Document:

<PAGE>
                                                                   EXHIBIT 10.3

    THIRD AMENDMENT TO AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT

         THIS THIRD AMENDMENT TO AMENDED AND RESTATED FINANCING AND SECURITY
AGREEMENT (this "Agreement") is made as of the ____ day of November, 2001,
effective as of September 30, 2001, by and among ARC CAPITAL CORPORATION II, a
Tennessee corporation ("ARCC"), the other Borrowers, if any, listed on the
signature pages hereof (the "Additional Borrowers", collectively with the
Original Borrower, the "Borrowers") and WASHINGTON MUTUAL BANK, FA, successor by
merger to Bank United (the "Agent") as agent for itself and the other lenders
who are or shall be from time to time participating as lenders (collectively,
the "Lenders") hereunder pursuant to the Agency Agreements dated June 8, 1999
and October 1, 1999 or any amendment thereto (as amended, restated or
substituted from time to time the "Agency Agreement").

                                    RECITALS

         A.       The Lenders have provided to the Borrowers a credit facility
(such credit facility, as modified, increased, extended, restated or
substituted, is referred to hereinafter as the "Credit Facility" or the "Loan")
in the maximum principal sum of up to $100,000,000 or such greater amount not to
exceed $150,000,000 as the Lenders may from time to time commit to lend pursuant
to any Agency Agreement. Advances or readvances of the Loan have been made
pursuant to, and secured by, the provisions of that certain Amended and Restated
Financing and Security Agreement dated February 11, 2000 by and between the
Agent and ARC Capital Corporation II, a Tennessee corporation, as amended by the
First Amendment to Amended and Restated Financing and Security Agreement dated
November 7, 2000 but effective as of September 30, 2000, and the Second
Amendment to Amended and Restated Financing and Security Agreement dated August
8, 2001 but effective as of June 30, 2001 (the "Financing Agreement").

         B.       The advances under the Loan are evidenced by promissory notes
made or to be made by one or more of the Borrowers for the benefit of each of
the Lenders in the aggregate principal sum of the then-applicable Credit
Facility Committed Amount (as amended, restated, renewed or substituted from
time to time, the "Notes"). Each of the Notes has been amended pursuant to the
terms of a First Amendment to Promissory Note dated November 7, 2000, a Second
Amendment to Promissory Note dated August 8, 2001 but effective as of June 30,
2001, and is being amended pursuant to the terms of a Third Amendment to
Promissory Note of even date herewith. The Notes are secured by, among other
things, certain Deeds of Trust (as defined in the Financing Agreement) from the
Borrowers in favor of the Agent for the benefit of the Lenders covering such
Borrowers' interest in the Land and the Improvements for the applicable Facility
(as defined in the Financing Agreement) or certain assignments to the Lenders of
Assigned Notes secured by Deeds of Trust payable to Borrowers in connection with
Synthetic Lease Transactions and Collateral Assignments and such other real and
personal property as shall be therein more particularly set forth (collectively,
the "Property"). The Credit Facility is

<PAGE>

evidenced, secured and guaranteed by the Financing Documents (as defined in the
Financing Agreement).

         C.       The Borrowers obligations under the Credit Facility are
guaranteed by American Retirement Corporation, a Tennessee corporation (the
"Guarantor"), pursuant to the terms of the Amended and Restated Guaranty of
Payment Agreement dated February 11, 2000 as amended pursuant to the First
Amendment to Amended and Restated Guaranty of Payment Agreement dated November
7, 2000, a Second Amendment to Amended and Restated Guaranty of Payment
Agreement dated August 8, 2001 but effective as of June 30, 2001, and the Third
Amendment to Amended and Restated Guaranty of Payment Agreement of even date
herewith but effective as of September 30, 2001 (as amended, restated, renewed
or substituted from time to time, the "Guaranty").

         D.       The Borrowers have requested and the Lenders have agreed to
modify certain provisions of the Financing Agreement and the Guaranty.

         E.       The Lenders have required, as a condition to continuing to
make available the Credit Facility, that the Borrowers execute and deliver this
Agreement to the Agent.

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

         (1)  The above Recitals are a part of this Agreement. Unless otherwise
expressly defined in this Agreement, terms defined in the Financing Agreement or
the Construction Agreement shall have the same meaning under this Agreement.

         (2)  The Financing Agreement is hereby amended as follows:

                  (a) Effective as of the date of signature of this Agreement
and continuing through the Revolving Credit Termination Date, amounts repaid
under the Credit Facility may not be reborrowed (including but not limited to
any repayment arising from the Boynton Beach Facility and the Shavano Park
Facility being classified as a Pool B Project or from the sale of the Padgett
Place (Pecan Park) Facility), despite the use of the term "revolving" in the
Financing Documents and no additional advances may be made for any purpose. Any
additional Eligible Project provided as Collateral for the Credit Facility will
not create any additional availability under the Borrowing Base. No additional
availability under the Borrowing Base will be allowed from the Santa Catalina
Facility if it qualifies as a Special Eligible Project; provided, however, that
if the Santa Catalina Facility so qualifies, the higher Borrowing Base
availability for Special Eligible Projects shall be used for the sole purpose of
calculations under Section 7.2.5 (Percentage of Stabilized Projects).

                                       2
<PAGE>

                  (b) The following definitions in Section 1.1 of the Financing
Agreement are amended and restated in their entirety as follows:

                  "Credit Facility Committed Amount" means $81,571,266.

                  "Revolving Credit Expiration Date" means November 2, 2002, or
         any date to which it may be extended from time to time pursuant to the
         terms of Section 2.6 hereof.

                  "Tangible Net Worth" means, at any time, the sum at such time
         of Net Worth less the total of (a) all assets which would be classified
         as intangible assets under GAAP, including goodwill, trademarks,
         trademark applications, trade names, service marks, patent applications
         and licenses, and deferred charges, (b) pre-opening costs,
         organizational costs and deferred financing costs, and (c) advances or
         loans made to or receivables from any unconsolidated affiliates of
         which the Guarantor owns less than fifty percent (50%) or any
         stockholder of the Guarantor or any affiliate. The following items (a)
         through (e) will also be excluded from Tangible Net Worth: (a) non-cash
         "mark to market" adjustments related to the Guarantor's two existing
         interest rate swap instruments with J.P. Morgan and SunTrust Bank,
         respectively (the "J.P. Morgan and SunTrust Swaps") not to exceed
         $1,200,000 in the aggregate net of taxes over the life of the J. P.
         Morgan and SunTrust Swaps, (b) the $1,227,000 in pre-tax loss for debt
         prepayment penalty and $762,000 pre-tax ordinary loss each in
         connection with the sale of the Rossmoor Regency Facility, (c) the
         one-time $1,200,000 expense for liability insurance "nose coverage"
         paid to Technical Risk, Inc., (d) any gain or loss on the sale of the
         Pecan Park Facility or any other Facility identified to be sold during
         fiscal quarters ending June 30, 2001, September 30, 2001, December 31,
         2001 and March 31, 2002 on the list attached hereto as Exhibit C and
         (e) extraordinary losses arising from prepayments of debt in connection
         with the projects listed on Exhibit C attached hereto during fiscal
         quarters ending June 30, 2001, September 30, 2001, December 31, 2001
         and March 31, 2002. Transaction costs associated with the sale or
         refinance of assets listed on Exhibit C attached hereto during the
         fiscal quarters ending June 30, 2001, September 30, 2001, December 31,
         2001 and March 31, 2002 will be included as tangible assets in the
         calculation of Tangible Net Worth. All assets classified in the
         Guarantor's financial statements as leaseholds of Senior Living
         Facilities or leasehold acquisition costs related to Senior Living
         Facilities shall be included as tangible assets in the calculation of
         its Tangible Net Worth with the exception of leasehold acquisition
         costs, if any, for the Senior Living Facility known as "Freedom Plaza
         Peoria".

                                       3
<PAGE>

                  (c) Section 2.1(c) of the Financing Agreement is hereby
amended and restated in its entirety as follows:

                  The conditions precedent for making an advance under the Loan
                  shall be as set forth in this Agreement. Sums borrowed and
                  repaid may not be readvanced.

                  (d) Section 2.5 of the Financing Agreement is hereby
intentionally deleted in its entirety.

                  (e) Section 2.7 (Mandatory Prepayment) of the Financing
 Agreement is hereby amended and restated in its entirety as follows:

                  Section 2.7 Mandatory Prepayment. On or before May 1, 2002,
         the Principal Sum outstanding under the Credit Facility shall be
         permanently reduced by not less than $10,000,000 and such reduced
         Principal Sum shall then constitute the Credit Facility Committed
         Amount. One or more Eligible Projects may be released from the
         Borrowing Base in connection with such prepayment of the Credit
         Facility subject to the Lenders' right to approve the release of an
         Eligible Project pursuant to provisions of Section 4.16 (Consent to
         Releases) hereof. The Lenders acknowledge that as of the date hereof
         the Borrowers have permanently reduced the Principal sum by
         $10,760,033.95, which amount fully satisfies the requirement of a
         $10,000,000 reduction by May 10, 2002.

                  (f) Section 4.18 (Funding of Operating Deficiencies and
Limitations on Advances) is hereby amended and restated as follows:

                  Section 4.18  Funding of Operating Deficiencies and
Eliminations.

                  (a) For all Eligible Projects in the Borrowing Base as of the
         date hereof, no additional availability in the Borrowing Base or
         reimbursement will be given for any purpose.

                  (b) On or before the last Banking Day of each fiscal quarter,
         beginning with the quarter ending September 30, 2001, the Borrowers
         shall submit a report projecting the aggregate dollar amount of
         operating deficits of all Eligible Projects until all Eligible Projects
         reach break-even operations. If necessary as a result of such report
         after review and acceptance by the Lenders and based upon the aggregate
         difference between projected operating deficits and the aggregate net
         income from Eligible Projects which have projected positive cash flow
         for the same period and (such then applicable amount being referred to
         herein as an "Operating Deficiency"), the requirement for and amount of
         the Operating Deficiency Reserve will be established, replenished
         and/or increased (as applicable) by the Borrowers, but only upon demand
         by the Agent in the discretion of the Requisite Lenders. Failure to
         deliver such funds to the Agent within three (3) Banking Days of
         Agent's demand shall constitute an Event of Default under the Financing
         Documents.

                                       4
<PAGE>

                  (c) At such time or times as an Operating Deficiency Reserve
         has been posted, the Borrowers may request advances from the Operating
         Reserve Deficiency Account (without eligibility for reimbursement under
         the Credit Facility) until it is exhausted. The Requisite Lenders shall
         determine in their sole discretion when and if such Operating Reserve
         may be released to the Borrowers.

                  (g) The Guarantor Certificate and Attachments 1 through 6
attached to Exhibit E to the Financing Agreement are hereby replaced by the
amended and restated schedules attached hereto as Exhibit B to be completed by
the Guarantor and delivered to the Agent at the times required by the Financing
Agreement.

         3.  The agreements of the Agent under this Agreement are subject to the
following terms and conditions, time being of the essence:

                  (a) Execution and delivery by the Borrowers and/or the
Guarantor as applicable of each of the following documents (collectively the
"Modification Agreements"):

                      (i)    This Agreement;

                      (ii)   The Third Amendment to Amended and Restated
         Guaranty of Payment Agreement;

                      (iii)  A Third Amendment to Promissory Note for each
         of the Notes.

