Document:

Exhibit 10.2

 

	
        Healthcare Regulatory 

Agreement – Borrower

        Section 232

         
	
        U.S. Department of
        Housing 

        and Urban Development

        Office of Residential

        Care Facilities
	
        OMB Approval No. 2502-0605

        (exp. 06/30/2017)

 

Public reporting burden for this collection of information
is estimated to average 0.5 hours. This includes the time for collecting, reviewing, and reporting the data. The information is
being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure
that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD
requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of
the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays
a currently valid OMB control number. 

 

Warning: Any person who knowingly presents a false, fictitious,
or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is
subject to criminal penalties, civil liability, and administrative sanctions. 

 

Document prepared by and:

after recording return to:

U.S. Department of Housing & Urban Development

c/o Attorney, Chali Roche Garcia

Miami Field Office

909 SE First Avenue

Room 500

Miami, Florida 33131

 

Project Name:       Danby House

 

FHA Project No.:      053-22140

 

Project Location:      Winston-Salem, North
Carolina

 

Lender:      Lancaster Pollard Mortgage Company,
LLC

 

Original Principal Amount of Note: $7,858,000.00         Date
of Note: December 1, 2015

 

Originally endorsed for insurance under Section 232 pursuant
to 223(f):

 

Borrower: Profit-Motivated x
Non-Profit  ̈

Is Non-Profit Borrower permitted to take Distributions?
Yes ̈ No ̈

(Failure to check the appropriate space(s) shall not affect
the enforceability or application of this Agreement.)

 

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This Healthcare Regulatory
Agreement – Borrower (this “Agreement”) is entered into as of the date or dates acknowledged below to
be effective as of December 1, 2015, between HP WINSTON-SALEM LLC, a limited liability company organized and existing under
the laws of Delaware whose address is 2 South Pointe Dr., Suite 100, Lake Forest, California 92614, its successors, heirs,
and assigns (jointly and severally) (“Borrower”) and the U.S. Department of Housing and Urban Development, acting
by and through the Secretary, his or her successors, assigns or designates (“HUD”). Borrower is sometimes also
referred to as “Owner” or “Mortgagor” in the Loan Documents and Program Obligations. If Borrower is also
Operator, references in this Agreement to Operator refer to Borrower. To the extent that Borrower contracts with any other party
to perform any functions included in this Agreement, Borrower shall maintain ultimate responsibility for performance of all required
functions included herein.

 

In consideration of,
and in exchange for an action by HUD, HUD and Borrower agree to the terms of this Agreement. The HUD action may be one of the following:
HUD’s endorsement for insurance of the Note, HUD’s consent to the transfer of any of the Mortgaged Property, HUD’s
sale and conveyance of any of the Mortgaged Property, or HUD’s consent to other actions related to Borrower, the Project,
or to the Mortgaged Property.

 

Borrower and HUD execute
this Agreement in order to comply with Program Obligations, with the requirements of the National Housing Act, as amended, and
the regulations adopted by HUD pursuant thereto. This Agreement shall continue during such period of time as HUD shall be the owner,
holder, or insurer of the Note. Upon satisfaction of the Note, as evidenced by the discharge or release of the Borrower’s
Security Instrument, this Agreement shall automatically terminate. However, Borrower shall be responsible for any violations of
this Agreement which occurred prior to termination.

 

Violation of this Agreement
or Program Obligations may subject Borrower and other signatories hereto to adverse actions.

 

Borrower and HUD covenant
and agree as follows:

 

I. DEFINITIONS.

 

1.          DEFINITIONS.
Any capitalized term or word used herein but not defined shall have the meaning given to such term in the Borrower’s Security
Instrument. The following terms, when used in this Agreement (including when used in the above recitals), shall have the following
meanings, whether capitalized or not and whether singular or plural, unless, in the context, an incongruity results:

 

“Affiliate”
is defined in 24 C.F.R. 200.215, or any successor regulation.

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“Approved Use”
means the use of the Project for the operation of the Healthcare Facility as an assisted living facility with 100 beds, including
48 beds for alzheimers/dementia care, of which not less than 96 beds are in use and such other uses as may be approved in writing
from time to time by HUD based upon a request made by Borrower, Master Tenant, or Operator, but excluding any uses that are discontinued
with the written approval of HUD.

 

“Borrower” shall mean
the entity identified as “Borrower” in the first paragraph of this Agreement, together with any successors, heirs,
and assigns (jointly and severally). “Borrower” shall include any person or entity taking title to the Mortgaged Property
whether or not such person or entity assumes the Note. “Borrower” is sometimes also referred to in the Loan Documents
and Program Obligations as the “Obligor,” the “Owner,” and/or the “Mortgagor.”

 

“Borrower-Operator Agreement”
means any agreement relating to the operation of the Healthcare Facility by and between Master Tenant and Operator, including any
Operator Lease.

 

“Borrower’s Security Instrument”
means the North Carolina Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing, and shall be deemed to be the
mortgage as defined by Program Obligations.

 

“Distribution” means
any disbursal, conveyance, loan or transfer of cash, any asset of Borrower, or any other portion of the Mortgaged Property, other
than in payment of Reasonable Operating Expenses.

 

“Firm Commitment”
means the commitment for insurance of advances or commitment for insurance upon completion, dated November 3, 2015, issued
to Lender by HUD under which the debt evidenced by the Note is to be insured pursuant to a Section of the National Housing Act.

 

“Fixtures” has the meaning
set forth in the Borrower’s Security Instrument.

 

“Healthcare Facility”
means that portion of the Project operated on the Land as a Nursing Home, Intermediate Care Facility, Board and Care Home,
Assisted Living Facility and/or any other healthcare facility authorized to receive insured mortgage financing pursuant to Section
232 of the National Housing Act, as amended, including any commercial space included in the facility.

 

“HUD” means the U.S.
Department of Housing and Urban Development acting by and through the Secretary in the capacity as insurer or holder of the Loan
under the authority of the National Housing Act, as amended, the Department of Housing and Urban Development Act, as amended, or
any other federal law or regulation pertaining to the Loan or the Project.

 

“Improvements” has the
meaning set forth in the Borrower’s Security Instrument.

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“Indebtedness” means
the principal of, interest on, and all other amounts due at any time under the Note or the Loan Documents, including prepayment
premiums, late charges, default interest, and advances to protect the security as provided in the Loan Documents.

 

“Land” has the meaning
set forth in the Borrower’s Security Instrument and is also legally described on Exhibit A, attached hereto and incorporated
herein.

 

“Lender” means the entity
identified as “Lender” in the first paragraph of the Borrower’s Security Instrument, or any subsequent holder
of the Note, and whenever the term “Lender” is used herein, the same shall be deemed to include the “Obligee”,
or the “Trustee(s)” and the “Beneficiary” of the Borrower’s Security Instrument, and shall also be
deemed to be the “Mortgagee” as defined by Program Obligations.

 

“Loan Documents” has
the meaning set forth in the Borrower’s Security Instrument.

 

“Master Lease” means
that certain Master Lease, in which the Healthcare Facility is aggregated with other HUD-insured healthcare facilities and leased
to the Master Tenant.

