in the Security Property, an assumption fee
equal to one percent (1.0%) of the outstanding balance of the Loan, (B)
Beneficiary's approval of the financial condition, managerial capabilities and
ownership structure of the proposed transferee, including requiring that the
transferee of any fee interest in the Security Property be a Single-Purpose
Entity, (C) if the Transfer shall result in a change in control of Grantor or
the Security Property, execution of an assumption agreement by the proposed
transferee, in form and content acceptable to Beneficiary, (D) the Loan being in
good standing and free from any Event of Default, and (E) if required by
Beneficiary, receipt of an Opinion of Counsel reasonably satisfactory to
Beneficiary stating that, if effected, the proposed Transfer would have no
effect on the enforceability of the Mortgage or the other Loan Documents, and
would not result in the dissolution or termination of Grantor, the managing
member of Grantor, if applicable, any general partner of Grantor or any general
partner of any general partner of Grantor, if applicable. Grantor agrees to pay
on demand all expenses (including, without limitation, reasonable attorney's
fees and disbursements, title search costs and title insurance endorsement
premiums) incurred by Beneficiary in connection with the review, approval and
documentation of any Transfer. In no event shall any Transfer otherwise
permitted under this Section occur if such Transfer is required to be registered
under the Securities Act of 1933, as amended (the "1933 Act"), or any state
securities or Blue Sky laws, or offered pursuant to Rule 144A under the 1933
Act.

            (5) Notwithstanding any other provision of this Section 13 to the
contrary, Transfers of partnership interests, membership interests or corporate
shares in Grantor or any Person holding an interest in Grantor between or among
partners, members or shareholders existing as such on the date hereof, or
Transfers of such interests to immediate family members of existing partners,
members or shareholders or to trusts for estate planning purposes for the
benefit of existing partners, members or shareholders or members of the
transferor's immediate family shall be permitted without Beneficiary's consent,
provided that in no event shall Grantor and any Person holding an interest in
Grantor who is a Single-Purpose Entity cease to be a Single-Purpose Entity and
provided no such Transfer results in a change of control of Grantor.

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

                                       16
<PAGE>   17

            (a) any failure by Mortgagor to pay or deposit within ten (10) days
after the same becomes due any amount required by the Note, this Instrument or
any other Loan Document;

            (b) any failure by Mortgagor to maintain the insurance coverage
required under the Loan Agreement which continues beyond the applicable cure
period; if any, provided therein;

            (c) any failure by Mortgagor to comply with the provisions of
Section 25;

            (d) fraud or material misrepresentation or material omission by
Mortgagor, any of its officers, directors, trustees, general partners or
managers or any guarantor in connection with (i) the application for or creation
of the Indebtedness, (ii) any financial statement, financial report,
certification, or other report or information required under the Loan Agreement
required to be provided to Mortgagee during the term of the Indebtedness, or
(iii) any request for Mortgagee's consent to any proposed action, including a
request for disbursement of funds under any Collateral Agreement;

            (e) a failure of Mortgagor to comply with the provisions of Section
13;

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

            (g) any failure by Mortgagor to perform any of its obligations under
this Instrument (other than those specified in Sections 14 (a) through (f))
hereof and other than those specified in Sections 7.1(a), (b) and (c) of the
Loan Agreement), as and when required, which continues for a period of thirty
(30) days after notice of such failure by Mortgagee to Mortgagor; provided,
however, that if such default cannot be cured within such thirty (30) day
period, then such cure period shall be extended for an additional sixty (60)
days as long as Mortgagor is diligently and in good faith prosecuting such cure
to completion. However, no such notice or grace period shall apply in the case
of any such failure which could, in Mortgagee's judgment, absent immediate
exercise by Mortgagee of a right or remedy under this Instrument, result in harm
to Mortgagee, impairment of the Note or this Instrument or any other security
given under any other Loan Document;

            (h) any failure by Mortgagor 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;

            (i) any exercise by the holder of any 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;

            (j) the Mortgaged Property becomes part of a bankrupt debtor's
estate pursuant to any chapter of the Federal Bankruptcy Code or the Mortgaged
Property otherwise becomes

                                       17
<PAGE>   18

subject to any reorganization, receivership (other than a receivership
proceeding instituted by Mortgagee) or insolvency proceeding or any similar
proceeding pursuant to any federal, state or foreign law affecting debtor and
creditor rights; or

            (k) if any representation or warranty made by Mortgagor in that
certain Loan Closing Certification executed in connection with the Loan is not
true and correct in any material respect at the time when the facts therein set
forth were stated or certified, or upon Mortgagor's breach of any covenant made
in that Loan Closing Certification and, if susceptible of cure, such breach
remains uncured of thirty (30) days after Mortgagee gives written notice of such
breach to Mortgagor.

        15. REMEDIES.

            (a) Acceleration of Maturity. If an Event of Default shall have
occurred, then the entire Indebtedness shall, at the option of Mortgagee,
immediately become due and payable without notice or demand, time being of the
essence of this Instrument, and no omission on the part of Mortgagee to exercise
such option when entitled to do so shall be construed as a waiver of such right.