                  (b) Payment by the Borrowers to the Lenders of their pro rata
share of a fee in consideration for the Modification Agreements of .125% of the
Credit Facility Committed Amount and payment to the Lenders of $750,000 in
additional proceeds from the sale of the Eligible Project known as Pecan Park
or Padgett Place.

                  (c) The Agent shall have received an opinion of counsel for
the Borrowers and Guarantor in form and substance satisfactory to the Agent and
all due diligence items listed on the closing checklist.

                  (d) The Borrowers have paid all costs and expenses of the
agent and the other Lenders, including, but not limited to, legal fees in
connection with the preparation and execution of Modification Agreements.

         4.  Payment for Appraisals. The Borrowers agree that they will
reimburse the Agent for the cost of appraisals recently ordered for all Eligible
Projects upon demand by the Agent and regardless of whether such appraisals are
classified by the Lenders as appraisals obtained pursuant to Section 7.27 of the
Financing Agreements.

                                       5
<PAGE>

         5.  Release of Claims. The Borrowers and the Guarantor, for themselves
and for each of their respective successors and assigns, hereby release and
waive all claims and/or defenses they now or hereafter may have against the
Lenders and their successors and assigns on account of any occurrence relating
to the Credit Facility, the Financing Documents and/or the Property which
accrued prior to the date hereof, including, but not limited to, any claim that
the Lenders (a) breached any obligation to the Borrowers and/or the Guarantor in
connection with the Credit Facility, (b) was or is in any way involved with the
Borrowers and/or the Guarantor as a partner, joint venturer, or in any other
capacity whatsoever other than as a lender, (c) failed to fund any portion of
the Loan or any other sums as required under any document or agreement in
reference thereto, or (d) failed to timely respond to any offers to cure any
defaults under any document or agreement executed by the Borrowers, the
Guarantor or any third party or parties in favor of the Lenders (INCLUDING ANY
ACT OR OMISSION CONSTITUTING, CAUSED BY OR RESULTING FROM THE ORDINARY
NEGLIGENCE OF THE LENDERS). This release and waiver shall be effective as of the
date of this Agreement and shall be binding upon the Borrowers and the Guarantor
and each of their respective successors and assigns, and shall inure to the
benefit of the Lenders and their successors and assigns. The term "Lenders" as
used herein shall include, but shall not be limited to, their present and former
officers, directors, employees, agents and attorneys.

         6.  Except as specifically set forth herein, the terms, provisions and
covenants of the Financing Agreement are hereby ratified and confirmed and
remain in full force and effect.

         7.  This Agreement may be executed in any number of duplicate originals
or counterparts, each of such duplicate originals or counterparts shall be
deemed to be an original and all taken together shall constitute but one and the
same instrument.

         8.  This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas, without regard to principles of
choice of law.

                         [SIGNATURES ON FOLLOWING PAGE]

                                       6
<PAGE>

         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered under seal by their duly authorized representatives as of
the date and year first written above.

                                   BORROWER:

WITNESS/ATTEST:                    ARC CAPITAL CORPORATION II
                                   a Tennessee corporation

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

WITNESS/ATTEST:                    ARC CARRIAGE CLUB OF JACKSONVILLE,
                                   INC, a Tennessee corporation

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

WITNESS/ATTEST:                    ARC SANTA CATALINA, INC., a Tennessee
                                   corporation

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

                                   AGENT:

WITNESS/ATTEST:                    WASHINGTON MUTUAL BANK, FA,
                                   as Agent for the Lenders

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

                                       7
<PAGE>

                             AGREEMENT OF GUARANTOR

         The undersigned is the "Guarantor" under an Amended and Restated Master
Guaranty of Payment Agreement, dated February 11, 2000 as amended pursuant to
the First Amendment to Amended and Restated Guaranty of Payment Agreement dated
November 7, 2000, the Second Amendment to Amended and Restated Guaranty of
Payment Agreement dated August 8, 2001 and the Third Amendment to Amended and
Restated Guaranty of Payment Agreement of even date herewith (as amended,
modified, substituted, extended and renewed from time to time, the "Guaranty"),
in favor of the Agent on behalf of the Lenders. In order to induce the Lenders
to enter into the foregoing Agreement, the undersigned (a) consents to the
transactions contemplated by, and agreements made by the Borrower under, the
foregoing Agreement, and (b) ratifies, confirms and reissues the terms,
conditions, promises, covenants, grants, assignments, security agreements,
agreements, representations, warranties and provisions contained in the
Guaranty, and the other Financing Documents entered into by the Guarantor.

         WITNESS signature and seal of the undersigned as of the date of the
Agreement.

WITNESS/ATTEST:                    AMERICAN RETIREMENT CORPORATION, a
                                   Tennessee corporation

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

                                       8
<PAGE>

                         THIRD AMENDMENT TO AMENDED AND
                     RESTATED GUARANTY OF PAYMENT AGREEMENT

         THIS THIRD AMENDMENT TO AMENDED AND RESTATED GUARANTY OF PAYMENT
AGREEMENT (this "Agreement") is made this ___ day of November, 2001, effective
as of September 30, 2001, by and between AMERICAN RETIREMENT CORPORATION, a
Tennessee corporation (the "Guarantor") and WASHINGTON MUTUAL BANK, FA,
successor by merger to Bank United (the "Agent") as agent for itself and the
other lenders who are or shall be from time to time participating as lenders
(collectively, the "Lenders") hereunder pursuant to the Agency Agreement dated
June 8, 1999 and October 1, 1999 or any amendment thereto (as amended, restated
or substituted from time to time the "Agency Agreement").

                                    RECITALS

         A.       The Lenders have provided to ARC Capital Corporation II, a
Tennessee corporation, and the other Borrowers a credit facility (such credit
facility, as modified, increased, extended, restated or substituted, is referred
to hereinafter as the "Credit Facility" or the "Loan") in the maximum principal
sum of up to $100,000,000 or such greater amount not to exceed $150,000,000 as
the Lenders may from time to time commit to lend pursuant to any Agency
Agreement. Advances or readvances of the Loan have been made pursuant to, and
secured by, the provisions of that certain Amended and Restated Financing and
Security Agreement dated February 11, 2000 by and between the Agent and the
Borrowers, as amended pursuant to the First Amendment to Amended and Restated
Financing and Security Agreement dated November 7, 2001 and the Second Amendment
to Amended and Restated Financing and Security Agreement of even date herewith
(as further amended, restated, renewed or substituted from time to time, the
"Financing Agreement").

         B.       The advances under the Loan are evidenced by promissory notes
made by one or more of the Borrowers for the benefit of each of the Lenders in
the aggregate principal sum of the then-applicable Credit Facility Committed
Amount (as amended, restated, renewed or substituted from time to time, the
"Notes"). Each of the Notes has been amended pursuant to the terms of a First
Amendment to Promissory Note dated November 7, 2000 and is being amended
pursuant to the terms of a Second Amendment to Promissory Note of even date
herewith. The Notes are secured by, among other things, certain Deeds of Trust
(as defined in the Financing Agreement) from the Borrowers in favor of the Agent
for the benefit of the Lenders covering such Borrowers' interest in the Land and
the Improvements for the applicable Facility (as defined in the Financing
Agreement) or certain assignments to the Lenders of Assigned Notes secured by
Deeds of Trust payable to Borrowers in connection with Synthetic Lease
Transactions and Collateral Assignments and such other real and personal
property as shall be therein more particularly set forth (collectively, the
"Property"). The Credit Facility is evidenced, secured and guaranteed by the
Financing Documents (as defined in the Financing Agreement).

         C.       The Borrowers obligations under the Credit Facility are
guaranteed by the Guarantor pursuant to the terms of the Amended and Restated
Guaranty of Payment Agreement

                                       1
<PAGE>

dated February 11, 2000 as amended pursuant to the First Amendment to Amended
and Restated Guaranty of Payment Agreement dated November 7, 2000 and the Second
Amendment to Amended and Restated Guaranty (the "Guaranty").

         D.       The Borrowers have requested and the Lenders have agreed to
modify certain provisions of the Financing Agreement and the Guaranty.

         E.       The Lenders have required, as a condition to continuing to
make available the Credit Facility, that the Guarantor execute and deliver this
Agreement to the Agent.

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

         1.       The above Recitals are a part of this Agreement. Unless
otherwise expressly defined in this Agreement, terms defined in the Financing
Agreement or the Guaranty shall have the same meaning under this Agreement.

         2.       The Guaranty is hereby amended as follows: Subsections (a),
(d), (f) and (g) of Section 3.2 of the Guaranty are hereby amended and restated
in their entirety as follows:

                           (a) Minimum Tangible Net Worth. Maintain, on a
                  consolidated basis with all subsidiaries, at all times during
                  the term of the Credit Facility measured quarterly, a minimum
                  Tangible Net Worth of not less than $85,000,000 as of
                  September 30, 2001 and beginning with the quarter ending
                  December 31, 2001 a minimum Tangible Net Worth of not less
                  than the sum of $85,000,000 plus fifty percent (50%) of the
                  Guarantor's net income (if positive) for each subsequent
                  quarter plus seventy-five (75%) of the net cash proceeds to
                  the Guarantor of any equity capital (or equity equivalent)
                  securities offering received during such quarter, excluding
                  the dollar amount of any such equity offering issued in
                  connection with any acquisition, merger or business
                  combination which is attributed to the purchase of the
                  goodwill of the acquired entity. "Tangible Net Worth" means,
                  at any time, the sum at such time of Net Worth less the total
                  of (a) all assets which would be classified as intangible
                  assets under GAAP, including goodwill, trademarks, trademark
                  applications, trade names, service marks, patent applications
                  and licenses, and deferred charges, (b) pre-opening costs,
                  organizational costs and deferred financing costs, and (c)
                  advances or loans made to or receivables from any
                  unconsolidated affiliates of which the Guarantor owns less
                  than fifty percent (50%) or any stockholder of the Guarantor
                  or any affiliate. The following items (a) through (e) will
                  also be excluded from Tangible Net Worth (provided, however,
                  that after deduction therefor, Tangible Net Worth shall not be
                  less than $75,000,000): (a) non-cash "mark to market"
                  adjustments related to the Guarantor's two existing interest
                  rate swap instruments obtained from J.P. Morgan and SunTrust
                  Bank, respectively (the "J.P. Morgan and SunTrust Swaps") not
                  to exceed $1,200,000 in the aggregate, net of taxes, over the
                  life of the J. P. Morgan and SunTrust Swaps, (b) the
                  $1,227,000 in pre-tax loss for debt

                                       2
<PAGE>

                  prepayment penalty and $762,000 pre-tax ordinary loss each in
                  connection with the sale of the Rossmoor Regency Facility, (c)
                  the one-time $1,200,000 expense for liability insurance "nose
                  coverage" paid to Technical Risk, Inc., (d) any gain or loss
                  on the sale of the Pecan Park Facility or any other Facility
                  as listed on Exhibit A attached hereto during fiscal quarters
                  ending June 30, 2001, September 30, 2001, December 31, 2001 or
                  March 31, 2002 and (e) extraordinary losses arising from
                  prepayments of debt during fiscal quarters ending June 30,
                  2001, September 30, 2001, December 31, 2001 or March 31, 2002
                  as listed on Exhibit A attached hereto. Transaction costs
                  associated with the sale or refinance of assets listed on
                  Exhibit A attached hereto during the fiscal quarters ending
                  June 30, 2001, September 30, 2001, December 31, 2001 and March
                  31, 2002 will be included as tangible assets in the
                  calculation of Tangible Net Worth. All assets classified in
                  the Guarantor's financial statements as leaseholds of Senior
                  Living Facilities or leasehold acquisition costs related to
                  Senior Living Facilities shall be included as tangible assets
                  in the calculation of its Tangible Net Worth except leasehold
                  acquisition costs, if any, for the Senior Living Facility
                  known as "Freedom Plaza Peoria".