 

“Master Tenant” means
WPH Salem, LLC, a limited liability company organized and existing under the laws of Delaware, the master tenant
pursuant to the Master Lease.

 

“Master Tenant’s Regulatory
Agreement” means that certain Healthcare Regulatory Agreement – Master Tenant, relating to the Project and entered
into by Master Tenant for the benefit of HUD.

 

“Mortgaged Property”
has the meaning set forth in the Borrower’s Security Instrument.

 

“Non-Profit Borrower”
means a Borrower that is treated under the Firm Commitment as an entity organized for purposes other than profit or gain for itself
or persons identified therewith, pursuant to Section 501(c)(3) or other applicable provisions of the Internal Revenue Code. For
transactions entered into pursuant to Section 223(a)(7) of the National Housing Act, a Borrower who executed with HUD’s permission
a “for-profit” regulatory agreement in connection with the original loan being refinanced through this transaction
shall not be considered a “Non-Profit Borrower” for purposes of this Agreement and may designate itself as a “Profit-Motivated”
entity on page 1, provided, however, that any conditions in the Firm Commitment conflicting with the above statement shall control.

 

“Note” means the Note executed by Borrower,
described in the Borrower’s Security Instrument, including all schedules, riders, allonges and addenda, as such Note may
be amended from time to time.

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“Notice” is defined in Section 45.

 

“Operator” means
Danby House, LLC, a limited liability company organized and existing under the laws of Delaware, or any subsequent operator
approved by HUD.

 

“Operator Lease” means
a lease by Master Tenant to Operator providing for the operation of the Healthcare Facility.

 

“Operator’s Regulatory Agreement”
means that certain Healthcare Regulatory Agreement - Operator relating to the Project and entered into by Operator for the benefit
of HUD.

 

“Personalty” has
the meaning set forth in the Borrower’s Security Instrument.

 

“Principal” is
defined in 24 C.F.R. 200.215, and any successor regulation, provided that for purposes of the Loan Documents, “Principal”
shall also include the managing member and any other member that has a twenty-five percent (25%) or more interest in a limited
liability company.

 

“Program Obligations”
means (1) all applicable statutes and any regulations issued by HUD pursuant thereto that apply to the Project, including all amendments
to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall
become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides,
notices, and mortgagee letters that apply to the Project, and all future updates, changes and amendments thereto, as they become
effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking
process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that
they interpret, clarify and implement terms in this Agreement rather than add or delete provisions from such document. Handbooks,
guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm
or a successor location to that site.

 

“Project” has
the meaning set forth in the Borrower’s Security Instrument.

 

“Property Jurisdiction”
is any jurisdiction in which the Land is located.

 

“Reasonable Operating Expenses”
means expenses that arise from the operation, maintenance and routine repair of the Project, including all payments and deposits
required under this Agreement and any of the Loan Documents, and comply with the requirements of 24 C.F.R. 232.1007, or successor
regulation.

 

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“Rent,” “Profits”
and “Income” shall include: all rent due pursuant to any Master Lease or Operator Lease; any payments due
pursuant to any Residential Agreement; any other lease payments, revenues, charges, fees and assistance payments arising from the
operation of the Project, including but not limited to, if and for so long as applicable, commercial leases, workers’ compensation,
social security, Medicare, Medicaid, and other third-party reimbursement payments, Accounts Receivable (as defined in the Borrower’s
Security Instrument) and all payments and income arising from the operation of the Healthcare Facility and/or the provision of
services to residents thereof.

 

“Reserve for Replacement”
is defined in Section 13.

 

“Residential Agreement”
means a lease or other resident agreement between the operator of the Healthcare Facility and a resident setting forth the terms
of the resident’s living arrangement and the provision of any related services.

 

“Residual Receipts”
means certain funds held by a Non-Profit Borrower which are restricted in their use by this Agreement and Program Obligations,
and otherwise described in Section 17.

 

“Surplus Cash” is defined
in Section 15.

 

“Taxes” means all taxes,
assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public
betterments and general or local improvements, that are levied, assessed or imposed by any public authority or quasi-public authority,
and that, if not paid, could become a lien on the Land or the Improvements.

 

“Waste” means a failure
to keep the Project in decent, safe and sanitary condition and in good repair. “Waste” also means the failure to meet
certain financial obligations regarding the payment of Taxes and the relinquishment of the possession of Rents. During any period
in which HUD insures the Loan or holds a security interest on the Mortgaged Property, Waste is committed when, without Lender’s
and HUD’s express written consent, Borrower:

 

		(1)	physically changes, or permits changes to, the Mortgaged
Property, whether negligently or intentionally, in a manner that reduces its value;

 

		(2)	fails to maintain the Mortgaged Property in decent,
safe, and sanitary condition and in good repair;

 

		(3)	fails to pay, or cause to be paid, before delinquency
any Taxes that because of such failure, may subject the Project to a lien having priority over the Borrower’s Security Instrument;

 

		(4)	materially fails to comply with covenants in the Note,
the Borrower’s Security Instrument, this Agreement, or any of the Loan Documents respecting physical care, maintenance,
construction, abandonment, demolition, or insurance against casualty of the Mortgaged Property; or

 

		(5)	retains possession of Rents to which Lender or its
assigns have the right of possession under the terms of the Loan Documents.

 

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II. CONSTRUCTION; REPAIRS.

 

2.          CONSTRUCTION
FUNDS. Borrower shall keep construction funds of the Project, if any, separate and apart from operating funds of the Project,
including without limitation any funds necessary to operate the Healthcare Facility.

 

3.          UNPAID
OBLIGATIONS. Borrower certifies that upon final endorsement of the Note by HUD, Borrower shall have no unpaid obligations in
connection with the purchase of the Mortgaged Property, the construction of the Mortgaged Property, or with respect
to the Borrower’s Security Instrument except such unpaid obligations as have the written approval of HUD as to terms, form
and amount.

 

4.
          LENDER’S CERTIFICATE. Borrower shall be bound
by the terms of either the Lender’s Certificate, a copy of which has been provided to Borrower, and/or the Request for Endorsement
of Credit Instrument & Certificate of Lender, Borrower & General Contractor, as applicable (a copy of which has been provided
to Borrower), insofar as the applicable document establishes or reflects obligations of Borrower, and Borrower agrees that the
fees and expenses enumerated in the applicable document have been fully paid or payment has been provided for as set forth in the
applicable document and that all funds deposited with Lender shall be used for the purposes set forth in the applicable document
insofar as Borrower has rights and obligations in respect thereto.

 

5.
         CONSTRUCTION COMMENCEMENT/REPAIRS. Borrower shall
not commence, and has not commenced, construction or substantial rehabilitation of the Mortgaged Property prior to HUD endorsement
of the Note except as permitted by Program Obligations or as otherwise permitted by HUD, and provided that this Section 5 is not
applicable if HUD has given prior written approval to an early commencement or early start of construction, or if this Project
is an Insurance Upon Completion loan or involves a loan refinancing.

 

6.          DRAWINGS
AND SPECIFICATIONS. The Project shall be constructed in accordance with the terms of the Construction Contract
as approved by HUD, if any, and with the “Drawings and Specifications,” as such term is referred to in such Construction
Contract.