            (b) Right to Enter and Take Possession.

                (1) If an Event of Default shall have occurred and is
continuing, Grantor, upon demand of Mortgagee, shall forthwith surrender to
Mortgagee the actual possession of the Mortgaged Property and, if and to the
extent permitted by law, Mortgagee itself, or by such officers or agents as it
may appoint, may enter and take possession of all or any part of the Mortgaged
Property without the appointment of a receiver or an application therefor, and
may exclude Grantor and its agents and employees wholly therefrom, and take
possession of the books, papers and accounts of Grantor relating thereto;

                (2) If Grantor shall for any reason fail to surrender or deliver
possession of the Mortgaged Property or any part thereof after such demand by
Mortgagee, Mortgagee may obtain a judgment or decree conferring upon Mortgagee
the right to immediate possession or requiring Grantor to deliver immediate
possession of the Mortgaged Property to Mortgagee. Grantor will pay to
Mortgagee, upon demand, all expenses of obtaining such judgment or decree,
including costs and expense incurred by Mortgagee, its attorneys and agents, and
all such expenses and costs shall, until paid, become part of the Indebtedness
and shall be secured by this Instrument;

                (3) To the extent permitted by applicable law, upon every such
entering or taking of possession, Mortgagee may hold, store, use, operate,
manage and control the Mortgaged Property and conduct the business thereof, and,
from time to time (i) make all necessary and proper maintenance, repairs,
renewals, replacements, additions, betterments and improvements thereto and
thereon and purchase or otherwise acquire additional Fixtures, Personalty and
Equipment; (ii) insure or keep the Mortgaged Property insured; (iii) manage and
operate the Mortgaged Property and exercise all of the rights and powers of
Grantor to the same extent as Grantor could in its own name; and/or (iv) enter
into any and all agreements with respect to the exercise by others of any of the

                                       18
<PAGE>   19

powers herein granted to Mortgagee, all as Mortgagee from time to time may
determine to be in its best interest. Mortgagee may collect and receive all the
Rents, including those past due as well as those accruing thereafter, and, after
deducting (A) all expenses of taking, holding, managing and operating the
Mortgaged Property (including compensation for the services of all persons
employed for such purposes); (B) the cost of all such maintenance, repairs,
renewals, replacements, additions, betterments, improvements, purchases and
acquisitions; (C) the cost of such insurance deemed necessary by Grantor; (D)
such taxes, assessments and other similar charges as Mortgagee may at its option
pay; (E) other proper charges upon the Mortgaged Property or any part thereof;
and (F) reasonable fees, expenses and disbursements of the attorneys and agents
of Mortgagee, Mortgagee shall apply the remainder of the monies and proceeds so
received by Mortgagee, first, to the payment of accrued interest; second, to the
payment of Imposition Deposits and to other sums required to be paid hereunder;
and third, to the payment of overdue installments of principal and any other
unpaid Indebtedness then due. Anything in this Section to the contrary
notwithstanding, Mortgagee shall not incur any liability as a result of any
exercise by Mortgagee of its rights under this Instrument, and Mortgagee shall
be liable to account only for the Rents actually received by Mortgagee;

                (4) Mortgagor agrees to use commercially reasonably efforts to
cause the licensed operator of the Facility to promptly notify all of its
account debtors, including the Medicaid and Medicare agencies and other account
debtors pursuant to all Reimbursement Contracts, to the extent permitted under
applicable law, to make payments to one or more such deposit accounts upon
Mortgagee's request and as designated by Mortgagee, and, to the extent permitted
under any law applicable to Medicare and Medicaid, Mortgagor agrees to provide
any necessary endorsements to checks, drafts and other forms of payment so that
such payments will be properly deposited in such accounts. Mortgagee may require
that the deposit accounts be established so as to comply with any applicable
Medicaid, Medicare and other requirements applicable to payments of any accounts
receivable. Mortgagee may cause moneys to be withdrawn from such deposit
accounts and applied to the Indebtedness in such order as Mortgagee may elect.
Mortgagor appoints Mortgagee as Mortgagor's attorney-in-fact, which appointment
is coupled with an interest and is irrevocable, to provide, after the occurrence
of an Event of Default and so long as such default is continuing, any notice,
endorse any check, draft or other payment for deposit, or take any other action
which Mortgagor agrees to undertake in accordance with this Section 18(f)(4), to
the extent permitted under any law applicable to Medicare and Medicaid; and

                (5) Whenever all the Indebtedness shall have been paid and all
Events of Default shall have been cured, Mortgagee shall surrender possession of
the Mortgaged Property to Grantor, its successors and/or assigns. The same right
of taking possession, however, shall exist if any subsequent Event of Default
shall occur and be continuing.