                           (d) Ratio of EBITDAR to Interest and Rent. Maintain
                  on a consolidated basis a minimum ratio of EBITDAR to the sum
                  of Interest plus Rent as shown below for the period or periods
                  indicated; provided, however, that any calculation of such
                  ratio shall at all times (i) exclude non-cash reserves for
                  general and/or professional liability claims and the costs
                  associated therewith, (ii) exclude all non-cash income arising
                  from the contribution of assets to a joint venture, (iii)
                  except as provided in (vi) hereafter, include cash payments
                  made for general and/or professional liability claims and the
                  costs associated therewith, (iv) exclude non-cash "mark to
                  market" adjustments related to the J.P. Morgan and SunTrust
                  Swaps not to exceed $1,200,000 in the aggregate, net of taxes,
                  over the life of the J.P. Morgan and SunTrust Swaps, (v)
                  exclude the $1,227,000 in pre-tax loss for debt prepayment
                  penalty and $762,000 pre-tax ordinary loss each in connection
                  with the sale of the Rossmoor Regency Facility, (vi) exclude
                  the one-time $1,200,000 expense for liability insurance "nose
                  coverage" paid to Technical Risk, Inc., (vii) exclude any gain
                  or loss on the sale of the Pecan Park Facility or any other
                  Facility identified to be sold as listed on Exhibit A attached
                  hereto during fiscal quarters ending June 30, 2001, September
                  30, 2001, December 31, 2001 or March 31, 2002 as listed on
                  Exhibit A attached hereto and (viii) exclude extraordinary
                  losses arising from prepayments of debt during fiscal quarters
                  ending June 30, 2001 or September 30, 2001 as listed on
                  Exhibit A attached hereto.

                                       3
<PAGE>

                  (i)  Measured on a rolling four (4) fiscal quarter basis as
         follows:

<TABLE>
<CAPTION>
                    Period Ending                           Ratio
                    -------------                           -----
                  <S>                                   <C>
                  September 30, 2001                    1.05 to 1.00
                  December 31, 2001                     1.05 to 1.00
                    March 31, 2002                      1.05 to 1.00
                    June 30, 2002                       1.10 to 1.00
                  September 30, 2002                    1.10 to 1.00
</TABLE>

                  (ii) Measured on a single fiscal quarter basis as follows:

<TABLE>
<CAPTION>
                    Period Ending                           Ratio
                    -------------                           -----
                  <S>                                   <C>
                  September 30, 2001                    1.00 to 1.00
                  December 31, 2001                     1.05 to 1.00
                    March 31, 2002                      1.05 to 1.00
                    June 30, 2002                       1.10 to 1.00
                  September 30, 2002                    1.10 to 1.00
</TABLE>

                           (f)   Minimum Liquidity. Maintain on a consolidated
                  basis Liquid Assets of not less than the greater of (i) (aa)
                  ten percent (10%) of its Tangible Net Worth or (bb)
                  $13,514,000 as of June 30, 2001, measured quarterly plus (ii)
                  $.50 for every $1.00 (the "Additional Required Liquidity") of
                  net equity capital that is invested after the date hereof by
                  the Guarantor or its Subsidiaries in any of the new
                  investments described in subparts (i) through (v) below
                  (individually, a "New Investment" or, collectively, the "New
                  Investments"):

                           (i)   acquisition of Guarantor's convertible
                  subordinated debentures,

                           (ii)   voluntary prepayments of debt balances, other
                  than payments currently scheduled or required pursuant to the
                  terms of the documents evidencing such indebtedness
                  (including, without limitation, prepayments associated with
                  the sale or refinancing of assets),

                           (iii)  acquisitions of Senior Living Facilities;

                           (iv)   the dollar amount spent on new (i.e., first
                  initiated after September 30, 2000) construction either for
                  expansion of existing or development of new Senior Living
                  Facilities; and

                           (v)    the dollar amount of cash spent to acquire the
                  ownership of "black box" Synthetic Lessees.

                                       4
<PAGE>

                           The foregoing notwithstanding, the following
                  limitations shall apply to the Additional Required Liquidity:
                  (1) New Investments must exceed $500,000 in a fiscal quarter
                  in order to give rise to commensurate Additional Required
                  Liquidity and thereafter, the Additional Required Liquidity
                  shall be calculated on the amount of New Investments in excess
                  of $500,000 in such quarter; and (2) in all events, the
                  minimum Liquid Assets requirement shall not exceed $25,000,000
                  (except to the extent 10% of the Guarantor's Tangible Net
                  Worth exceeds $25,000,000).

                           Notwithstanding the foregoing, the following New
                  Investments shall not give rise to any Additional Required
                  Liquidity: (1) the acquisition by the Guarantor or any
                  Subsidiary of any Senior Living Facility which is currently a
                  leasehold (except as provided in Section 3.2(f)(v)); or (2)
                  the cost of proposed expansion of the Senior Living Facility
                  knows as "Park Regency".

                           In addition, with regard to the sale of an asset the
                  proceeds of which are invested in a new asset pursuant to a
                  1031 exchange transaction, only 50% of the net capital in
                  excess of the 1031 sale proceeds included in the New
                  Investment will be subject to the Additional Required
                  Liquidity.

                           (g) Fixed Charge Coverage Ratio. Maintain on a
                  consolidated basis a minimum ratio of EBITDAR (as defined in
                  the Financing Agreement as modified pursuant to Subsection (d)
                  of this Section 3.2) to Interest plus Rent plus current of
                  principal amortization of debt 1.00 to 1.00, measured
                  quarterly on a rolling four (4) quarters basis. In determining
                  the amount of principal amortization of any debt any balloon
                  or bullet payment shall be excluded.

         3.       Except as specifically set forth herein, the terms, provisions
and covenants of the Guaranty are hereby ratified and confirmed and remain in
full force and effect.

         4.       This Agreement may be executed in any number of duplicate
originals or counterparts, each of such duplicate originals or counterparts
shall be deemed to be an original and all taken together shall constitute but
one and the same instrument.

                     [SIGNATURES APPEAR ON FOLLOWING PAGES]

                                       5
<PAGE>

         WITNESS the signatures and seals of the Guarantor and the Agent on
behalf of the Lenders under seal by their duly authorized representatives as of
the day and year first above written.

WITNESS OR ATTEST:                 AMERICAN RETIREMENT CORPORATION,
                                   a Tennessee corporation

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

STATE/COMMONWEALTH OF _______________
 COUNTY/CITY OF ______________, TO WIT:

         I HEREBY CERTIFY, that on this ___ day of November, 2001, before me,
the undersigned Notary Public of said State/Commonwealth, personally appeared
______________, who acknowledged himself to be the ___________________ of
American Retirement Corporation, known to me (or satisfactorily proven) to be
the person whose name is subscribed to the within instrument, and acknowledged
that he executed the same for the purposes therein contained as the duly
authorized officer of said corporation by signing the name of the corporation by
himself as __________________.

         WITNESS my hand and Notarial Seal.

                                                 ------------------------------
                                                 Notary Public

My Commission Expires:

                                       6
<PAGE>

WITNESS:                           WASHINGTON MUTUAL BANK, FA,
                                   as Agent on behalf of the Lenders

                                   By:
------------------                    ------------------------ (SEAL)
                                      Name:
                                      Title:

STATE/COMMONWEALTH OF _______________
 COUNTY/CITY OF ______________, TO WIT:

         I HEREBY CERTIFY, that on this ___ day of November, 2001, before me,
the undersigned Notary Public of said State/Commonwealth, personally appeared
____________________, who acknowledged himself to be the
__________________________ of Washington Mutual Bank, FA, known to me (or
satisfactorily proven) to be the person whose name is subscribed to the within
instrument, and acknowledged that he executed the same for the purposes therein
contained as the duly authorized officer of said bank by signing the name of the
bank by himself as ______________________.

         WITNESS my hand and Notarial Seal.

                                              ------------------------------
                                              Notary Public

                                       7<PAGE>
                                                                   EXHIBIT 10.4

                                 LOAN AGREEMENT

         THIS LOAN AGREEMENT (this "Agreement") is made as of September ___,
2001, by and between ARC HOLLEY COURT, LLC, a Tennessee limited liability
company (together with its successors and assigns, "Borrower"), and GMAC
COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its
successors and assigns, "Lender").

                                    RECITALS

         A.       Borrower has requested that Lender make a loan to Borrower in
the principal sum of $13,000,000.00.

         B.       Lender has agreed to make such loan on the terms and
conditions hereinafter set forth.

                                    AGREEMENT

         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" has the meaning given to that term in the Mortgage.

                  "ACTUAL MANAGEMENT FEES" means actual management fees paid or
incurred in connection with operation of the Facility.

                  "AFFILIATE" means, with respect to any Person, (a) each Person
that controls, is controlled by or is under common control with such Person, (b)
each Person that, directly or indirectly, owns or controls, whether beneficially
or as a trustee, guardian or other fiduciary, a sufficient quantity of the Stock
of such Person to elect a majority of the directors or other managers of such
Person or otherwise to direct the policies and management of such Person, and
(c) each of such Person's officers, directors, members, joint venturers and
partners.

                  "ASSIGNMENT OF LEASES AND RENTS" shall mean that certain
Assignment of Leases and Rents of even date herewith by Borrower for the benefit
of Lender.

                  "ASSUMED MANAGEMENT FEES" means assumed management fees of
five percent (5%) of gross resident revenues of the Facility.

                  "BUSINESS DAY" means a day, other than Saturday or Sunday and
legal holidays, when Lender is open for business.
<PAGE>

                  "CAP ASSIGNMENT" means an Assignment of Interest Rate Cap as
Collateral to be executed by and between Borrower and Lender pursuant to Section
2.3 hereof, as such agreement may be amended, modified or supplemented from time
to time.

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

                  "COMMITMENT LETTER" means the commitment letter issued by
Lender to Borrower dated August 1, 2001.

                  "DEBT SERVICE COVERAGE FOR THE FACILITY" means a ratio in
which the first number is the sum of pre-tax "net income" of Borrower from the
operations of the Facility as set forth in the financial statements provided to
Lender (without deduction for Actual Management Fees or expenses 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 and lease expense to the extent deducted in determining net
income and non-cash expenses or allowances for depreciation and amortization of
the Facility for said period, less either Assumed Management Fees or Actual
Management Fees (based upon the covenant to which such definition relates) for
said period, and the second number is the sum of the principal amounts due (even
if not paid) on the Loan (but which shall not include that portion associated
with the balloon payment of the Loan) for the applicable period plus the
interest amount due on the Loan for the applicable period not to exceed an
amount calculated at the applicable strike rate for which the cap provider, who
is obligated to make payments in accordance with the Cap Agreement (defined
below), agrees to make certain payments to or for the benefit of Borrower as set
forth in the Cap Documents. In calculating "net income," Extraordinary Income
and Extraordinary Expenses shall be excluded.

                  "DEBT SERVICE RESERVE AGREEMENT" means that certain Debt
Service Reserve 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" has 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 Land and/or the
Improvements.

                  "EQUIPMENT" has the meaning given to that term in the
Mortgage.