 

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7.          REQUIRED
CONSTRUCTION PERMITS. Unless otherwise required in the Construction Contract and Building Loan Agreement,
Borrower has obtained all necessary certificates, permits, licenses, qualifications, authorizations, consents and approvals from
all necessary Governmental Authorities to own, construct or substantially rehabilitate, to carry out all of the transactions required
by the Loan Documents and to comply with all applicable federal statutes and regulations of HUD in effect on the date of the Firm
Commitment, except for those, if any, which customarily would be obtained at a later date, at an appropriate stage of construction
or completion thereof, and which the Borrower shall obtain in the future. The licenses and permits that are in effect as
of the date hereof are sufficient to allow any construction (or substantial rehabilitation, as applicable) of the Improvements
to proceed to completion in the ordinary course. As the construction (or substantial rehabilitation, as applicable) of the Project
progresses, unless otherwise required by the Construction Contract, Borrower shall procure and submit all necessary building and
other permits required by Governmental Authorities. The Project shall not be available for residency by any resident, nor shall
the Healthcare Facility commence operations, except to the extent approved by prior written consent of HUD and of all other legal
authorities having jurisdiction of the Project.

 

8.          PRE-COMPLETION
ACCOUNTING REQUIREMENTS. Borrower shall submit an accounting to HUD, as required by Program Obligations, for
all receipts and disbursements during the period starting with the date of first occupancy of the Mortgaged Property after [initial]
endorsement of the Note and ending, at the option of Borrower, any date after completion of the Project, as determined in accordance
with Program Obligations. Any income of the Project in excess of disbursements for HUD-approved construction and development costs
and Reasonable Operating Expenses, as such excess is determined by HUD, shall be treated as a recovery of construction cost, except
as otherwise allowed in Program Obligations.

 

III. FINANCIAL MANAGEMENT.

 

9.          OUTSTANDING
OBLIGATIONS. Borrower shall have no obligations as of the date of this Agreement except those approved by HUD in writing and,
except for those approved obligations, the Land has been paid for in full (or if the Land is subject to a leasehold interest, it
must be subject to a HUD-approved lease), and is free from any liens or purchase money obligations, except as approved by HUD.
As of the date hereof, all contractual obligations relating to the Project have been fully disclosed to HUD.

 

10.         PAYMENTS.
Borrower shall make promptly all payments, including any deposits to required reserves, due under the Loan Documents, including
without limitation the Note and the Borrower’s Security Instrument.

 

11.         PROPERTY
AND OPERATION; ENCUMBRANCES.

 

(a)          Borrower
shall deposit all receipts of Borrower relating to the Project including all Rents, Advances, and equity or capital contributions
required under the Firm Commitment or otherwise advanced for the purpose and as part of the Mortgaged Property, in the name of
Borrower, for the benefit of the Project, in a federally insured depository or depositories and in accordance with Program Obligations,
provided that, in accordance with Program Obligations, an account held in an institution approved by the Government National Mortgage
Association may have a balance that exceeds the amount to which such deposit insurance is limited. Equity or capital contributions
shall not include certain syndication proceeds, such as proceeds from Low Income Housing Tax Credit transactions used to repay
bridge loans, all as more fully set forth in Program Obligations. Such funds shall be withdrawn
only in accordance with the provisions of this Agreement and Program Obligations. Any person or entity receiving Mortgaged Property
or any other proceeds of the Project other than for eligible purposes pursuant to this Agreement shall immediately deliver such
Mortgaged Property or other proceeds to Borrower for the benefit of the Project and failing so to do shall hold and be deemed to
hold such Mortgaged Property in trust for the benefit of the Project.

 

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(b)          Borrower
shall not engage in any business or activity, including the operation of any other project or other healthcare facility, or other
ancillary businesses, or incur any liability or obligation not in connection with the Project. Borrower shall not acquire an Affiliate
or contract to enter into any affiliation with any party, except as approved by HUD.

 

(c)          Borrower
shall immediately satisfy or obtain a release of any mechanic’s lien, attachment, judgment lien, or any other lien that attaches
to the Mortgaged Property, except to the extent permitted by HUD.

 

(d)          Penalties,
including but not limited to delinquent tax penalties, shall not be paid from the Mortgaged Property except to the extent such
payments are considered Distributions and are allowed pursuant to this Agreement.

 

(e)          Borrower
shall promptly notify HUD of the appointment of any receiver for the Project, the filing of a petition in bankruptcy or insolvency
or for reorganization, as well as the retention of any attorneys, consultants or other professionals in anticipation of such an
appointment or filing.

 

(f)          Borrower
shall cause the Project to be insured at all times in accordance with the Borrower’s Security Instrument and Program Obligations,
and Borrower shall notify HUD of all payments received, or claimed, from an insurer.

 

(g)          Borrower
shall notify HUD of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all
or any part of the Mortgaged Property, whether direct or indirect condemnation.

 

(h)          Borrower
shall notify HUD of any litigation proceeding filed against Borrower or Principals, Operator, the Healthcare Facility, or the Project,
or any litigation proceeding filed by Borrower, pursuant to Program Obligations.

 

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(i)          If
the Healthcare Facility is an Assisted Living Facility, Borrower shall require that no more than one person shall occupy any residential
unit of the Healthcare Facility unless Operator receives prior written consent from all residents of such unit.

 

12.         FINANCIAL
ACCOUNTING. Borrower shall keep the books and accounts of the operation of the Mortgaged Property in accordance with Program
Obligations. Financial records of Borrower and the Project shall be complete, accurate and current at all times. Posting must be
made at least monthly to the ledger accounts, and year-end adjusting entries must be posted promptly in accordance with sound accounting
principles. All expenditures in connection with the Project must be fully documented so as to provide reasonable assurance to all
persons or entities that review such expenditures that such expenditures are permitted under Program Obligations. Undocumented
expenses shall not be considered Reasonable Operating Expenses.

 

13.         RESERVE
FOR REPLACEMENT.

 

(a)          Borrower
shall establish and maintain a Reserve for Replacement account for defraying certain costs for replacing major structural elements
and mechanical equipment of the Project or for any other purpose. The Reserve for Replacement shall be deposited with Lender or
in a safe and responsible depository designated by Lender in accordance with Program Obligations. Such funds shall at all times
remain under the control of Lender or Lender’s designee, whether in the form of a cash deposit or invested in obligations
of, or fully guaranteed as to principal by, the United States of America or in such other investments as may be allowed by HUD
and shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations.

 

(b)          Borrower
shall deposit at endorsement of the Note an initial amount of $221,952.83, if applicable, and Borrower shall deposit a monthly
amount of $2,917, concurrently with the beginning of payments towards amortization of the Note unless a different date or
amount is established by HUD. At least every ten years, starting April 27, 2025, and more frequently at HUD’s discretion,
Borrower shall submit to HUD a written analysis of its use of the Reserve for Replacement during the prior ten years and the projected
use of the Reserve for Replacement funds during the coming ten years in accordance with Program Obligations. The amount of the
monthly deposit may be increased or decreased from time to time at the written direction of HUD without a recorded amendment to
this Agreement. In connection therewith, every ten years starting April 27, 2025, the Lender shall obtain a physical and
capital needs assessment report for HUD to evaluate. The cost of such report may be paid from the Reserve for Replacements. HUD
may, in its sole discretion, require Borrower to maintain a minimum balance in the account, in an amount to be set by HUD.