            (c) Performance by Mortgagee. Upon the occurrence of an Event of
Default, Mortgagee may, at its sole option, pay, perform or observe the same,
and all payments made or costs or expenses incurred by Mortgagee in connection
therewith, with interest thereon at the Default Rate (as defined in the Note) or
at the maximum rate from time to time allowed by applicable law, whichever is
less, shall be secured hereby and shall be, without demand, immediately repaid
by

                                       19
<PAGE>   20

Mortgagor to Mortgagee. Notwithstanding anything to the contrary herein,
Mortgagee shall have no obligation, explicit or implied to pay, perform, or
observe any term, covenant, or condition.

            (d) Receiver. If any Event of Default shall have occurred and be
continuing, Mortgagee, upon application to a court of competent jurisdiction,
shall be entitled as a matter of strict right, without notice and without regard
to the sufficiency or value of any security for the Indebtedness or the solvency
of any party bound for its payment, to the appointment of a receiver to take
possession of and to operate the Facility and to collect and apply the Rents.
The receiver shall have all the rights and powers permitted under the laws of
the Property Jurisdiction. Mortgagor will pay unto Mortgagee upon demand all
expenses, including receiver's fees, actual attorney's fees, costs and agent's
compensation, incurred pursuant to the provisions of this Section, and upon any
Mortgagor's failure to pay the same, any such amounts shall be added to the
Indebtedness and shall be secured by this Instrument.

            (e) Mortgagee's Power of Enforcement. If an Event of Default shall
have occurred and be continuing, Mortgagee may, either with or without entry or
taking possession as hereinabove provided or otherwise, proceed by suit or suits
at law in equity or any other appropriate proceeding or remedy (i) to enforce
payment of the Note or the performance of any term thereof or any other right,
(ii) to foreclose this Instrument and to sell, as an entirety or in separate
lots or parcels, the Mortgaged Property, as provided by applicable Arkansas law,
and (iii) to pursue any other remedy available to it, all as Mortgagee shall
deem most effectual for such purposes. Mortgagee shall take action either by
such proceedings or by the exercise of its powers with respect to entry or
taking possession, as Mortgagee may determine.

            (f) Power of Sale. Upon the occurrence of an Event of Default, the
Mortgagee, is authorized, pursuant to the Arkansas Statutory Foreclosure Act
and, to the extent not inconsistent therewith, and empowered to sell the
Mortgaged Property or any part thereof situated in the State of Arkansas at the
courthouse of any county in the State of Arkansas in which any part of the
Mortgaged Property is situated, at public vendue to the highest bidder for cash
between the hours of 9:00 a.m. and 4:00 p.m. on any day which is not a Saturday,
Sunday or legal holiday after having given notice of such sale in accordance
with the statutes of the State of Arkansas then in force governing sales of real
estate under powers of sale. Any sale may be adjourned by announcement at the
time and place appointed for such sale without further notice except as may be
required by law. After each sale, the Mortgagee shall make to the purchaser or
purchasers at such sale good and sufficient conveyances in the name of Grantor,
conveying the property so sold to the purchaser or purchasers in fee simple with
general warranty of title, and shall receive the proceeds of said sale or sales
and apply the same as herein provided. Payment of the purchase price to the
Mortgagee shall satisfy the obligation of purchaser at such sale therefor, and
such purchaser shall not be responsible for the application thereof. The power
of sale granted herein shall not be exhausted by any sale held hereunder by the
Mortgagee, and such power of sale may be exercised from time to time and as many
times as the Mortgagee may deem necessary until all of the Mortgaged Property
has been duly sold and all secured indebtedness has been fully paid. In the
event any sale hereunder is not completed or is defective in the opinion of the
Mortgagee, such sale shall not exhaust the power of sale hereunder and the
Mortgagee shall have the right to cause a subsequent sale or sales to be made
hereunder. Any and all statements of fact or other recitals made in any deed or
deeds

                                       20
<PAGE>   21

given by the Mortgagee as to nonpayment of the indebtedness secured hereby, or
as to the occurrence of any default, or as to the Mortgagee having declared all
of such indebtedness to be due and payable, or as to the request to sell, or as
to notice of time, place and terms of sale and of the properties to be sold
having been duly given, or as to any other act or thing having been duly done by
the Mortgagee, shall be taken as prima facie evidence of the truth of the facts
so stated and recited. The Mortgagee may appoint or delegate any one or more
persons as agent to perform any act or acts necessary or incident to any sale
held by the Mortgagee, including the posting of notices and the conduct of sale,
but in the name and on behalf of the Mortgagee. Mortgagee shall apply the
proceeds from such sale - First, to the payment of all costs and expenses of
such sale, including attorney and trustee fees and expenses incurred in
connection with the sale and Grantor's default; Second, to the payment of the
Indebtedness, including any and all advances made under the terms hereof with
interest thereon; Third, the surplus, if any, to the parties legally entitled
thereto. In the event the Mortgagee cannot determine to Mortgagee's satisfaction
the person or persons to whom the surplus should be paid or a controversy exists
with respect to the surplus, the Mortgagee may pay the surplus into a court of
competent jurisdiction in an interpleader action and all expenses of such
action, including legal fees incurred by Mortgagee, shall be paid from the
surplus or, if the surplus is insufficient, by Grantor.