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

                  "EXTRAORDINARY INCOME AND EXTRAORDINARY EXPENSES" means
material items of income and expense 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

                                       2
<PAGE>
Borrower's business, and any items of income and expense 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 "Holley Court Terrace",
presently a 178 unit independent living 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
assisted living or nursing facility), now or hereafter operated on the Land.

                  "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.

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

                  "GUARANTOR" means American Retirement Corporation, a Tennessee
corporation.

                  "GUARANTY AGREEMENT" means that certain Payment and
Performance Guaranty Agreement of even date herewith from Guarantor to Lender;
as such agreement may be modified, supplemented or amended from time to time.

                  "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 Land and/or the Improvements 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 Land 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.

                                       3
<PAGE>

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 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 apparatus which are or shall be attached
to the property or said buildings, structures or improvements.

                  "INDEBTEDNESS" means any (a) obligations for borrowed money,
(b) obligations, payment for which by their terms are being deferred by more
than sixty (60) 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, (c)
obligations, whether or not assumed, secured by Liens on or payable out of the
proceeds or production from the Accounts and/or property now or hereafter owned
or acquired, and (d) 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, except those obligations for resident security
deposits and pre-paid rent received from residents of the Facility and except
those obligations described in (b) above, payment for which by their terms are
being deferred by less than sixty (60) days.

                  "INVENTORY" has the meaning given to that term in the
Mortgage.

                  "LAND" means the real estate located in Oak Park, Cook County,
Illinois, 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.

                  "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 $13,000,000.00
made by Lender to Borrower as of the date hereof.

                  "LOAN DOCUMENTS" means, collectively, this Agreement, the
Note, the Mortgage, the Assignment of Leases and Rents, the Guaranty Agreement,
the Debt Service Reserve Agreement, and the Subordination Agreement, together
with any and all other documents executed by Borrower or others, evidencing,
securing or otherwise relating to the Loan, as any of the foregoing may be
amended, modified or supplemented from time to time.

                  "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,

                                       4
<PAGE>
agreements and other obligations from time to time owing to, or for the benefit
of, Lender pursuant to the Loan Documents.

                  "MANAGEMENT AGREEMENT" means that certain Management Agreement
dated August 1, 2001, by and between Manager and Borrower; the Management
Agreement obligates Manager to operate and manage the Facility.

                  "MANAGER" means ARC Management, LLC, a Tennessee limited
liability company, and any successor manager of the Facility approved by Lender
in writing.

                  "MATURITY DATE" means October 1, 2003.

                  "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.

                  "MORTGAGE" means that certain Mortgage and Security Agreement
of even date herewith by and between Borrower and Lender, encumbering the real
estate located in Cook County, Illinois, which is more particularly described in
Exhibit "A" hereto, and upon which the Facility is located.

                  "MORTGAGED PROPERTY" has the meaning given to that term in the
Mortgage.

                  "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 Land and/or the Improvements.

                  "PERMITS" means all licenses, permits and certificates used,
required 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.

                                       5
<PAGE>

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

                  "PROCEEDS" has the meaning given to that term in the Mortgage.

                  "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.

                  "RENTS" has the meaning given to that term in the Mortgage.

                  "SINGLE PURPOSE ENTITY" means a Person, which complies with
the requirements of Section 5.4.

                  "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).

                  "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.

         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
Illinois.

         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

                                       6
<PAGE>
                                  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.

         2.3      INTEREST RATE PROTECTION To protect against fluctuations in
interest rates, the Borrower shall make arrangements for an interest rate cap (a
"Cap") to be in place and maintained at all times with respect to the Note. The
Cap must be in place on or before the Closing Date and shall not terminate
earlier than the Maturity Date. The Cap shall be secured and documented on terms
and conditions approved by Lender, and with a counterparty (who is obligated to
make payments in accordance with the rate cap agreement pertaining to the Cap)
acceptable to Lender. The Cap shall be evidenced and governed by such documents
(the "Cap Documents") as shall be acceptable to, and which shall be in form and
content acceptable to, Lender.

                                  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 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 Illinois and every
other 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
necessary action. 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 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

                                       7
<PAGE>

constitute any default under any law, government regulation, decree, judgment,
Borrower's limited partnership agreement, 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 any Reimbursement Contracts.
Borrower is not in violation of any agreement, order, judgment, or decree of any
court, or any statute or governmental regulation to which it is subject, the
violation of which might reasonably be expected to have a materially adverse
effect on Borrower's business, financial condition or prospects.

                  (b)      Land and Improvements. 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 Land, the Improvements or any interest therein, or to enjoin or
similarly prevent or restrict the use of the Land 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
financial condition of Borrower as of such dates, 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 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 or prior to 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.

         3.7      COMPLIANCE WITH FACILITY LAWS. The Facility is currently
operated as a 178 unit independent living facility. Borrower is the lawful owner
of all Permits for the Facility; all Permits (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 any restriction 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. Borrower and Manager as well as the operation of the Facility are in
compliance in all material respects with the applicable provisions of
independent 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 area
requirements per unit) are required for the Facility to operate at the foregoing
permitted unit capacity. If and to the extent applicable, all Reimbursement
Contracts with

                                       8
<PAGE>
respect to the Facility are in full force and effect, and Borrower and Manager
are in good standing with all the respective agencies governing such applicable
Facility licenses, program certification, and Reimbursement Contracts.

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

         3.9      MEDICARE AND MEDICAID COMPLIANCE. If and to the extent
applicable, 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. If and to the extent
applicable, the Facility is in conformance in all material respects with all
insurance, reimbursement and cost reporting requirements.

         3.10     THIRD PARTY PAYORS. If and to the extent applicable, 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 applicable 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.

         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 residents or result in the imposition of a fine or
sanction or a lower rate certification or a materially lower reimbursement rate
for services rendered to eligible residents;

                  (b)      Modify or 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, if and to the extent applicable, or any other
Third-Party Payors' Programs, or any successor programs thereto, at current rate
certifications.

         3.12     PHYSICAL PLANT STANDARDS. The Facility and the use thereof
comply in all material respects with all applicable local, state and federal
building codes, fire codes, health care, nursing facility and other similar
regulatory requirements (the "Physical Plant Standards"), and no waivers of
Physical Plant Standards exist at the Facility.

         3.13     PLEDGE OF RECEIVABLES. Borrower has not pledged its Accounts
as collateral security for any loan or Indebtedness other than, if applicable,
the Loan.

                                       9
<PAGE>
         3.14     PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed
all federal, state, and local tax returns which it is required to file, prior to
delinquency, 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 material
respects. Borrower has paid or made adequate provision for the payment of all
applicable water and sewer charges, ground rents (if applicable) and Taxes (as
defined in the Mortgage) with respect to the Land and/or the Improvements.

         3.15     TITLE TO MORTGAGED PROPERTY. Borrower has good and marketable
title to all of the Mortgaged Property, subject to no lien, mortgage, pledge,
encroachment, zoning violation, or encumbrance except Permitted Encumbrances.
All Improvements situated on the Land are situated wholly within the boundaries
of the Land.

         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 which may hereafter accrue,
excepting only Permitted Encumbrances.

         3.17     LOCATION OF CHIEF EXECUTIVE OFFICES. The location of
Borrower's principal place of business and chief executive office are 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. Neither Borrower nor the Facility, which operates
under the trade name "Holley Court Terrace", has 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.

         3.20     ERISA. As of the date hereof and throughout the term of this
Agreement,

                  (a)      Borrower is not and will not be an "employee benefit
plan," as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), subject to Title I of ERISA, and none of the
assets of Borrower constitutes or will constitute "plan assets" (within the
meaning of Department of Labor Regulation Section 2510.3-101) of one or more
such plans, and

                  (b)      Borrower is not and will not be a "governmental plan"
within the meaning of Section 3(32) of ERISA, and transactions by or with
Borrower are not and will not be subject to state statutes applicable to
Borrower regulating investments of and fiduciary obligations with respect to
governmental plans.

                  The execution and delivery of the Loan Documents, and the
borrowing of indebtedness hereunder, does not constitute a non-exempt prohibited
transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"). Borrower shall not engage in a non-exempt
prohibited transaction described in Section 406 of ERISA or Section 4975 of the
Code, as such sections relate to Borrower, or in any transaction

                                       10
<PAGE>
that would cause any obligation or action taken or to be taken hereunder or the
exercise by Lender of any of its rights under the Loan Documents) to be a
non-exempt prohibited transaction under ERISA.

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

         3.22     COMPLIANCE WITH APPLICABLE LAWS. The Facility and its
operations and the Land and Improvements 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 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     MANAGEMENT AGREEMENT. The Management Agreement is in full
force and effect, and there are no defaults (either monetary or non-monetary) by
Manager or Borrower thereunder.

         3.25     OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness,
secured or unsecured, direct or contingent (including any guaranties), other
than (a) the Loan, (b) indebtedness which represents trade payables or accrued
expenses incurred in the ordinary course of business of owning and operating the
Mortgaged Property and (c) Indebtedness which represents resident security
deposits and pre-paid rent received from residents of the Facility; no other
debt will be secured (senior, subordinate or pari passu) by the Mortgaged
Property.

         3.26     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
Mortgaged Property is otherwise bound, other than obligations incurred in the
ordinary course of the operation of the Mortgaged Property and other than
obligations under this Agreement, the Note, the Mortgage and the other Loan
Documents.

         3.27     FRAUDULENT CONVEYANCES. Borrower (a) 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 (b) has received reasonably equivalent value
in exchange for its obligations under the Loan Documents. Giving effect to the
transactions contemplated by the Loan Documents, 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

                                       11
<PAGE>
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).

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

                                   ARTICLE IV
                        AFFIRMATIVE COVENANTS OF BORROWER

         Borrower agrees with and covenants unto 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.

         4.3      MAINTENANCE OF SINGLE PURPOSE. Maintain its existence as a
Single Purpose Entity.

         4.4      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), 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.

         4.5      INSURANCE. Maintain, at its expense, the following insurance
coverages and policies with respect to the Mortgaged Property and the Facility,
which coverages and policies must be acceptable to Lender's insurance consultant
in its sole discretion:

                  (a)      Comprehensive "all risk" insurance, including
coverage for windstorms and hail, in an amount equal to 100% of the full
replacement cost of the Facility, which replacement cost shall be determined by
the "Insurable Value" or "Cost Approach to Value" reflected in the most recent
Lender approved appraisal for the Facility, without deduction for depreciation.
Such insurance shall also include (i) agreed insurance amount endorsement
waiving all co-insurance provisions, and (ii) an "Ordinance or Law Coverage"
endorsement if the Facility or the use thereof shall constitute a legal
non-conforming structure or use.

                                       12
<PAGE>
                  (b)      Commercial general liability insurance against claims
for sexual harassment, abuse of residents, personal injury, bodily injury, death
or property damage, in or about the Facility to be on a so-called "claims made"
or "occurrence" basis for at least $1,000,000.00 per occurrence and
$3,000,000.00 in the aggregate with a $10,000,000.00 umbrella coverage.

                  (c)      Professional liability insurance against claims for
personal injury, bodily injury or death, in or about the Facility to be on a
so-called "claims made" or "occurrence" basis for at least $1,000,000.00 per
occurrence and $5,000,000.00 in the aggregate.

                  (d)      Business interruption income insurance for the
Facility in an amount equal to 100% of the projected aggregate Loan payments
plus carrying costs and extraordinary expenses of the Facility for a period of
twelve (12) months as projected by Lender, containing a 180-day extended period
of indemnity endorsement.