 

(c)          Borrower
shall carry the balance in this account on the financial records as a restricted asset. The Reserve for Replacement shall be invested
in accordance with Program Obligations, and any interest earned on the investment shall be deposited in the Reserve for Replacement
for use by the Project in accordance with this Section 13.

 

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(d)          Disbursements
from such account shall only be made after consent, in writing, of HUD, which may be given or withheld in HUD’s sole discretion.
In the event of a notification of default under the terms of the Borrower’s Security Instrument pursuant to which the Indebtedness
has been accelerated, a written notification by HUD to Borrower of a violation of this Agreement, or at such other times as determined
solely by HUD, HUD may direct the application of the balance in such account to the amount due on the Indebtedness as accelerated
or for such other purposes as may be determined solely by HUD.

 

(e)          Upon
Borrower’s full satisfaction of all of its obligations under the Loan Documents, any monies remaining in the Reserve for
Replacement account shall be released to Borrower or its designee.

 

(f)          Borrower
may, only with the advance written approval of HUD, borrow funds from the Reserve for Replacement for Reasonable Operating Expenses
as provided in Program Obligations. Such funds shall be repaid to the Reserve for Replacement by Borrower pursuant to the terms
approved by HUD prior to the making of such loan. To the extent HUD does not specify repayment requirements, Borrower shall repay
the Reserve for Replacement in full within thirty (30) days of the approved withdrawal. If Borrower fails to timely make any repayment
installment pursuant to the terms approved by HUD, upon notice from HUD, Borrower shall immediately repay the full amount of such
loan from non-Project funds.

 

14.         RESERVED.

 

15.         SURPLUS
CASH.

 

(a)         Surplus
Cash shall be calculated semi-annually, at the end of the first six months of the Borrower’s annual fiscal year, and at the
end of the Borrower’s annual fiscal year.  Each Surplus Cash calculation shall be submitted to Lender and HUD with the
filing of Borrower’s Annual Financial Reports, unless otherwise required by HUD.

 

(b)       “Surplus
Cash” means any cash remaining after:

 

		(i)	the payment of (1) all sums due or currently required
to be paid by Borrower under the Loan Documents, including any required deposits into reserves; and (2) all of Borrower’s
obligations relating to the Project other than those required to be paid under the Loan Documents, unless funds for such payments
have been set aside or deferment of payment has been approved by HUD; and

 

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		(ii)	the segregation of all amounts required to be held
in trust (e.g., tenant security deposits) and all amounts required to be held (segregated) in other restricted asset accounts
of the Project (e.g., Reserve for Replacements) pursuant to this Agreement, the Loan Documents and Program Obligations.

 

16.         DISTRIBUTIONS.

 

(a)          Borrower
may make and take Distributions of Mortgaged Property, to the extent and as permitted by the law of the applicable jurisdiction,
pursuant to the restrictions below, including without limitation the reconciliation requirements set forth in Section 16(d); provided
however that, except as may be approved by HUD or permitted under Program Obligations, or as otherwise provided in this Agreement,
Distributions of Mortgaged Property are prohibited for Non-Profit Borrowers.

 

(b)          Distributions
shall not be made:

 

		(i)	from borrowed funds (unless the Borrower is Operator and such Distribution is permitted under the
Operator’s Regulatory Agreement and Program Obligations) or prior to the completion of the construction or rehabilitation
of the Project;

 

		(ii)	after HUD has given written notice to Borrower of a violation or default under this Agreement and/or
after Lender has given written notice to Borrower of a violation or default under any of the Loan Documents, and until the terms
of such notices of violation or default have been satisfied to the satisfaction of HUD and/or Lender, as applicable;

 

		(iii)	when Borrower or the Project is under a forbearance agreement;

 

		(iv)	If: (A) necessary services for the operation of the Healthcare Facility are not being provided
on a regular basis, which failure Borrower knows or should have known about in the exercise of due care; (B) written notices of
necessary physical repairs or deficiencies involving exigent or significant health or safety risks to residents in connection with
the Project (including but not limited to building code violations) by other Governmental Authorities and/or by HUD have been issued
and remain unresolved to the satisfaction of the issuing Governmental Authority, (C) Borrower has been notified in writing by HUD,
Lender or other Governmental Authority that necessary physical repairs and/or deficiencies exist in connection with the Project
and Borrower has not corrected or cured, or caused to be corrected or cured, the identified items to HUD’s satisfaction,
(D) there remain any outstanding loans from the Reserve for Replacement or Residual Receipts account, or any required deposits
to such accounts have not been made when due, or (E) the Reserve for Replacement account or any other required reserve does not
have the minimum balance required by HUD; and/or

 

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		(v)	if the Borrower is also Operator, at any time that Operator is prohibited from distributing, advancing
or otherwise using funds attributable to the Healthcare Facility (e.g., failure to timely file financial reports or when Healthcare
Facility Working Capital is negative).

 

(c)         Any Distribution
of any funds, which the party receiving such funds is not entitled to retain hereunder, shall be returned to Borrower’s Project-related
accounts immediately.

 

(d)         Upon each required
calculation of Surplus Cash, Borrower must demonstrate positive Surplus Cash, or to the extent Surplus Cash is negative, repay
to Project-related accounts any Distributions taken during such calculation period. Such repayment must be made within thirty (30)
days of the conclusion of the reporting period, or such longer period approved by HUD.

 

(e)          If a Non-Profit
Borrower has been permitted to take Distributions, as indicated on the first page of this Agreement, and to the extent the annual
audited financial statement of such Non-Profit Borrower demonstrates Surplus Cash, such Non-Profit Borrower may make Distributions
of such Surplus Cash, upon the following conditions:

 

		(i)	Distributions may only be made after the end of any annual or semi-annual fiscal period, and when
the Borrower can demonstrate positive Surplus Cash pursuant to Section 15, at the end of the immediately prior annual or semi-annual
fiscal period;

 

		(ii)	Operator is in good standing with the applicable licensing agency and has no open state compliance
issues or special focus facility designation;

 

		(iii)	No unresolved audit findings in the annual audited financial statements exist relating to the Project;

 

		(iv)	Borrower and Operator are in compliance with the terms of this Agreement and the Operator’s
Regulatory Agreement, respectively, with no notice of noncompliance or violation from HUD;

 

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		(v)	No defaults exist under any of the Loan Documents and all payments required by any of the Loan
Documents are current, with no notice of noncompliance or violation from HUD; and

 

		(vi)	The balance of the Residual Receipts account remains equal to no less than six months of the Borrower’s
required debt service (including any mortgage insurance premium, escrow deposit, reserve deposits, or any other payments required
by Borrower pursuant to the Loan Documents).