        Mortgagee or Mortgagee's designee may purchase the Mortgaged Property at
any sale. In the event Mortgagee purchases the Mortgaged Property at the
foreclosure sale, to the extent Mortgagee's bid price exceeds the Indebtedness,
Mortgagee shall pay cash equal to such excess to the person or persons legally
entitled thereto.

        The Mortgaged Property or any part thereof may be sold in one parcel, or
in such parcels, manner or order as Mortgagee in its sole discretion may elect,
and one or more exercises of the power herein granted shall not extinguish or
exhaust the power unless the entire Mortgaged Property is sold or the
Indebtedness paid in full. The Mortgagee may sell the Land and Improvements
thereon together with the Personal Property subject to the provisions of the
security agreement set forth in this Instrument, or the Mortgagee may sell the
Personal Property separately, provided, however, that Grantor shall never have
any right to require the sale of less than the whole of the Mortgaged Property
but the Mortgagee shall have the right, at its sole election, to sell less than
the whole of the Mortgaged Property.

        Grantor further agrees that in case of any sale hereunder, it will at
once surrender possession of the Mortgaged Property, and will from that moment
become and be the tenant at will of the purchaser, and removable by process as
upon a forcible and unlawful detainer suit, hereby agreeing to pay such
purchaser the reasonable rental value of the Mortgaged Property after such sale
plus all expenses, including legal fees, incurred by the purchaser.

            (g) Purchase by Mortgagee. Upon any foreclosure sale, Mortgagee may
bid for and purchase the Mortgaged Property and shall be entitled to apply all
or any part of the Indebtedness as a credit to the purchase price.

            (h) Application of Proceeds of Sale. In the event of a foreclosure
or other sale of all or any portion of the Mortgaged Property, the proceeds of
said sale shall be applied, first, to

                                       21
<PAGE>   22

the expenses of such sale and of all proceedings in connection therewith,
including actual attorney's fees and expenses (and attorney's fees and expenses
shall become absolutely due and payable whenever foreclosure is commenced); then
to insurance premiums, liens, assessments, Impositions and charges, including
utility charges and any other amounts advanced by Mortgagee hereunder, and
interest thereon; then to payment of the Indebtedness in such order of priority
as Mortgagee shall determine, in its sole discretion; and finally the remainder,
if any, shall be paid to Mortgagor, or to the person or entity lawfully entitled
thereto.

            (i) Mortgagor as Tenant Holding Over. In the event of any such
foreclosure sale, Mortgagor (if Mortgagor shall remain in possession) shall be
deemed a tenant holding over and shall forthwith deliver possession to the
purchaser or purchasers at such sale or be summarily dispossessed according to
provisions of law applicable thereto.

            (j) Waiver of Appraisement, Valuation, Etc. Mortgagor agrees, to the
full extent permitted by law, that in case of an Event of Default on the part of
Mortgagor hereunder, neither Mortgagor nor anyone claiming through or under
Mortgagor will assert, claim or seek to take advantage of any appraisement,
redemption, valuation, stay, homestead, extension, exemption or laws now or
hereafter in force, in order to prevent or hinder the enforcement of foreclosure
of this Instrument, or the absolute sale of the Mortgaged Property, or the
delivery of possession thereof immediately after such sale to the purchaser at
such sale. Without limiting the foregoing, Mortgagor expressly waives all rights
of redemption conferred by the Act passed by The General Assembly of Arkansas on
May 8, 1899, and all acts amendatory thereof.

            (k) Discontinuance of Proceedings. In case Mortgagee shall have
proceeded to enforce any right, power or remedy under this Instrument by
foreclosure, entry or otherwise, and such proceedings shall have been
discontinued or abandoned for any reason, or shall have been determined
adversely to Mortgagee, then in every such case, Mortgagor and Mortgagee shall
be restored to their former positions and rights hereunder, and all rights,
powers and remedies of Mortgagee shall continue as if no such proceedings had
occurred.

            (l) Waiver.

                (i)      No delay or omission by Mortgagee or by any holder of
                         the Note to exercise any right, power or remedy
                         accruing upon any default shall exhaust or impair any
                         such right, power or remedy or shall be construed to be
                         a waiver of any such default, or acquiescence therein,
                         and every right, power and remedy given by this
                         Instrument to Mortgagee may be exercised from time to
                         time and as often as may be deemed expedient by
                         Mortgagee. No consent or waiver expressed or implied by
                         Mortgagee to or of any breach or default by Mortgagor
                         in the performance of the obligations of Mortgagor
                         hereunder shall be deemed or construed to be a consent
                         or waiver to or of any other breach or default in the
                         performance of the same or any other obligations of
                         Mortgagor hereunder. Failure on the part of Mortgagee
                         to complain of any act or failure to act or failure to

                                       22
<PAGE>   23
                         declare an Event of Default, irrespective of how long
                         such failure continues, shall not constitute a waiver
                         by Mortgagee of its rights hereunder or impair any
                         rights, powers or remedies of Mortgagee hereunder.