                  (e)      Flood Hazard insurance if any portion of the
Improvements is located in a federally designated "special flood hazard area"
and in which flood insurance is available. In lieu thereof, Lender will accept
proof, satisfactory to it in its sole discretion, that the Improvements are not
within the boundaries of a designated area.

                  (f)      Workers' compensation insurance, if applicable and
required by state law, subject to applicable state statutory limits, and
employer's liability insurance with a limit of $1,000,000.00 per accident and
per disease per employee with respect to the Facility.

                  (g)      Comprehensive boiler and machinery insurance,
including property damage coverage and time element coverage in an amount equal
to 100% of the full replacement cost, without deduction for depreciation, of the
Facility housing the machinery, if steam boilers, pipes, turbines, engines or
any other pressure vessels are in operation with respect to the Facility. Such
insurance coverage shall include a "joint loss" clause if such coverage is
provided by an insurance carrier other than that which provides the
comprehensive "all risk" insurance described above.

                  (h)      During the period of any construction and/or
renovation of capital improvements with respect to the Facility or any new
construction at the Facility, builder's risk insurance for any improvements
under construction and/or renovation, including, without limitation, costs of
demolition and increased cost of construction or renovation, in an amount equal
the amount of the general contract plus the value of any existing trust note for
improvements and materials stored on or off the Property, including "soft cost"
coverage.

                  (i)      Such other insurance coverages, in such amounts, and
such other forms and endorsements, as may from time to time be required by
Lender in its commercially reasonable discretion 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.

                                       13
<PAGE>
                  (j)      All insurance required under this Section 4.5 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 acceptable to Lender in its
commercially reasonable discretion, 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 and such insurer must have a long term senior debt rating of at least "AA"
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 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 (iii) 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 4.5. 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.

                  (k)      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.

                  (l)      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

                                       14
<PAGE>
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.

                  (m)      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 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.

                  (n)      If the liability insurance maintained by Borrower
pursuant to clause (c) above is on a "claims made" basis, then Borrower hereby
agrees to purchase commercial general liability insurance and/or professional
liability insurance in the form of an "extended reporting endorsement" or
coverage sometimes known as "tail coverage" within five (5) days after the
occurrence of (i) the cancellation or non-renewal of an existing "claims made"
policy or(ii) a change in borrower's existing insurance carriers, or (iii) the
purchase of "occurrence" based coverage, or (iv) the purchase of a new or
renewal "claims made" policy in which the "retro date" has been moved forward
from the first purchase date of "claims made coverage" or (v) any other future
determined need for the "extended reporting/tail" coverage.

         4.6      PROCEEDS OF INSURANCE OR CONDEMNATION. Satisfy the following
conditions, if Lender, at its sole option, makes 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:

                  (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 their
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;

                                       15
<PAGE>

                  (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 (d) and prior to any Proceeds being disbursed
to Borrower, Borrower shall have provided to Lender all of the following:

                           (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 (c) above,

                           (ii)     if loss or damage exceeds Fifty Thousand
($50,000), 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)      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 Lender,
its architect and general contractor with appropriate invoices and lien waivers
as required by Lender; and

                  (j)      Lender shall have a first lien and security interest
in all building materials and completed repair and restoration work and in all
fixtures and equipment acquired with

                                       16
<PAGE>
such 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.

                  (k)      In the event and to the extent such Proceeds are not
used or permitted to be used (for any reason) for the repair, restoration and
replacement of the Improvements, Equipment and Inventory for which a loss or
damage has occurred, 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 (a) to the full or partial payment or prepayment of the
Loan Obligations (without premium) in the manner aforesaid, or (b) 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. Notwithstanding
the foregoing, all net proceeds of insurance or condemnation (after payment of
Lender's reasonable costs and expenses, including without limitation, inspection
fees) in an amount equal to Two Hundred Fifty Thousand Dollars ($250,000.00) or
less, per occurrence, shall be made available to Borrower to be applied to
repair or rebuild the Improvements, Equipment and Inventory damaged or taken, if
such repair or rebuilding is "economically feasible". For purposes hereof,
"economically feasible" shall mean that the Improvements, Equipment, and
Inventory for which loss or damage has resulted shall be capable of being
restored to their preexisting condition and utility in all material respects
with a value equal to or greater than the 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 income insurance
for the Facility (as described in Section 4.5(d) above) as determined by the
Lender or its operating adviser or (ii) the date which is one hundred eighty
(180) days prior to the Maturity Date.

                  (l)      Borrower appoints Lender as Borrower's
attorney-in-fact to cause the issuance of 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.

         4.7      FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause
Guarantor and Manager to provide to Lender, at its address set forth in Section
8.7 and at GMAC Commercial Mortgage Corporation, 8333 Douglas Avenue, Suite
1460, Dallas, Texas 75225, 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 Guarantor, consolidated financial statements for the
Guarantor and its subsidiaries, including Manager, Borrower and the Facility (if
different from the Borrower), prepared in accordance with generally accepted
accounting principles consistently applied, audited by a nationally recognized
accounting firm or independent certified public accounting firm acceptable to
the Lender, which statements shall include a balance sheet and a statement of
income and expenses for the year then ended. In lieu of its obligations
hereunder, Guarantor may submit to Lender, upon its filing thereof, a copy of
its Form 10 K as filed with the United States Securities and Exchange
Commission.

                                       17
<PAGE>

                  (b)      Within forty-five (45) days after the end of each
fiscal quarter of the Facility (if different from Borrower), unaudited interim
financial statements of the Facility, certified as true and correct in all
material respects by a financial officer of Borrower, subject to customary year
end adjustments, which statements shall be prepared in accordance with generally
accepted accounting principles consistently applied and shall include a balance
sheet, statement of income and expenses for the quarter then ended.

                  (c)      Within forty-five (45) days after the end of each
fiscal quarter of Borrower, unaudited interim financial statements of Borrower,
certified as true and correct in all material respects by a financial officer of
Borrower, subject to customary year end adjustments, which statements shall be
prepared in accordance with generally accepted accounting principles
consistently and shall include a balance sheet and statement of income and
expenses for the quarter then ended.

                  (d)      Within forty-five (45) days after the end of each
fiscal quarter of Guarantor, unaudited interim financial statements of
Guarantor, certified as true and correct in all material respects by a financial
officer of Guarantor, subject to customary year end adjustments, which
statements shall be prepared in accordance with general accounting principles
consistently applied and shall include a balance sheet and a statement of income
and expenses for the quarter then ended. In lieu of its obligations hereunder,
Guarantor may submit to Lender a copy of its Form 10 Q as filed by Guarantor
with the United States Securities and Exchange Commission.

                  (e)      Within forty-five (45) days after the end of each
quarter of Manager, unaudited interim financial statements of Manager, certified
as true and correct in all material respects by a financial officer of Manager,
subject to customary year end adjustments, which statements shall be prepared in
accordance with generally accepted accounting principles consistently applied
and shall include a balance sheet and a statement of income and expenses for the
quarter then ended.

                  (f)      Within forty-five (45) days after the end of each
fiscal quarter of Borrower, a statement of the number of unit days available and
the actual residents days incurred for such quarter, together with quarterly
census information of the Facility as of the end of such quarter in sufficient
detail to show resident-mix (i.e., private, Medicare, Medicaid, and VA) on a
daily average basis for such year through the end of such quarter, certified by
a financial officer of Manager or Borrower 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".

                  (g)      If requested by Lender, within thirty (30) days after
the filing deadline, as may be extended from time to time, copies of the federal
income tax returns of Borrower and Guarantor and all state and local tax returns
of Borrower, together with all supporting documentation and required schedules.

                  (h)      If and to the extent applicable, within ten (10) days
after filing or receipt, all Medicaid and/or Medicare cost reports and any
amendments thereto filed with respect to the Facility and all responses, audit
reports or inquiries with respect to such cost reports.

                                       18
<PAGE>

                  (i)      If and to the extent applicable, within ten (10) days
after receipt, copies of all licensure and certification survey reports and
statements of deficiencies (with plans of correction attached thereto).

                  (j)      If and to the extent applicable, within ten (10) days
after receipt, a copy of the "Medicaid Rate Calculation Worksheet" (or the
equivalent thereof) from the applicable agency.

                  (k)      If and to the extent applicable, within ten (10) days
of receipt, a statement of the number of resident days 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.

                  (l)      Within three (3) days of receipt, any and all notices
(regardless of form) from any and all federal or state agencies, including any
licensing and/or certifying agencies that the Facility license and/or the
participation in Medicare, Medicaid or any other federal or state health care
program, as applicable, of the Facility or any of its owners, officers,
directors, agents or managing employees is being downgraded to a substandard
category, revoked, suspended, or subjected to federal or state health care
program exclusion, civil monetary penalty, criminal penalty, or false claims
recovery, or that any such action is pending, threatened or being considered.

                  (m)      If requested by Lender, evidence of payment by
Borrower or Manager of any applicable provider bed taxes or similar taxes, which
Borrower or Manager agrees to pay.

                  (n)      Within forty-five (45) days after the end of each of
Borrower's fiscal quarter, and more frequently, if requested by Lender, an aged
accounts payable report and an aged accounts receivable report for the Facility
in sufficient detail to show amounts due from each class of patient-mix (i.e.,
private, Medicare, Medicaid, and V.A.) both by the account age classifications
of 30 days, 60 days, 90 days, 120 days and over 120 days.

                  (o)      Any deficiency (identified above) shall be corrected
by the date required by the licensure and certification agency, if such
deficiency could adversely affect either (a) the right to continue participation
in Medicare and Medicaid for existing residents or (b) the right to admit new
Medicare and Medicaid residents, or (c) the right to continue operating the
Facility as an independent living facility.

                  (p)      If and to the extent applicable, Lender reserves the
right to require that the annual financial statements of Borrower be audited and
prepared by a nationally recognized accounting firm or independent certified
public accountant acceptable to Lender, at their respective sole cost and
expense, 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, (iii) if Lender has reasonable grounds
to believe that the unaudited financial statements do not accurately represent
the financial condition of Borrower, Guarantor or Manager as the case may be, or
(iv) the financial results of the Borrower and/or Manager (as the case may be)
are no longer consolidated into Guarantor's audited financial statements.

                                       19
<PAGE>

                  (q)      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) as
Lender shall reasonably deem 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.

         4.8      COMPLIANCE CERTIFICATE. 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 its chief financial officer.

         4.9      BOOKS AND RECORDS. Keep and maintain at all times at the
Facility or Manager's offices, and upon Lender's request 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 material written contracts,
leases (if any), and other instruments which affect the Mortgaged 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 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.

         4.10     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/or collateral for the payment and
security thereof have been established as determined by Lender in its
commercially reasonable discretion.

         4.11     RECORDS OF ACCOUNTS. Maintain all records, including records
pertaining to the Accounts of Borrower, at the principal place of business of
Borrower or Manager as set forth in this Agreement.

         4.12     CONDUCT OF BUSINESS. Conduct, or cause 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:

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

                  (b)      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

                                       20
<PAGE>
programs (if any) to remain in effect without reduction in the number of units
authorized for use in the Medicaid, Medicare, or other applicable reimbursement
programs;

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

                  (d)      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;

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

                  (f)      to keep all required Permits current and in full
force and effect and to promptly provide Lender with a copy of any assisted
living license which may hereafter be issued with respect to the Facility.

         4.13     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 residents or for new
residents to be admitted with Medicaid or Medicare coverage, by the date
required for cure by such agency (plus extensions granted by such agency).