 

The Non-Profit Borrower making Distributions
must evidence, with appropriate documentation sufficient for audit and HUD monitoring purposes, compliance with each condition
listed above at the time such Distribution is made, and must retain such documentation in accordance with Program Obligations,
for audit and HUD monitoring purposes.

 

17.         RESIDUAL
RECEIPTS.

 

(a)          Any
Non-Profit Borrower shall establish and maintain a Residual Receipts account.  Unless and until otherwise approved in writing
by HUD, Residual Receipts and the Residual Receipts account shall be restricted as set forth in this Section 17. Within ninety
(90) days after the end of the annual or semi-annual fiscal period for which Surplus Cash is calculated, Borrower shall deposit
into the Residual Receipts account an amount equal to the excess, if any, of (i) Surplus Cash as of the end of such fiscal period
over (ii) the amount of any permitted Distributions therefrom.

 

(b)          Residual
Receipts shall be deposited with Lender or in a safe and responsible depository designated by Lender in accordance with Program
Obligations. Residual Receipts shall at all times remain under the control of Lender or Lender’s designee, whether in the
form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America or in
such other investments as may be allowed by HUD and shall be held in accounts insured or guaranteed by a federal agency and in
accordance with Program Obligations.

 

(c)          Borrower
shall carry the balance in such account on the financial records as a restricted asset. Residual Receipts shall be invested in
accordance with Program Obligations, and any interest earned on the investment shall be deposited in the Residual Receipts account
for use by the Project in accordance with this Section 17.

 

(d)          Disbursements
from such account shall only be made after consent, in writing, of HUD, which may be given or withheld in its sole discretion,
provided that, if the Non-Profit Borrower has been permitted to take Distributions as indicated on the first page of this Agreement,
then HUD shall apply the conditions enumerated in Section 16(e) in granting or withholding such consent. In the event of a notification
of default under the terms of the Borrower’s Security Instrument, pursuant to which the Indebtedness has been accelerated,
a written notification by HUD to Borrower of a violation of this Agreement or at such other times as determined solely by HUD,
HUD may direct the application of the balance in such account to the amount due on the Indebtedness as accelerated or for such
other purposes as may be determined solely by HUD.

 

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(e)          Upon
Borrower’s full satisfaction of all its obligations under the Loan Documents, all funds remaining in the Residual Receipts
account shall be released to the Borrower.

 

(f)          Borrower
may, only with the advance written approval of HUD, borrow funds from Residual Receipts for Reasonable Operating Expenses as provided
in Program Obligations or for such other purposes as HUD may permit. Such funds shall be repaid to the Residual Receipts account
pursuant to the terms approved by HUD prior to the making of such loan. To the extent HUD does not specify repayment requirements,
Borrower shall repay the Residual Receipts account in full within thirty (30) days of the approved withdrawal. If Borrower fails
to timely make any repayment installment pursuant to the terms approved by HUD, upon notice from HUD, Borrower shall immediately
repay the full unrepaid amount of all such loan from non-Project funds.

 

18.         ADVANCES.

 

(a)          All
advances made by Borrower (or by a member, partner, shareholder of Borrower, or other individual or entity acting on behalf of
Borrower) for Reasonable Operating Expenses or otherwise for the benefit of the Project must be deposited into the Project’s
operating account, or otherwise as directed by HUD, as required by Program Obligations.

 

(b)          Interest
may accrue, and be paid, on such advances pursuant to terms approved by HUD in advance in writing.

 

(c)          Repayments
of advances must be approved by HUD, or as otherwise provided in Program Obligations.

 

19.         PROJECT
RECORDS. Borrower shall:

 

(a)          Make
and keep books, records, and accounts, in such reasonable detail, so as to fully, accurately, and fairly reflect the activities
of Borrower.

 

(b)          Record
the Project’s assets, liabilities, revenues, expenses, receipts and disbursements in separate accounts from any other assets,
liabilities, revenues, expenses, receipts and disbursements of Borrower so as to permit the production of a Statement of Financial
Position, a Statement of Profit and Loss (Statement of Activities), and a Statement of Cash Flows for Borrower in which the activities
of Borrower are separately identifiable from the activities of the Operator, unless Borrower is also Operator.

 

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(c)          Devise
and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:

 

		(i)	Transactions are executed, and access to assets is permitted, only in accordance with Borrower’s
authorization;

 

		(ii)	Transactions are accurately and timely recorded to permit the preparation of quarterly and annual
financial reports in conformity with applicable Program Obligations;

 

		(iii)	Transactions are timely recorded in sufficient detail so as to permit an efficient audit of the
Borrower’s books and records in accordance with Generally Accepted Auditing Standards (GAAS), Generally Accepted Government
Auditing Standards (GAGAS), and other applicable Program Obligations; and

 

		(iv)	Transactions are timely recorded in sufficient detail so as to maintain accountability of the Borrower’s
assets. The recorded accountability for assets shall be compared with the existing assets at reasonable intervals, but not less
than annually, and appropriate action shall be taken with respect to any differences.

 

(d)          Make
the books, records and accounts of Borrower available for inspection by HUD or its authorized representatives, after reasonable
prior notice, during normal business hours, at the Project or other mutually agreeable location or, at HUD’s request, shall
provide legible copies of such documents to HUD or its authorized representatives within a reasonable time after HUD or its authorized
representative makes a request for such documents.

 

(e)          Include
as a requirement in any operating or management contract that the books, records, and accounts of any agent of Borrower, as they
pertain to the operations of the Project, shall be kept in accordance with the requirements of this Section 19 and be available
for examination by HUD or its authorized representatives after reasonable prior notice during customary business hours at the Project
or other mutually agreeable location or, at HUD’s request, the Management Agent shall provide legible copies of such documents
to HUD or its authorized representatives within a reasonable time after HUD or its authorized representative makes the request.

 

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20.         ANNUAL
FINANCIAL REPORTS.

 

(a)          For
so long as any portion or portions of this Section 20 are not expressly waived or modified in writing by HUD, within ninety (90)
days, or such longer period established in writing by HUD, following the end of each fiscal year, Borrower shall furnish HUD and
Lender with a complete annual financial report of all of Borrower’s financial activities for the immediately preceding fiscal
year, or for such other period as approved by HUD in writing, prepared in accordance with Generally Accepted Accounting Principles
(GAAP). For purposes of this Section 20, where Borrower is also Operator, and without limiting the requirements for Operator’s
submission of financial reports to HUD under the Operator’s Regulatory Agreement, financial activities of Borrower and the
Project shall include all of the activities of both Borrower and Operator. To the extent any records or other information of the
Project is held by Operator, or any management agent or Affiliate, Borrower shall cause such entity to provide such information
to Borrower, Lender, and HUD, and every contract related to the Project with Operator, or any management agent or Affiliate, shall
include the provision that such information shall be provided on demand. All annual financial reports furnished to HUD required
herein shall be furnished in accordance with 24 C.F.R. 5.801 and other Program Obligations, and shall include a certification in
content and form prescribed by HUD and certified by Borrower.