                (ii)     No act or omission by Mortgagee shall release,
                         discharge, modify, change or otherwise affect the
                         original liability under the Note, this Instrument,
                         other Loan Documents or any other obligation of
                         Mortgagor or any subsequent purchaser of the Mortgaged
                         Property or any part thereof, or any maker, co-signer,
                         endorser, surety or guarantor, nor preclude Mortgagee
                         from exercising any right, power or privilege herein
                         granted or intended to be granted in any Event of
                         Default then existing or of any subsequent default, nor
                         alter the lien of this Instrument, except as expressly
                         provided in an instrument or instruments executed by
                         Mortgagee. Without limiting the generality of the
                         foregoing, Mortgagee may (A) grant forbearance or an
                         extension of time for the payment of all or any portion
                         of the Indebtedness; (B) take other or additional
                         security for the payment of any of the Indebtedness;
                         (C) waive or fail to exercise any right granted herein,
                         in the Note or in other Loan Documents; (D) release any
                         part of the Mortgaged Property from the security
                         interest or lien of this Instrument or otherwise change
                         any of the terms, covenants, conditions or agreements
                         of the Note, this Instrument or other Loan Documents;
                         (E) consent to the filing of any map, plat or replat
                         affecting the Land; (F) consent to the granting of any
                         easement or other right affecting the Mortgaged
                         Property; (G) make or consent to any agreement
                         subordinating the security title or lien hereof, or (H)
                         take or omit to take any action whatsoever with respect
                         to the Note, this Instrument, the other Loan Documents,
                         the Mortgaged Property or any document or instrument
                         evidencing, securing or in any way related to the
                         Instrument, all without releasing, discharging,
                         modifying, changing or affecting any such liability, or
                         precluding Mortgagee from exercising any such right,
                         power or privilege with respect to the lien of this
                         Instrument. In the event of the sale or transfer by
                         operation of law or otherwise of all or any part of the
                         Mortgaged Property, Mortgagee, without notice, is
                         hereby authorized and empowered to deal with any such
                         vendee or transferee with respect to the Mortgaged
                         Property or the Indebtedness, or with reference to any
                         of the terms, covenants, conditions or agreements
                         hereof, as fully and to the same extent as it might
                         deal with the original parties hereto and without in
                         any way releasing or discharging any liabilities,
                         obligations or undertakings of Mortgagor, any guarantor
                         of the Indebtedness or others.

                                       23
<PAGE>   24

                (iii)    Mortgagor waives and relinquishes any and all rights it
                         may have, whether at law or equity, to require
                         Mortgagee to proceed to enforce or exercise any rights,
                         powers and remedies it may have under the Loan
                         Documents in any particular manner, in any particular
                         order, or in any particular state or other
                         jurisdiction. Mortgagor expressly waives and
                         relinquishes any and all rights and remedies that
                         Mortgagor may have or be able to assert by reason of
                         the laws of the state of jurisdiction pertaining to the
                         rights and remedies of sureties.

        Mortgagor makes these arrangements, waivers and relinquishments
knowingly and as a material inducement to Mortgagee in making the Loan, after
consulting with and considering the advice of independent legal counsel selected
by Mortgagor.

            (m) Suits to Protect the Mortgaged Property. Mortgagee shall have
power to institute and maintain such suits and proceedings as it may deem
expedient (i) to prevent any impairment of the Mortgaged Property by any acts
which may be unlawful or constitute an Event of Default under this Instrument;
(ii) to preserve or protect its interest in the Mortgaged Property and in the
Rents arising therefrom; and (iii) to restrain the enforcement of or compliance
with any legislation or other governmental enactment, rule or order that may be
unconstitutional or otherwise invalid, if the enforcement of or compliance with
such enactment, rule or order would materially impair the security hereunder or
be prejudicial to the interest of Mortgagee.

            (n) Proofs of Claim. In the case of any receivership, insolvency,
bankruptcy, reorganization, arrangement, adjustment, composition or other
proceedings affecting Mortgagor, its creditors or its properties, Mortgagee, to
the extent permitted by law, shall be entitled to file such proofs of claim and
other documents as may be necessary or advisable in order to have the claims of
Mortgagee allowed in such proceedings for the entire amount due and payable by
Mortgagor under this Instrument at the date of the institution of such
proceedings and for any additional amount which may become due and payable by
Mortgagor hereunder after such date.