         4.14     DEBT SERVICE COVERAGE REQUIREMENTS.

                  (a)      Maintain (commencing with the closing of the Loan),
and within forty-five (45) days of the end of each fiscal quarter provide
evidence to Lender of the achievement of, the following debt service coverage
ratios (calculated on a trailing 12 month basis) until the Loan Obligations are
paid in full:

                           (i)      a Debt Service Coverage for the Facility,
after deduction of Actual Management Fees, of not less than 1.0 to 1.0; and

                           (ii)     a Debt Service Coverage for the Facility,
after deduction of Assumed Management Fees, of not less than 1.25 to 1.0.

                  (b)      If Borrower fails to achieve or provide evidence of
achievement of the Debt Service Coverage for the Facility, Borrower may deposit
with Lender, at Borrower's option within fifteen (15) days of such failure,
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 requirement having been satisfied. If after
Borrower

                                       21
<PAGE>
has deposited such additional cash or liquid collateral, Borrower again fails to
achieve or provide evidence of the achievement of the Debt Service Coverage for
the Facility requirements set forth above and such failure continues for two (2)
consecutive quarters, Borrower may deposit with Lender, at Borrower's option
within fifteen (15) days of such failure, 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 (1st) 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, would have resulted in the noncomplying debt service
coverage requirement having been satisfied. Any additional cash or liquid
collateral deposited by Borrower hereunder in order to achieve the required Debt
Service Coverage for the Facility and cure any existing default with respect
thereto will be held by 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 Lender, in such order and manner as 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 Lender at such time
as Borrower provides 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 4.14) for two (2)
consecutive fiscal quarters.

         4.15     OCCUPANCY. Maintain or cause to be maintained at all times, a
daily average annual (calendar year) occupancy for the Facility of eighty
percent (80%) or more, as measured at the end of each of the Facility's fiscal
quarters, (based on the number of units available at each Facility with the
minimum number of units available at the Facility remaining at or in excess of
the number of units set forth in the Facility description in Article I).

         4.16     CAPITAL EXPENDITURES. Maintain and/or cause Manager to
maintain the Facility in good condition and make minimum capital expenditures
for the Facility in each fiscal year, in the amount of $300.00 per residential
unit (which such capital expenditures may include ordinary repairs and routine
maintenance), commencing the first year of the Loan term, 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 unit and the amount per unit actually spent by Borrower.
Borrower grants to Lender a right of setoff against all moneys in the capital
expenditures 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 caused to be made the required capital expenditures. Upon Borrower's or
Manager's failure to adequately maintain the Facility in good condition as
required hereby, 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

                                       22
<PAGE>
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 required amount per unit amount 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.
During the term of the Loan, Lender may, from time to time, engage a
professional building inspector to conduct an inspection of the Facility. If the
inspector's report indicates that repairs or replacements are necessary over and
above the $300.00 per unit requirement in this paragraph, then Lender shall
require a non-interest bearing repair escrow fund to insure completion of the
repairs. The amount of any repair escrow shall be one hundred twenty-five
percent (125%) of the estimated cost of repairs as determined by the inspector
and Lender. Lender also shall require an agreement satisfactory to Lender, which
will provide for completion of the repairs and the disbursement of the escrow
funds. All fees and costs associated with the inspection, report and subsequent
inspections (if required) shall be paid by Borrower.

         4.17     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 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 may
be withheld in the sole and absolute discretion of Lender. Borrower will enter
into and cause Manager to enter into the Subordination Agreement. Borrower will
not enter into any other management agreement without Lender's prior written
consent, which consent may be in the sole and absolute discretion of Lender.

         4.18     UPDATED APPRAISALS. For so long as the Loan remains
outstanding, if any Event of Default shall occur hereunder, or if, in Lender's
commercially reasonable judgment, a material depreciation in the value of the
Land and/or the Improvements shall have occurred, then in either such event,
Lender may cause the Land and Improvements 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 Land and Improvements 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.

         4.19     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 Land and
Improvements 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.

         4.20     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.

                                       23
<PAGE>
         4.21     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.

         4.22     CERTIFICATE. 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
representations and warranties contained herein are true and correct with the
same effect as though made on the date of such certificate, or if not, then
stating the reasons which such representations and/or warranties are no longer
true and correct.

         4.23     DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service
Reserve 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 One Thousand Dollars ($1,000).

         4.24     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.

         4.25     LOAN CLOSING CERTIFICATION. Immediately notify Lender in
writing, in the event any representation or warranty contained in that certain
Loan Closing Certification of even date herewith, executed by Borrower for the
benefit of Lender, becomes untrue (except by virtue of changes in facts and
circumstances permitted by the terms of this Agreement and the other Loan
Documents) or there shall have been any material adverse change in any such
representation or warranty.

         4.26     ERISA. As of the date hereof and throughout the term of this
Agreement, Borrower will not be an "employee benefit plan," as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), subject to Title I of ERISA, and none of the assets of Borrower will
constitute "plan assets" (within the meaning of Department of Labor Regulation
Section 2510.3-101) of one or more such plans, and Borrower will not be a
"governmental plan" within the meaning of Section 3(32) of ERISA, and
transactions by or with Borrower will not be subject to state statutes
regulating investments of, and fiduciary obligations with respect to,
governmental plans. Borrower shall not engage in a non-exempt prohibited
transaction described in Section 406 of ERISA or Section 4975 of the Code, as
such sections relate to Borrower, or in any transaction that would cause any
obligation or action taken or to be taken hereunder (or the exercise by Lender
of any of its rights under the Loan Documents) to be a non-exempt prohibited
transaction under ERISA.

         4.27     CAP ASSIGNMENT: DELIVERY OF CAP PAYMENTS. Assign any Cap in
effect pursuant to this Agreement to Lender pursuant to a Cap Assignment and/or
other documentation that is acceptable in form and content to Lender. The
counterparty (described in Section 2.3

                                       24
<PAGE>
above) shall make any and all payments under the Cap (and the Cap Documents and
such Cap Assignment shall direct the counterparty to make any such payments) (a)
to Borrower's account as designated in the Cap Documents or (b) if an Event of
Default has occurred, directly to the Lender, and such counterparty must provide
for any collateral posted by the Cap Provider to be delivered to and held by
Lender, or its designee. The Cap and any payments made by the counterparty
thereunder shall constitute additional collateral for the Loan Obligations and,
upon the occurrence of an Event of Default, may be applied by Lender, in such
order and manner as Lender may elect, to the reduction of the Loan Obligations.

         4.28     PERFORMANCE UNDER CAP DOCUMENTS. Fully comply with, and to
otherwise perform when due, its obligations under, all Cap Documents and all
other agreements evidencing, governing or securing any Cap arrangement. The
Borrower shall not exercise, without Lender's prior written consent, and shall
exercise at Lender's direction, any rights or remedies under any Cap Documents
including, without limitation, the right of termination.

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 any Permits or Reimbursement Contracts (including rights to
payment thereunder) pertaining to the Facility to anyone other than Lender, or
assign, transfer, or remove or permit any other person to assign, transfer, or
remove any records pertaining to the Facility including, without limitation,
resident records, medical and clinical records (except for removal of such
resident records as directed by the residents owning such records), without
Lender's prior written consent, which consent may be granted or refused in
Lender's sole discretion.

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

                  (a)      Liens at any time existing in favor of 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 Land or
Improvements, such Lien must be fully disclosed to Lender and bonded off and
removed from the Land 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

                                       25
<PAGE>

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 provided payment thereof shall not be delinquent;
and

                  (f)      Liens in connection with purchase money financing
(including Equipment leases) for the acquisition of Equipment provided that at
no time shall such purchase money financing (including the principal component
of any Equipment leases) exceed $75,000.00 in any one case and $200,000.00 in
the aggregate without Lender's prior written consent.

         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 Lender, which consent
may be granted or refused in Lender's sole discretion.

         5.4      MAINTAIN SINGLE PURPOSE ENTITY.

                  (a)      Engage in any business or activity other than the
ownership, operation and maintenance of the Mortgaged Property, and activities
incidental thereto;

                  (b)      Acquire or own any material assets other than (i) the
Mortgaged Property, and (ii) such incidental machinery, equipment, fixtures and
other personal property as may be necessary for the operation of the Mortgaged
Property;

                  (c)      Merge into or consolidate with any person or
dissolve, terminate or liquidate in whole or in part, transfer or otherwise
dispose of all or substantially all of its assets or change its legal structure,
without in each case Lender's consent;

                  (d)      Fail to preserve its existence as a limited liability
company, validly existing and in good standing (if applicable) under the laws of
the jurisdiction of its organization or formation, or without the prior written
consent of Lender, amend, modify, terminate or fail to comply with the
provisions of its operating agreement or similar organizational document, as
same may be further amended or supplemented, if such amendment, modification,
termination or failure to comply would adversely affect its ability to perform
its obligations hereunder, under the Note or any other Loan Document;

                  (e)      Own any subsidiary or make any investment in any
Person without the consent of Lender;

                  (f)      Commingle its assets with the assets of any of its
partners, affiliates, principals or of any other Person;

                  (g)      Incur any Indebtedness, secured or unsecured, direct
or contingent (including guaranteeing any obligation), other than the Loan and
trade payables incurred in the ordinary course of business and other than that
certain Equipment purchase money financing described in Section 5.2(f) above,
provided same are paid when due;

                                       26
<PAGE>
                  (h)      Fail to maintain its records, books of account and
bank accounts separate and apart from those of its partners, principals and
affiliates, the affiliates of any of its partners, principals and any other
Person;

                  (i)      Enter into any contract or agreement with any of its
partners, principals or affiliates, or the affiliates of any of its partners,
principals, except upon terms and conditions that are intrinsically fair and
substantially similar to those that would be available on an arms-length basis
with third parties;

                  (j)      Seek its dissolution or winding up in whole, or in
part;

                  (k)      Maintain its assets in such a manner that it will be
costly or difficult to segregate, ascertain or identify its individual assets
from those of any of its partners, principals and affiliates, the affiliates of
any of its partners, principals or any other Person;

                  (l)      Hold itself out to be responsible for the debts of
another person;

                  (m)      Make any loans or advances (except to the extent a
loan or advance may be considered an "Account") to any third party, including
any of its partners, principals or affiliates, or the affiliates of any of its
partners or principals;

                  (n)      Fail to file its own tax returns, except as to the
extent such tax returns are consolidated into those tax returns filed by or on
behalf of Guarantor;

                  (o)      Agree to, enter into or consummate any transaction
which would render it unable to confirm that (i) it is not an "employee benefit
plan" as defined in Section 3(32) of ERISA, which is subject to Title I of
ERISA, or a "governmental plan" within the meaning of Section 3(32) of ERISA;
(B) it is not subject to state statutes regulating investments and fiduciary
obligations with respect to governmental plans; and (iii) less than twenty-five
percent (25%) of each of its outstanding class of equity interests are held by
"benefit plan investors" within the meaning of 29 C.F.R. ss. 2510.3-101(f)(2);

                  (p)      Fail either to hold itself out to the public as a
legal person separate and distinct from any other person or to conduct its
business solely in its own name in order not (A) to mislead others as to the
identity with which such other party is transacting business, or (B) to suggest
that it is responsible for the debts of any third party (including any of its
partners, principals or affiliates, or any general partner, principal or
affiliate thereof); or

                  (q)      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.

         5.5      CHANGE OF BUSINESS. Make any material change in the nature of
its business as it is being conducted or contemplated to be 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

                                       27
<PAGE>

preventing what would otherwise be an Event of Default or Default had such
change not taken place.