 

(b)          In
addition, except as otherwise provided in this Section 20, annual financial reports shall be audited in accordance with Generally
Accepted Auditing Standards (GAAS) and Government Auditing Standards (GAS), and certified by a certified public accountant licensed
or certified by a regulatory authority of a state or other political subdivision of the United States, which authority makes such
certified public accountant subject to regulations, disciplinary measures, or codes of ethics prescribed by law. Such certified
public accountant must have no business relationship with Borrower other than for the provision of tax consulting and return preparation
and auditing services.

 

(c)          Any
Non-Profit Borrower shall submit audited annual financial reports, as applicable, pursuant to federal notice (e.g., Office of Management
and Budget Circular A-133). However, notwithstanding any additional time provided for Non-Profit Borrowers to submit audited annual
financial reports, such Borrowers shall still be required to submit unaudited annual financial reports pursuant to Section 20(a),
except that, for Borrowers that elect to submit their required audited annual financial reports early (i.e. within the time specified
in Section 20(a)), the requirement to submit unaudited annual financial reports shall be waived.

 

(d)          If
Borrower fails to submit any annual financial report required by this Section 20 within ninety (90) days of the required due date,
HUD, at its sole election, and without relieving Borrower of its requirement to file such report, may thereafter examine, or cause
to be examined at Borrower’s expense, the books and records of Borrower and the Project for purposes of preparing a report
of the operations of the Project for HUD’s use.

 

(e)          Auditing
costs and tax return preparation costs may be charged as Reasonable Operating Expenses only to the extent they are required of
Borrower itself by state law, the Internal Revenue Service (“IRS”), the Securities and Exchange Commission,
or HUD. Neither IRS audit costs nor costs of tax return preparation for partners, members, shareholders, Principals or Affiliates
of Borrower are considered Reasonable Operating Expenses.

 

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IV. PROJECT MANAGEMENT.

 

21.         PRESERVATION,
MANAGEMENT AND MAINTENANCE OF THE MORTGAGED PROPERTY. Borrower (a) shall not commit or permit Waste, (b) shall not abandon
the Mortgaged Property, (c) shall restore or repair promptly, or cause to be restored or repaired promptly, in a good and workmanlike
manner, any damaged part of the Project to the equivalent of its original condition, or such other condition as HUD may approve
in writing, whether or not litigation or insurance proceeds or condemnation awards are available to cover any costs of such restoration
or repair, and (d) shall keep, or cause to be kept, the Project in decent, safe, sanitary condition and good repair, including
the replacement of Personalty and Fixtures with items of equal or better function and quality. Obligations (a) through (d) of this
Section 21 are absolute and unconditional and are not limited by any conditions precedent and are not contingent on the availability
of financial assistance from HUD or on HUD’s performance of any administrative or contractual obligations. In the event all
or any of the Improvements shall be destroyed or damaged by fire, by an exercise of the power of eminent domain, by failure of
warranty, or other casualty, the money derived from any settlement, judgment, or insurance on any portion of the Project shall
be applied in accordance with the terms of Program Obligations and the Borrower’s Security Instrument or as otherwise may
be directed in writing by HUD.

 

22.         FLOOD
HAZARDS. Borrower shall maintain, or cause to be maintained, flood insurance as required by Program Obligations.

 

23.         CONTRACTS
FOR GOODS AND SERVICES. Consistent with Program Obligations, to the extent that Borrower obtain, or cause to be obtained, contracts
for goods, materials, supplies, and services (“Goods and Services”) at costs, amounts, and terms that do not
exceed reasonable and necessary levels and those customarily paid in the vicinity of the Land for Goods and Services received.
The purchase price of Goods and Services shall be based on quality, durability and scope of work. Reasonable Operating Expenses
do not include amounts paid for betterments as defined in the Property Jurisdiction or the Improvements unless determined by HUD
to be prudent and appropriate. If the Borrower is acquiring goods and services whose costs exceed five percent (5.00%) of the Healthcare
Facility’s gross annual revenue, Borrower shall solicit written cost estimates. Borrower shall keep copies of all written
cost estimates and contracts or other instruments relating to the Project, all or any of which may be subject to inspection and
examination by HUD at the Project or other mutually agreeable location.

 

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24.         RESPONSIVENESS
TO INQUIRIES.  At the request of HUD, Borrower shall promptly furnish or cause to be furnished operating budgets and occupancy,
accounting and other reports (including credit reports) and give or cause to be given specific answers to questions relative to
income, assets, liabilities, contracts, operation, and conditions of the Project and the status of the Borrower’s Security
Instrument.

 

25.         PERMITS
AND APPROVALS.

 

(a)          Borrower
shall at all times cause Operator, or any lessee or management agent, as applicable, to maintain in full force and effect, all
appropriate certificates of need, bed authority, provider agreements, licenses, permits and approvals reasonably necessary to operate
the Healthcare Facility or to fund the operation of the Project for the Approved Use (collectively, the “Permits and Approvals”).
Without the prior written consent of HUD, none of the Permits and Approvals shall be conveyed, assigned, encumbered, transferred
or alienated from the Healthcare Facility or the Project (nor shall they be relinquished to any licensing or certification authority).
Borrower shall ensure that the Healthcare Facility and the Project are at all times operated in accordance with the requirements
of the Permits and Approvals.

 

(b)          The
security interest referred to in Section 27 below shall constitute, to the extent permitted by law, a first lien upon all of the
rights, titles and interests of Borrower, if any, in the Permits and Approvals. However, in the event of either a monetary or other
default under this Agreement, the Note, the Borrower’s Security Instrument, or any of the other Loan Documents, the Borrower
shall cooperate in any legal and lawful manner necessary or required to permit the continued operation of the Healthcare Facility
for the Approved Use. For the intents and purposes herein, Borrower hereby irrevocably nominates and appoints Lender and HUD, their
respective successors and assigns, each in its own capacity, as Borrower’s attorney-in-fact coupled with an interest to do
all things that any such attorney-in-fact deems to be necessary or appropriate in order to facilitate the continued operation of
the Healthcare Facility and the Project for the Approved Use, including but not limited to, the power and authority to provide
any and all information and data, pay such fees as may be required, and execute and sign in the name of Borrower, its successors
or assigns, any and all documents, as may be required by any Governmental Authority exercising jurisdiction over the Project.

 

(c)          Borrower
shall not alter, terminate or relinquish or suffer or permit the alteration, termination or relinquishment of any Permits and Approvals
without the prior written approval of HUD. In the event that any such alteration, termination or relinquishment is proposed, upon
learning of such proposed alteration, termination or relinquishment, Borrower shall advise HUD and Lender promptly. Borrower shall
insert the foregoing requirements into any Borrower-Operator Agreement for the Project.