            (o) Actions Without Mortgagor's Consent. Mortgagor agrees that
Mortgagee may do any one or all of the following without notice to or the
consent of Mortgagor and without affecting Mortgagee's rights or remedies
against Mortgagor: (i) accept partial payment of, compromise, settle, renew,
extend the time for payment or performance of, or refuse to enforce any of
Mortgagor's Indebtedness to Mortgagee under or in connection with this
Instrument or any of the other Loan Documents; (ii) grant any indulgence or
forbearance to Guarantor or any other Person under or in connection with any or
all of the Loan Documents; (iii) release, waive, substitute or add any or all
collateral securing payment of any or all of the Indebtedness; (iv) release,
substitute or add any one or more endorsers or guarantors of any or all of the
Indebtedness; and (v) exercise any right or remedy with respect to the
Indebtedness or any collateral securing the Indebtedness, notwithstanding any
effect on or impairment of Mortgagor's subrogation, reimbursement or other
rights against Guarantor or any other Person under or in connection with any or
all of the Loan Documents.

                                       24
<PAGE>   25

        16. 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.

        17. FORBEARANCE.

            (a) Mortgagee may agree with Mortgagor, from time to time, at
Mortgagee's option 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, 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, or otherwise modify this Instrument, the Note, or any
other Loan Document.

            (b) Any forbearance by Mortgagee in exercising any right or remedy
under the Note, this Instrument, the Guaranty Agreement, or any other Loan
Document or otherwise afforded by applicable law, shall not be a waiver of or
preclude the exercise of any right or remedy. The acceptance by Mortgagee 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 Mortgagee'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 Mortgagee of any security for the
Indebtedness shall not constitute an election by Mortgagee of remedies so as to
preclude the exercise of any other right available to Mortgagee. Mortgagee's
receipt of any insurance and/or condemnation proceeds shall not operate to cure
or waive any Event of Default.

        18. LOAN CHARGES. If any applicable law limiting the amount of interest
or other charges permitted to be collected from Mortgagor 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 Mortgagor 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 Mortgagee in excess of the permitted
amounts shall be applied by Mortgagee 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 Mortgagor
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.

                                       25
<PAGE>   26

        19. WAIVER OF STATUTE OF LIMITATIONS. To the extent permitted by
applicable law Mortgagor 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.

        20. WAIVER OF MARSHALLING. Notwithstanding the existence of any other
security interests in the Mortgaged Property held by Mortgagee or by any other
party, Mortgagee 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, the Loan Agreement, any other Loan Document or under
applicable law. Mortgagee 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. Mortgagor 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 marshalling 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.

        21. FURTHER ASSURANCES. Mortgagor 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 Mortgagee may require from time to time in order to better assure,
grant, and convey to Mortgagee the rights intended to be granted, now or in the
future, to Mortgagee under this Instrument and the Loan Documents.

        22. ESTOPPEL CERTIFICATE. Within ten (10) days after a request from
Mortgagee, Mortgagor shall deliver to Mortgagee a written statement, signed and
acknowledged by Mortgagor, certifying to Mortgagee or any person designated by
Mortgagee, as of the date of such statement, (a) that the Loan 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); (b) the unpaid principal balance of the Note; (c) the
date to which interest under the Note has been paid; (d) that Mortgagor 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 Mortgagor is in default, describing such default in reasonable
detail); (e) whether or not there are then existing any setoffs or defenses
known to Mortgagor against the enforcement of any right or remedy of Mortgagee
under the Loan Documents; and (f) any additional facts reasonably requested by
Mortgagee.

        23. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

            (a) This Instrument and the rights and obligations of the parties
hereunder shall in all respects be governed by, and construed and enforced in
accordance with the laws of the State of Tennessee, except to the extent (a) of
procedural and substantive matters relating only to the creation, perfection,
foreclosure and enforcement of rights and remedies against the Mortgaged
Property, which matters shall be governed by the laws of the State of Arkansas,
and (b) that the laws of the United States of America and any rules,
regulations, or orders issued or promulgated thereunder, applicable to the
affairs and transactions entered into by Assignee, otherwise preempt Arkansas or
Tennessee law; in which event such Federal Law shall control.

                                       26
<PAGE>   27

            (b) Grantor consents to the nonexclusive jurisdiction of any and all
state and federal courts with jurisdiction in the States of Arkansas and
Tennessee over Grantor and Grantor's assets. Grantor agrees that its assets
shall be used first to satisfy all claims of creditors organized or domiciled in
the United States and that no assets of Grantor in the United States shall be
considered part of any foreign bankruptcy estate.

            (c) Grantor agrees that any controversy arising under or in relation
to the Guaranty Agreement, the Note, this Instrument, or any other Loan Document
may be litigated in the States of Tennessee or Arkansas, and the state and
federal courts and authorities with jurisdiction in the States of Tennessee and
Arkansas shall have jurisdiction over all controversies which shall arise under
or in relation to the Guaranty Agreement, the Note, or any other Loan Document.
Grantor 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.

        24. 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 (i) the date when the
Notice is received by the addressee; (ii) 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 (iii) the third
Business Day after the Notice is deposited in the United States mail with
postage prepaid, certified mail, return receipt requested.

            (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 24. Each party agrees that it will not
refuse or reject delivery of any Notice given in accordance with this Section
24, 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 Section 24 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 24.