         5.7      ERISA. Engage in any transaction which would cause any
obligation, or action taken or to be taken, hereunder (or the exercise by Lender
of any of its rights under this Agreement, the Note, the Mortgage or any of the
other Loan Documents) to be a non-exempt (under a statutory or administrative
class exemption) prohibited transaction under ERISA.

         5.8      TRANSACTIONS WITH AFFILIATES. Enter into any transaction with
a Person which is an 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 they could obtain in a comparable arms-length transaction with a
Person not an Affiliate.

         5.9      TRANSFER OF OWNERSHIP INTERESTS. Except as otherwise provided
in the Mortgage, permit a change in the ownership interests of the Persons
comprising Borrower unless the written consent of 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 for the Facility other than the Management
Agreement or enter into any operating lease for the Facility (excluding
residency agreements), 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; provided,
however, that Borrower may modify the use of the Facility to incorporate
assisted living services, subject to Lender's prior written consent, which
consent shall not be unreasonably withheld or delayed.

         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     DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Unless Borrower is
current in its Loan debt service payments as required under the terms of the
Note and has paid all necessary and customary expenses required of it under the
Loan Documents in connection with its ownership and operation of the Facility,
or except as otherwise consented to by Lender in writing, declare or pay any
distributions to its partners, or purchase, redeem, retire or otherwise acquire
for value, any ownership interests in Borrower, now or hereafter outstanding,
return any capital to its partners, or make any distribution of assets to its
partners.

                                       28
<PAGE>
                                   ARTICLE VI
                              ENVIRONMENTAL HAZARDS

         6.1      PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters
covered by 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 (including storage in above ground and underground storage
tanks), handling, or disposal-of any Hazardous Materials in, on or under the
Land, any Improvements, or any other property of Borrower that is adjacent to
the Land, subject to Section 6.2 below;

                  (b)      The transportation of any Hazardous Materials to,
from, or across the Land, subject to Section 6.2 below;

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

                  (d)      Any violation of or noncompliance with the terms of
any Environmental Permit with respect to the Land, the Improvements or any
property of Borrower that is adjacent to the Land; or

                  (e)      Any Lien (whether or not such Lien has priority over
the Lien created by the Mortgage) upon the Land or any Improvements imposed
pursuant to any Hazardous Materials Laws.

                  (f)      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 (a) pre-packaged supplies,
medical waste, cleaning materials and petroleum products customarily used in the
operation and maintenance of comparable facilities, (b) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by occupants of the Facility; and (c) petroleum products
used in the operation and maintenance of motor vehicles from time to time
located on the Land's parking areas, 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

                                       29
<PAGE>
employees, agents, and contractors of Borrower and any other persons present on
the Land 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:

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

                  (b)      No Prohibited Activities and Conditions exist or have
existed.

                  (c)      The Land 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 Land and the Improvements have not
contained any underground storage tanks in the past. If there is an underground
storage tank located on the Land or the Improvements which has been previously
disclosed by Borrower to Lender in writing, that tank complies with all
requirements of Hazardous Materials Laws.

                  (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 Land
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 Land 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 Land 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
Land, the Improvements or any other property of Borrower that is adjacent to the
Land. 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.

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<PAGE>
                  (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 Land, the Improvements or any other property of Borrower that is
adjacent to the Land.

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

                  (d)      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 ("Environmental Inspections")
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. The results of
all Environmental Inspections made by Lender shall at all times remain the
property of Lender, and Lender shall have no obligation to disclose or otherwise
make available to Borrower or any other party such results or any other
information obtained by Lender in connection with its Environmental Inspections.
Lender hereby reserves the right, and Borrower hereby expressly authorizes
Lender, to make available to any party, including any prospective bidder at a
foreclosure sale of the Mortgaged Property, the results of any Environmental
Inspections made by Lender with respect to the Mortgaged Property. Borrower
consents to Lender notifying any party (either as part of a notice of sale or
otherwise) of the results of any of Lender's Environmental Inspections. Borrower
acknowledges that Lender cannot control or otherwise assure the truthfulness or
accuracy of the results of any of its Environmental Inspections and that the
release of such results to prospective bidders at a foreclosure sale of the
Mortgaged Property may have a material and adverse effect upon the amount which
a party may bid at such sale. Borrower agrees that Lender shall have no
liability whatsoever as a result of delivering the results of any of its
Environmental Inspections to any third party, and Borrower hereby releases and
forever discharges Lender from any and all claims, damages, or causes of action,
arising out of, connected with or incidental to the results of, the delivery of
any of Lender's Environmental Inspections.

         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 Law or order of any
Governmental Authority that has or acquires jurisdiction over the Land, the
Improvements or the use, operation or improvement of the Land under any
Hazardous Materials Law, Borrower shall, by the earlier of (a) the applicable
deadline required by Hazardous Materials Law or (b) thirty (30) days after
notice from Lender demanding such action, begin performing the Remedial Work,
and thereafter prosecute it with reasonable diligence to completion, and shall
in any event complete such work by the time required by

                                       31
<PAGE>

applicable Hazardous Materials Law. If Borrower fails to begin on a timely basis
or diligently prosecute any required Remedial Work, Lender may, at its option,
cause the Remedial Work to be completed, in which case Borrower shall reimburse
Lender on demand for the cost of doing so. Any reimbursement due from Borrower
to Lender shall become part of the 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. Borrower, at its own expense, may contest by appropriate
legal proceedings, conducted diligently and in good faith, the amount or
validity of any such order, if (i) Borrower notifies Lender 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 Lender, (iii) if
requested by Lender, Borrower deposits with Lender cash reserves or other
collateral sufficient to pay the contested order, (iv) Borrower furnishes
whatever security is required in the proceedings or is reasonably requested by
Lender, which may include the delivery to Lender of the reserves established by
Borrower to pay the contested order, as additional security, and (v) such
contest operates to suspend enforcement of such order.

         6.10     INDEMNITY.

                  (a)      Borrower shall hold harmless, defend and indemnify
(i) Lender, (ii) any prior owner or holder of the Note, (iii) any Person who is
or will have been involved in the servicing of the Note, (iv) the officers,
directors, partners, agents, shareholders, employees and trustees of any of the
foregoing, and (v) the heirs, legal representatives, successors and assigns of
each of the foregoing (together, the "Indemnitees") from and 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:

                           (i) Any breach of any representation or warranty of
Borrower in this Article VI;

                           (ii)     Any failure by Borrower to perform any of
its obligations under this Article VI;

                           (iii)    The existence or alleged existence of any
Prohibited Activity and Condition;

                           (iv)     The presence or alleged presence of
Hazardous Materials in, on, around or under the Land, the Improvements or any
property of Borrower that is adjacent to the Land, subject to Section 6.2 above;
or

                           (v)      The actual or alleged violation of any
Hazardous Materials Law.

                  (b)      Counsel selected by Borrower to defend Indemnitees
shall be subject to the approval of those Indemnitees. Notwithstanding anything
contained herein, any Indemnitee

                                       32
<PAGE>
may elect to defend any claim or legal or administrative proceeding at
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. 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 (i) 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 (ii) 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:

                           (i)      Any amendment or modification of any Loan
Document;

                           (ii)     Any extensions of time for performance
required by any of the Loan Documents;

                           (iii)    The accuracy or inaccuracy of any
representations and warranties made by Borrower under this Agreement or any
other Loan Document;

                           (iv)     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;

                           (v)      The release or substitution in whole or in
part of any security for the Loan Obligations; or

                           (vi)     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:

                           (i)      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;

                           (ii)     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; and

                           (iii)    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.

                                       33
<PAGE>

                  (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 Land
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. Notwithstanding anything in this Article VI to the
contrary, the liability of Borrower hereunder shall not extend to any Prohibited
Activity and Condition arising solely after the date the Lender, or its duly
authorized agents, take possession of the Land and the Improvements pursuant to
a receivership action, foreclosure or deed-in-lieu of foreclosure.

                                  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;

                  (b)      Any failure by Borrower to provide and maintain in
full force and effect the insurance coverage required by Section 4.5(a) - (i),
inclusive, of this Agreement

                  (c)      Borrower's violation of any covenant set forth in
Article V hereof;

                  (d)      Borrower's failure to deliver or cause to be
delivered the financial statements and information set forth in Section 4.7
above within the times required and such failure is not cured within thirty (30)
days following Lender's written notice to Borrower thereof;

                  (e)      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 subsections (a), (b) and (c) of this Section 7.1) or any
other Loan Documents which is susceptible of being cured and is not cured within
any applicable cure period as set forth herein or, if no cure period is

                                       34
<PAGE>
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;

                  (f)      The filing by Borrower, Manager or Guarantor of a
voluntary petition, 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 making 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;

                  (g)      The entry by a court of competent jurisdiction of an
order, judgment, or decree approving a petition filed against Borrower,
Guarantor or Manager which such 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, profits or income thereof which appointment shall
remain unvacated and unstayed for an aggregate of sixty (60) days (whether or
not consecutive);

                  (h)      Unless otherwise permitted hereunder or under the
Mortgage or any other Loan Documents, the sale, transfer, lease, assignment, or
other disposition, voluntary or involuntary, of the Mortgaged Property, or any
part thereof, except for Permitted Encumbrances as described in Section 5.2
above, or any further encumbrance of the Mortgaged Property, unless the prior
written consent of Lender is obtained;

                  (i)      Any certificate, statement, representation, warranty
or audit heretofore or hereafter furnished by or on behalf of Borrower,
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 as of the time
which 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, Guarantor or Manager that otherwise should have been disclosed
therein or (iii) on the date of execution of this Agreement there shall have
been any material adverse change in any of the acts 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;

                  (j)      If and to the extent applicable, the failure of
Borrower to correct or to cause Manager to correct, within the time deadlines
set by any applicable Medicare, Medicaid

                                       35
<PAGE>

or licensing agency, any deficiency which would result in the following actions
by such agency with respect to the Facility:

                           (i)      a termination of any Reimbursement Contract
that is not simultaneously replaced with a substantial equivalent that is
approved by Lender in its sole discretion, or any Permit;

                           (ii)     a ban on new admissions generally or on
admission of residents otherwise qualifying for Medicare or Medicaid coverage;
or

                  (k)      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
$50,000.00; or

                  (l)      A final judgment shall be rendered by a court of law
or equity against Borrower, Guarantor or Manager in excess of $25,000.00, 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, Guarantor or Manager as the case may be, has
established reserves adequate for payment of the reasonably estimated probable
liability 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 materially adverse change in
the financial condition or prospects of Borrower or Manager or Guarantor, or the
existence of any other condition which, in a commercial loan context, reasonably
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, which is not remedied within thirty (30) days after
written notice.

                  (n)      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, Lender may, at its option:

                  (a)      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; and/or

                  (b)      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; and/or

                                       36
<PAGE>

                  (c)      Exercise any and all rights and remedies afforded by
the laws of the United States, the states in which any of the Mortgaged Property
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; and/or

                  (d)      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 Lender or any person who then
owns a participating interest in the Loan, to the extent of the full amount of
the Loan; and/or

                  (e)      Exercise its rights and remedies pursuant to any
other Loan Documents.