 

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(d)          Except
as otherwise provided below or in Program Obligations, Borrower shall electronically deliver within two (2) Business Days after
Borrower’s receipt thereof, to the assigned HUD personnel and Lender copies of any and all notices, reports, surveys and
other correspondence (regardless of form) received by Borrower from any Governmental Authority that includes any statement, finding
or assertion that (i) Borrower, Operator, the Project or any lessee or management agent of the Project is or may be in
violation of (or default under) any of the Permits and Approvals or any governmental requirements applicable thereto, (ii) any
of the Permits and Approvals are to be terminated, limited in any way, or not renewed, (iii) any civil money penalty relating to
the Project is being imposed with respect to the Healthcare Facility, or (iv) Borrower, Operator, the Project or any lessee or
management agent of the Project is subject to any governmental investigation or inquiry involving fraud. Borrower shall deliver
to the assigned HUD personnel and Lender, simultaneously with delivery thereof to any Governmental Authority, any and all responses
given by or on behalf of Borrower to any of the foregoing and shall provide to HUD and Lender, promptly upon request, such other
information regarding any of the foregoing as HUD or Lender may request. Unless otherwise requested by HUD, the reporting requirement
of this provision shall not encompass regulators’ communications relating solely to Licensed Nursing Facility surveys where
the most severe citation level is at the “G” level
or its equivalent (pursuant to CMS State Operations Manual, Chapter 7, as may hereafter be edited or updated, or any successor
guidance) unless a citation at such level is either (i) unresolved from the two  most recent consecutive prior surveys, or
(ii) is a repeat violation having the same citation number.  Moreover, unless otherwise requested by HUD or Lender, the initial
communication from the Operator pursuant to this paragraph shall be a notice by email to the Lender describing the conduct cited,
the scope and duration of remedy(ies) imposed, and the timelines for corrective actions.  Then, unless otherwise requested
by HUD or Lender, the next communication from the Operator shall be notification that the citations have been cleared by the issuing
regulatory agency. The receipt by HUD and/or Lender of notices, reports, surveys, correspondence and other information shall not
in any way impose any obligation or liability on HUD, the Lender or their respective agents, representatives or designees to take
or refrain from taking any action, and HUD, Lender and their respective agents, representatives and designees shall have no liability
for any failure to act thereon or as a result thereof.

 

26.         Operator;
Cooperation in Change of Operator.

 

(a)          Unless
Borrower is itself the licensed operator of the Healthcare Facility, Borrower has or shall enter into and maintain the Master Lease,
and shall cause Master Tenant to enter into and maintain the Borrower-Operator Agreement, in such form as approved by HUD. Any
Operator (including Borrower) must be approved by HUD and shall execute a Healthcare Regulatory Agreement – Operator (Form
HUD-92466A-ORCF) upon such terms as are acceptable to HUD and an Operator Security Agreement (Form HUD-92323-ORCF) and deposit
account control agreements in form and substance satisfactory to HUD and Lender. If Borrower is or becomes Operator, Borrower shall
execute a Healthcare Regulatory Agreement – Operator (Form HUD-92466A-ORCF) upon terms acceptable to HUD and an Operator
Security Agreement (Form HUD-92323-ORCF) and deposit account control agreements in form and substance satisfactory to HUD and Lender.

 

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(b)          Borrower
shall require Operator to comply with the terms of the Operator’s Regulatory Agreement and shall set forth such requirements,
or cause such requirements to be set forth, in any Borrower-Operator Agreement. Borrower shall require Master Tenant to comply
with the terms of the Master Tenant’s Regulatory Agreement and shall set forth such requirements in any Master Lease.

 

(c)          In
the event that, consistent with the Operator's Regulatory Agreement and/or Master Tenant’s Regulatory Agreement, HUD directs
Borrower and/or Master Tenant to terminate any Borrower-Operator Agreement and/or Master Lease and procure a new Operator acceptable
to HUD, Borrower shall expeditiously do so consistent with the continued operation of the Healthcare Facility for the Approved
Use, and in cooperation with and subject to the requirements of the necessary regulatory and/or funding entities. Doing so shall
in no way obviate the Borrower’s obligation to comply with all other terms of this Agreement or affect any enforcement action
by HUD.

 

(d)          In
the event that Borrower is itself the licensed operator of the Healthcare Facility and HUD determines that (i) any of the Permits
and Approvals have been or are at substantial and imminent risk of being terminated, suspended or otherwise restricted in such
a way that the Project could not be operated for the Approved Use, as evidenced by, without limitation, letters of warning or imposition
of penalties from applicable state and/or federal regulatory and/or funding agencies, or (ii) the financial viability of the Healthcare
Facility is at substantial and imminent risk, then, pursuant to Program Obligations and without prejudice to any enforcement actions
otherwise set forth in this Agreement, HUD may direct Borrower to retain the services of an operator acceptable to HUD. Upon such
direction from HUD, Borrower shall expeditiously do so.

 

(e)          Without
prior approval of HUD, neither the Operator Lease nor the Master Lease shall or shall be amended to contain any provisions that
cause such lease to be characterized as other than an “operating lease” pursuant to Generally Accepted Accounting Principles
and FASB Standard 13 (or its successor), including without limitation provisions that convey an ownership interest in the Project
to Operator or Master Tenant, as applicable, or grant Operator or Master Tenant, as applicable a bargain purchase option during
or after the lease term. Nothing herein shall be construed as prohibiting Borrower from granting an Operator or Master Tenant,
as applicable, an option to purchase the Project on arms-length negotiated terms, provided that such terms do not cause the Operator
Lease to be characterized as something other than an “operating lease” for accounting purposes and provided such option
provides that the exercising of same is subject to the prior satisfaction of applicable Program Obligations, including those relating
to the transfer of physical assets. 

 

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27.         Personal
Property; Security Interests. Borrower shall suitably equip, or cause to be equipped, the Project for the Approved Use.
Except as otherwise approved in writing by HUD, Borrower shall grant to Lender and HUD a first lien security interest in all personal
property of Borrower related to the Project as additional security for the obligations of Borrower under the Note, the Borrower’s
Security Instrument and this Agreement. Such security interest shall be evidenced by such security agreements as Lender and/or
HUD may require and, in connection therewith, Borrower shall execute or cause to be executed and delivered such deposit account
control agreements as may be required by Lender and/or HUD. Borrower hereby authorizes each of Lender and HUD to file such UCC
financing statements, amendments, and continuation statements as either of them may deem to be necessary or appropriate in connection
with the foregoing security interests. Borrower shall not be permitted to grant any other liens on any of the Mortgaged Property
without the prior written approval of Lender and HUD.

 

28.         Professional
Liability Insurance. Borrower shall maintain, or cause Operator or any lessee or management agent to maintain, professional
liability insurance that complies with the applicable requirements of HUD. Annually, Borrower shall provide, or cause Operator
or any lessee or management agent to provide, to HUD and Lender, a certification of compliance with such professional liability
insurance requirements as evidenced by an Acord or certified copy of the insurance policy.