            (d) A copy of any Notice sent to Mortgagee pursuant to this Section
24 shall be sent to:

                       Kay K. Bains, Esq.
                       Walston, Wells, Anderson & Bains, LLP
                       505 20th Street North, Suite 500
                       Birmingham, Alabama 35203

                                       27
<PAGE>   28

                       A copy of any Notice sent to Mortgagor pursuant to this
Section 24 shall be sent to:

                       Diversicare Pinedale, LLC
                       c/o Advocat Inc.
                       277 Mallory Station Road, Suite 130
                       Franklin, Tennessee 37067
                       Attn: CFO

        25. SINGLE-PURPOSE ENTITY. Until the Indebtedness is paid in full,
Mortgagor shall maintain its status as a Single-Purpose Entity and comply with
all those covenants with respect to its status as a Single-Purpose Entity as set
forth in Section 5.5 of the Loan Agreement.

        26. SUBROGATION. If, and to the extent that, the proceeds of the Loan
are used to pay, satisfy or discharge any obligation of Mortgagor 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 Mortgagee at Mortgagor's
request, and Mortgagee 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.

        27. LOAN CHARGES. If any applicable law limiting the amount of interest
or other charges permitted to be collected from Mortgagor 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 Mortgagor 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 Mortgagee in excess of the permitted
amounts shall be applied by Mortgagee 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 Mortgagor
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.

        28. DISCLOSURE OF INFORMATION. Mortgagee may furnish financial
information regarding Mortgagor or the Mortgaged Property to third parties with
an existing or prospective interest in the enforcement, evaluation, performance,
purchase or securitization of the Indebtedness, including but not limited to
credit rating agencies, but not further or otherwise without the prior written
consent of Mortgagor. Mortgagor irrevocably waives any and all rights it may
have under applicable law to prohibit such disclosure, including but not limited
to any right of privacy; but such disclosure shall be subject to prohibitions or
limitations on disclosure of any such data

                                       28
<PAGE>   29

under applicable laws or regulations, including without limitation any duly
enacted "Patient's Bill of Rights" or similar legislation, and such limitations,
as may be necessary to preserve the confidentiality of the Facility-patient
relationship and any physician-patient privilege.

        29. RELEASE. Upon Mortgagee's written request stating that (i) all
Indebtedness secured by this Instrument has been paid or performed in full
(other than contingent Indebtedness which by their terms survive the release
hereof and as to which no event giving rise to the incurrence of any such
Indebtedness shall have occurred), and (ii) all fees due Mortgagee in connection
with release of this Instrument have been paid, Mortgagor shall release the
Mortgaged Property from the lien of this Instrument. Upon the payment and
performance in full of all Indebtedness (other than contingent obligations which
survive the release hereof and as to which no event giving rise to the
incurrence of any such obligation shall have occurred), and upon request of
Mortgagor, Mortgagee shall release the lien of this Instrument upon the
Mortgaged Property and shall surrender to Mortgagor the Note and all other
documents evidencing the Indebtedness secured by this Instrument. The recitals
in the release of any matters or facts shall be conclusive proof of their
truthfulness. Such release shall operate as a reassignment of the Rents and
profits assigned to Mortgagee under the Assignment of Leases and Rents.
Mortgagee shall deliver this Instrument and the Note after release to the Person
or Persons legally entitled thereto.

        30. EXECUTION OF DOCUMENTS BY MORTGAGEE. Without notice to or affecting
the liability of Mortgagor or any other Person for the payment or performance of
the Indebtedness, without affecting the lien or priority of this Instrument or
Mortgagee's rights and remedies under the Loan Documents, and without liability
to Mortgagor or any other Person, Mortgagee shall have the right, at any time
and from time to time, to do any one or more of the following: (a) release any
part of the Mortgaged Property and (b) execute any extension agreement relating
to any or all of the Indebtedness, any document subordinating the lien of this
Instrument to any other lien or document, or any other document relating to the
Mortgaged Property, Indebtedness, or Loan Documents.

        31. JOINT AND SEVERAL LIABILITY. If more than one Person or entity signs
this Instrument as Mortgagor, the obligations of such Persons shall be joint and
several.

        32. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY. The
relationship between Mortgagee and Mortgagor shall be solely that of creditor
and debtor, respectively, and nothing contained in this Instrument shall create
any other relationship between Mortgagee and Mortgagor. 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.

        33. 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 agreement among the parties as to
the rights granted and the obligations assumed in this Instrument.

                                       29
<PAGE>   30

This Instrument may not be amended or modified except by a writing signed by the
party against whom enforcement is sought.