                                  ARTICLE VIII
                                  MISCELLANEOUS

         8.1      WAIVER. No remedy conferred upon, or reserved to, 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
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 Lender's part in
exercising any rights shall operate as a waiver of any of 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
commercially reasonable 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; excluding, however, taxes assessed against Lender on the
basis of its income or assets. 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 Mortgaged
Property and as a result of any of the foregoing, 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 Mortgaged Property, Borrower, any Guarantor or Manager, 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 Lender by any of
the Loan Documents, then in any such event, 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 Lender payable on demand of Lender. Without limiting the foregoing,
Borrower has undertaken the obligation for payment of, and shall pay, all

                                       37
<PAGE>

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 (excluding taxes assessed against Lender on the basis of its
income or assets), 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 (as defined
in the Note) from the date advanced until repaid.

         8.3      PERFORMANCE OF LENDER. At its option, upon Borrower's failure
to do so, Lender may make any payment or do any act on Borrower's behalf that
Borrower or others are required to do to remain in compliance with this
Agreement or any of the other Loan Documents, and Borrower agrees to reimburse
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 secured by the Mortgage and shall bear interest
at the Default Rate (as defined in the Note) from the date advanced until
repaid.

         8.4      INDEMNIFICATION. 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,
expenses, 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 Loan Documents 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,
Manager 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 Land, 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 Land, 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, any Guarantor or
Manager 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 Land and/or Improvements to be in compliance
with any applicable laws, (i) any and all claims and demands whatsoever which
may be asserted against Lender by reason of any alleged obligations or
undertakings on its part to perform or discharge any of the terms, covenants, or
agreements contained in the Management Agreement or any replacement or renewal
thereof or substitution therefor, (j) performance of any labor or

                                       38
<PAGE>
services or the furnishing of any materials or other property with respect to
the Land, the Improvements or any part thereof, (k) 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, (l) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents, (m) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (n) the violation of any requirements of the
Employee Retirement Income Security Act of 1974, as amended, (o) any fines or
penalties assessed or any corrective costs incurred by Lender if the Facility or
any part of the Land and/or Improvements is determined to be in violation of any
covenants, restrictions of record, or any applicable laws, ordinances, rules or
regulations, or (p) 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 (as defined in the Note).
The obligations and liabilities of Borrower under this Section 8.4 shall survive
any termination, satisfaction, assignment, 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. Notwithstanding anything contained herein, the liabilities and
obligations of the Borrower under Section 8.4(d), (e), (h) or (o) shall not
extend to any activity or condition giving rise to any such liability or
obligation which activity or condition arises solely after the date the Lender,
or its duly authorized agents, take possession of the Land and the Improvements
pursuant to a receivership action, foreclosure or deed in lieu of foreclosure.
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 Mortgaged 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.

                                       39
<PAGE>
         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 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:

                           c/o American Retirement Corporation
                           111 Westwood Place, Suite 200
                           Brentwood, Tennessee  37027
                           Attn:  George Hicks, Executive Vice President

                  with a copy to:

                           T. Andrew Smith, Esquire
                           Bass, Berry & Sims, PLC
                           315 Deaderick Street, Suite 2700
                           Nashville, Tennessee  37238-0002

                  If to Lender:

                           GMAC Commercial Mortgage Corporation
                           200 Witmer Road
                           Horsham, Pennsylvania  19044-8015
                           Attn:  Servicing Department

                  with a copy to:

                           Kelly M. Wrenn, Esquire
                           Ballard Spahr Andrews & Ingersoll, LLP
                           601 13th Street, NW, Suite 1000 South
                           Washington, D.C.  20005-3807

                  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")

                                       40
<PAGE>
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 amount due from
Borrower pursuant to the Loan Documents. The execution by a participant of a
participation agreement with Lender, and the execution by 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 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 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, the
Loan Documents and the instruments referred to herein and therein 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 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, 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 ILLINOIS AND THE
PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL
JURISDICTION IN THE STATE OF ILLINOIS, FOR THE ENFORCEMENT OF ANY AND ALL
OBLIGATIONS UNDER THE LOAN DOCUMENTS EXCEPT THAT IF ANY SUCH ACTION OR
PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES
OF

                                       41
<PAGE>
AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES THERETO,
SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL BE
BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
ILLINOIS OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION.

         8.13     WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, BORROWER HEREBY WAIVES ANY RIGHT THAT IT 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 AGREES THAT LENDER
MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE
KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF BORROWER IRREVOCABLY TO WAIVE ITS
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.

                                       42
<PAGE>
         IN WITNESS WHEREOF, Borrower and Lender have caused this Agreement to
be properly executed as of the date first above written.

WITNESS:                         BORROWER:

                                 ARC HOLLEY COURT, LLC, a Tennessee limited
                                 liability company

                                 By:      American Retirement Corporation, a
                                          Tennessee corporation, its sole member

                                          By:
-------------------------                      -------------------------------
                                               George T. Hicks
                                               Executive Vice President-Finance
------------------------
[Print Name]

                                       43
<PAGE>

                                          LENDER:

WITNESS:                                  GMAC COMMERCIAL MORTGAGE CORPORATION,
                                          a California corporation

                                          By:
-------------------------                      -------------------------------
                                               Monique Bimler
Print Name:                                    Vice President
           --------------

                                       44
<PAGE>

                                   EXHIBIT "A"

                                LEGAL DESCRIPTION

                                      A-1

<PAGE>
                                  EXHIBIT "B"

                     BORROWER'S PRINCIPAL PLACE OF BUSINESS
                           AND CHIEF EXECUTIVE OFFICE

1.       Principal Place of Business:
         111 Westwood Place, Suite 200
         Brentwood, Tennessee  37027

2.       Chief Executive Office:
         111 Westwood Place, Suite 200
         Brentwood, Tennessee  37027

3.       Facility address:
         1111 Ontario Street
         Oak Park, Illinois  60302

                                      B-1

<PAGE>
                                 EXHIBIT "C"

                             OWNERSHIP INTERESTS

American Retirement Corporation, a Tennessee corporation        100% Sole Member

                                      C-1

<PAGE>
                                   EXHIBIT "D"

                  QUARTERLY FINANCIAL STATEMENT AND CENSUS DATA

Facility Name:  Holley Court Terrace
Management Company:  ARC Management, LLC
Report Date:
              ------------------------------------------------

<TABLE>
<CAPTION>
                                               QUARTER       QUARTER       QUARTER       QUARTER       12 MONTHS
                                               ENDING         ENDING        ENDING        ENDING        ENDING
                                               (DATE)         (DATE)        (DATE)        (DATE)        (DATE)
<S>                                            <C>           <C>           <C>           <C>           <C>
CENSUS DATA
Total Number of Units:                        ________       ________      ________      ________      ________
Number of Days in Period:                     ________       ________      ________      ________      ________
Total Resident Days Available:                ________       ________      ________      ________      ________
Resident Utilization Days:
         Medicaid                             ________       ________      ________      ________      ________
         Private                              ________       ________      ________      ________      ________
         Medicare                             ________       ________      ________      ________      ________
         Other                                ________       ________      ________      ________      ________
Total Utilization Days:                       ________       ________      ________      ________      ________

CASH FLOW ANALYSIS
Total Routine Resident Revenue:               ________       ________      ________      ________      ________
Total Net Revenue:                            ________       ________      ________      ________      ________
Total Expenses:                               ________       ________      ________      ________      ________
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 _________, _____.

                                    ARC HOLLEY COURT, LLC, a Tennessee limited
                                      liability company

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

                                      D-1
<PAGE>
                                   EXHIBIT "E"

                             COMPLIANCE CERTIFICATE

GMAC Commercial Mortgage Corporation
8333 Douglas Avenue, Suite 1460
Dallas, TX  75225

         Re:      Loan Agreement dated September ___, 2001 (together with
                  amendments, if any, the "Loan Agreement"), by and between GMAC
                  Commercial Mortgage Corporation, as Lender, and ARC HOLLEY
                  COURT, LLC, a Tennessee limited liability company, 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 for the Facility 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:         1.0 to 1.0

                  Actual:  ___ to 1.0

                  THE MANNER OF CALCULATION IS ATTACHED.

         3.       The Debt Service Coverage for the 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:         1.25 to 1.0

                  Actual:  ___ to 1.0

                  THE MANNER OF CALCULATION IS ATTACHED.

         4.       The fiscal year to date average daily occupancy for the
Facility:

                  Required:         Not less than 80%

                  Actual:  __________

         5.       [ANNUAL COMPLIANCE CERTIFICATE ONLY] The capital expenditures
per unit was:

                                     E-1
<PAGE>

                  Required:         $300 per unit.

                  Actual:  $______ per unit.

                  EVIDENCE OF SUCH CAPITAL EXPENDITURES IS ATTACHED.

         6.       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 ________________________.

         7.       All information provided herein is true and correct.

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

         Dated this ______ day of _____________________, _______.

                                       ARC HOLLEY COURT, LLC, a Tennessee
                                       limited liability company

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

                                      E-2
<PAGE>
                                 EXHIBIT "F"

                            PERMITTED ENCUMBRANCES

1.       General taxes for the years (s) 2000, 2001 and subsequent years.

                  NOTE: The second installments of 2000 taxes are not yet due or
                  payable.

                  NOTE: Taxes for the years (s) 2001 are not yet due or payable.

2.       Rights of tenants in possession as of the date hereof, as tenants only
under unrecorded residential leases.

3.       Declaration of Development and Operating Covenants recorded December
29, 1983 as Document 26911571, as amended from time to time, between the Village
of Oak Park and LaSalle National Bank, as Trustee under a Trust Agreement dated
October 1, 1983 and known as Trust Number 107132, and Oak Park Retail Venture,
relates to, among other things, parking, party walls, tax agreement relating to
the venture not making application to reduce assessed value of the property
before certain improvements are completed.

4.       Easement dated July 6, 1964 and recorded October 6, 1964 as Document
Number 19266316 granted by the Village of Oak Park to the Commonwealth Edison
Company and the Illinois Bell Telephone company to install and maintain all
equipment for the purpose of telephone and electric service, together with the
right of access to said equipment.

5.       Easement plat recorded as Document Number 93655226 by the Village of
Oak Park for sewer manhole over the West 8 feet of the North 12 feet of the East
214.33 feet of Lot 6 in Block 8 in Kettlestring's Addition to Harlem and other
property.

6.       Grant of easement recorded August 1, 1991 as Document LR 3984533 made
by American National Bank and Trust Company, as Trustee under a Trust Agreement
dated October 3, 1998 and known as Trust Number 106602-07 and the Commonwealth
Edison Company and the Illinois Bell Telephone Company over part of the East 30
feet of Lot 6 in Block 8 in Kellestring's Addition to Harlem.

7.       Amendment of tax increment financing covenants recorded September 9,
1990 as Document Number 90471955 between the Village of Oak Park and American
National Bank and Trust Company, as Trustee under Trust Agreement dated October
3, 1998 and known as Trust Number 106602-07.

8.       Matters as shown on that certain survey dated July 31, 2001, Job Number
39590, prepared by Gary L. Ahlberg of Webster, McGrath & Ahlberg, Ltd., as
follows:

                                      F-1
<PAGE>

                  (i)      Public concrete sidewalk encroaches 5.01 feet onto
subject property.

                  (ii)     Adjoining building encroaches 0.17 feet onto subject
property and 0.06 feet onto subject property.

                  (iii)    Building encroaches onto easement by 1.78 feet.

                  (iv)     West edge of concrete light base serving subject
property encroaches 1.92 feet onto adjoiner.

                  (v)      West edge of concrete light base serving subject
property encroaches 1.42 feet onto adjoiner.

                  (vi)     Traffic control vault encroaches 5.81 feet onto
subject property.

                                      F-2

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