        34. MISCELLANEOUS PROVISIONS. 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."

        35. WAIVER OF TRIAL BY JURY. EACH OF MORTGAGOR AND MORTGAGEE (A)
COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE THAT
IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY 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, AND THIS WAIVER IS INTENDED TO ENCOMPASS
INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL
WOULD OTHERWISE EXIST. MORTGAGOR AND MORTGAGEE ARE AUTHORIZED TO SUBMIT THIS
INSTRUMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE
PARTIES TO ANY LOAN DOCUMENT, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF
MORTGAGOR'S AND MORTGAGEE'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, EACH OF
MORTGAGOR AND MORTGAGEE CERTIFIES THAT NEITHER MORTGAGOR'S NOR MORTGAGEE'S
REPRESENTATIVES OR AGENTS HAVE REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
ENFORCEMENT OF THIS WAIVER WILL NOT BE SOUGHT.

        36. WAIVER OF AUTOMATIC STAY. TO THE EXTENT PERMITTED UNDER APPLICABLE
LAW, MORTGAGOR HEREBY AGREES THAT, IN CONSIDERATION OF MORTGAGEE'S AGREEMENT TO
MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL
INDUCEMENT FOR MORTGAGEE TO MAKE THE LOAN, IN THE EVENT THAT MORTGAGOR SHALL (A)
FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF
ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE,
AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (B) BE THE SUBJECT OF
ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE;
(C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION,
ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION,

                                       30
<PAGE>   31

OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW
RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE SOUGHT
OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER,
CONSERVATOR, OR LIQUIDATOR; OR (E) BE THE SUBJECT OF AN ORDER, JUDGEMENT OR
DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED
AGAINST MORTGAGOR FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION,
READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR
FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF
FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, MORTGAGEE SHALL THEREUPON BE
ENTITLED AND MORTGAGOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND
AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION
IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE
(INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN
SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF
THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO MORTGAGEE AS PROVIDED IN THE LOAN
DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND MORTGAGOR HEREBY IRREVOCABLY
WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF.

        37. SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the
rights granted by this Instrument shall inure to, the respective successors and
assigns of Mortgagee and Mortgagor.

        38. COUNTERPARTS. This Instrument may be executed in any number of
counterparts, all of which when taken together shall constitute one and the same
Instrument.

                                       31
<PAGE>   32

               IN WITNESS WHEREOF, Mortgagor and Mortgagee have caused this
Instrument to be properly executed as of the date first above written.

                                    MORTGAGOR:
WITNESS:
                                    DIVERSICARE PINEDALE, LLC, a Delaware
                                    limited liability company

------------------------------
                                    By: Diversicare Leasing Corp., a Tennessee
                                        corporation, its sole member

------------------------------
[Print Name]                            By:
                                            ------------------------------------
                                            James F. Mills, Jr., Senior Vice
                                            President

WITNESS:                            MORTGAGEE:

                                    GMAC COMMERCIAL MORTGAGE
                                    CORPORATION, a California corporation

------------------------------

------------------------------      --------------------------------------------
[Print Name]                        James C. Thompson, Senior Vice President

STATE OF ____________                 )
                                      )SS.                      ACKNOWLEDGMENT
COUNTY OF __________                  )

        On this day before me, a Notary Public, duly commissioned, qualified and
acting within and for said County and State, appeared in person the within named
James F. Mills, Jr., being the Senior Vice President of Diversicare Leasing
Corp., a Tennessee corporation and the sole member of Diversicare Pinedale, LLC,
a Delaware limited liability company, who had been designated by said
institution to execute the foregoing instrument, to me personally well known,
who stated he was the Senior Vice President of Diversicare Leasing Corp., a
Tennessee corporation and the sole member of Diversicare Windsor House, LLC, a
Delaware limited liability company and was duly authorized in his/her respective
capacity to execute the foregoing instrument for and in the name and behalf of
said institution, and further stated and acknowledged that he had so signed,
executed, and delivered said foregoing instrument for the consideration, uses
and purposes therein mentioned and set forth.

        IN TESTIMONY WHEREOF, I have hereunto set my hand and seal this ________
day of March, 2001.

                                            ------------------------------------
                                            NOTARY PUBLIC
My Commission expires:

                                       32
<PAGE>   33

STATE OF ____________                 )
                                      )SS.                       ACKNOWLEDGMENT
COUNTY OF __________                  )

        On this day before me, a Notary Public, duly commissioned, qualified and
acting within and for said County and State, appeared in person the within named
James C. Thompson, being the Senior Vice President, of GMAC Commercial Mortgage
Corporation, a California corporation, who had been designated by said
institution to execute the foregoing instrument, to me personally well known,
who stated he was the Senior Vice President of GMAC Commercial Mortgage
Corporation and was duly authorized in his respective capacity to execute the
foregoing instrument for and in the name and behalf of said institution, and
further stated and acknowledged that he had so signed, executed, and delivered
said foregoing instrument for the consideration, uses and purposes therein
mentioned and set forth.

        IN TESTIMONY WHEREOF, I have hereunto set my hand and seal this ________
day of _____________, ________.

                                            ------------------------------------
                                            NOTARY PUBLIC
My Commission expires:

                                       33
<PAGE>   34

                                   EXHIBIT "A"

                                LEGAL DESCRIPTION

                                       A-1

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