 

29.         PROPERTY
MANAGEMENT AGREEMENTS. If, in addition to or in lieu of any Borrower-Operator Agreement, Borrower enters into a property management
agreement or other document outlining procedures for managing the Healthcare Facility (“Management Agreement”), such
agreement or document must be approved by HUD and consistent with Program Obligations. Any management agent must be approved by
HUD and must execute and deliver a Management Agent Certification - Residential Care Facilities (form HUD-9839-ORCF, or successor
form) in such form as approved by HUD. Any Management Agreement shall contain the following provisions: (1) the Management Agreement
shall terminate without penalty upon failure to comply with the provisions of Management Certification to HUD, or for other good
cause, including without limitation for violations of the Borrower’s Regulatory Agreement, Operator’s Regulatory Agreement,
and/or Master Tenant’s Regulatory Agreement, if any, thirty days after HUD has mailed to Borrower, or Operator, as applicable,
a written notice of its desire to terminate the Management Agreement; (2) in the event that HUD determines that any of the Permits
and Approvals reasonably necessary to operate the Healthcare Facility is at substantial and imminent risk of being terminated,
suspended or otherwise restricted, if such termination, suspension or other restriction would have a materially adverse effect
on the Project, the Management Agreement shall terminate immediately without penalty upon HUD’s issuance of a notice of termination
to Borrower, or Operator, as applicable, and such management agent; and (3) the Management Agreement may not be assigned without
the prior written approval of HUD. Upon HUD’s request for termination, Borrower, or Operator, as applicable, shall immediately
arrange to terminate any such Management Agreement and shall make arrangements satisfactory to HUD for the continuing proper management
of the Healthcare Facility and the Project. Any material amendment to the management agreement must be acceptable to HUD, in accordance
with Program Obligations.

 

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30.         ACCEPTABILITY
OF MANAGEMENT OF THE MORTGAGED PROPERTY. Borrower shall provide management of the Mortgaged Property in a manner consistent
with Program Obligations and acceptable to HUD. Borrower shall take such actions as shall cause the Project to conform to Program
Obligations.

 

31.         TERMINATION
OF CONTRACTS. Except as otherwise permitted by HUD, any contract pertaining to the Project with a vendor having an identity
of interest with the Borrower and/or Operator, as determined by HUD pursuant to Program Obligations, shall provide: (1) in the
event of a default under this Agreement, Master Tenant’s Regulatory Agreement, or the Operator’s Regulatory Agreement,
the contract shall be subject to termination without penalty and without cause upon written request by HUD, within thirty (30)
days notice of such termination; and (2) in the event that HUD determines that any of the Permits and Approvals are at substantial
and imminent risk of being terminated, suspended or otherwise restricted so as to have a material adverse effect on the Project,
the contract shall be subject to termination immediately without penalty and without cause upon written request by HUD. Upon such
request by HUD, Borrower shall immediately arrange to terminate the contract, or cause Operator to terminate the contract, and
Borrower shall also make arrangements, or cause Operator to make arrangements, satisfactory to HUD for continuing acceptable services
to the Project effective as of the termination date of the contract.

 

32.         MANAGEMENT
AGENT. In the event that a management agent is or will be the holder of the Healthcare Facility license or is or will be the
payee under one or more third-party payor agreements with respect to the Healthcare Facility, such management agent will be treated
as an Operator in accordance with Program Obligations.

 

33.         COMMERCIAL
(NON-RESIDENTIAL) LEASES. No portion of the Project shall be leased for any commercial purpose or use without receiving HUD’s
prior written approval as to terms, form and amount, except for commercial leases for support or ancillary services which are subordinate
to the Borrower’s Security Instrument, have terms of not more than five (5) years and otherwise comply with Program Obligations.
Borrower shall deliver, or cause to be delivered, an executed copy of any commercial lease to HUD and Lender within thirty (30)
days after its effective date.

 

V. ACTIONS REQUIRING
THE PRIOR WRITTEN APPROVAL OF HUD.

 

34.         Borrower
shall not without the prior written approval of HUD, including without limitation in accordance with Program Obligations:

 

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(a)          Convey,
assign, transfer, pledge, hypothecate, encumber, or otherwise dispose of the Mortgaged Property or any interest therein, or permit
the conveyance, assignment, or transfer of any interest or control in Borrower (if the effect of such conveyance, assignment or
transfer is the creation or elimination of a Principal) unless permitted by Program Obligations. Borrower need not obtain the prior
written approval of HUD for: (i) conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under the
Borrower’s Security Instrument; (ii) inclusion of the Mortgaged Property in a bankruptcy estate by operation of law under
the United States Bankruptcy Code; (iii) acquisition of an interest by inheritance or by court decree; or (iv) as otherwise allowed
by Program Obligations.

 

(b)          Enter
into any contract, agreement or arrangement to borrow funds or finance any purchase or incur any liability, direct or contingent,
other than in accordance with the Loan Documents and Program Obligations.

 

(c)          Pay
out any funds in violation of this Agreement, the Loan Documents, or Program Obligations.

 

(d)          In
accordance with 24 C.F.R. 232.1007 or any successor regulation, except for Distributions allowed pursuant to this Agreement, pay
any compensation, including wages or salaries, in excess of fair and reasonable compensation or incur any obligation to do so,
to any officer, director, stockholder, trustee, beneficiary, partner, member, or Principal of Borrower, or to any nominee thereof,
except that, at any time at which Borrower is the operator of the Healthcare Facility, Borrower may pay fair and reasonable compensation
to employees who are officers, directors, stockholders, trustees, beneficiaries, partners, members or Principals of Borrower.

 

(e)          Enter
into or change any contract, agreement or arrangement for supervisory or managerial services or leases for the operation of the
Healthcare Facility or any portion of the Project, except as permitted under Program Obligations.

 

(f)          Convey,
assign or transfer any right to receive Rents of the Mortgaged Property.

 

(g)          Remodel,
add to, subtract from, construct, reconstruct or demolish any part of the Project, except as required by HUD under Section 21(c)
and except that Borrower may, without approval of HUD, (i) dispose of or cause to be disposed of obsolete or deteriorated Fixtures
or Personalty if the same are replaced with like items of the same or greater quality or value (provided, that Borrower shall have
no obligation to replace any such Fixtures or Personalty that are not needed for operation of the Project) and (ii) make minor
alterations that do not adversely affect the Mortgaged Property.

 

(h)          Permit
the use of the Project, including any portion of the Healthcare Facility, for any other purpose except the Approved Use, or permit
commercial use greater than that originally approved by HUD.

 

    	Previous versions obsolete	Page 24 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

(i)          Amend
the organizational documents of Borrower in such a way that modifies the terms of the organizational documents required by HUD,
Lender, and/or Program Obligations, including, but not limited to: (i) any amendment that results in the creation or elimination
of a Principal or modifies the requirements regarding the filing of a HUD previous participation certification when required by
Program Obligations; (ii) any amendment that in any way affects the Loan Documents; (iii) any amendment that would change the identity
of the persons and/or entities authorized to bind Borrower previously approved by HUD or pre-approve a successor general partner,
manager or member to bind the partnership or company for any matters concerning the Project which require HUD’s consent or
approval; (iv) a change in any general partner, manager or managing member or pre-approved successor general partner, manager or
managing member of the partnership or company or any change in a guarantor of any obligation to HUD; and (v) any proposed changes
to the mandatory HUD language included in the organizational documents. Copies of all fully executed amendments to the organizational
documents must be provided to HUD within ten (10) days of the effective date of the amendment. If the amendments to the organizational
documents are recorded, copies of the recorded documents must be provided to HUD within ten (10) days of receipt by Borrower.

 

(j)          Except
in cases funded by proceeds from professional liability insurance, institute litigation seeking the recovery of a sum in excess
of $100,000, nor settle or compromise any action for specific performance, damages, or other equitable relief, in excess of $100,000;
and in all cases dispose of or distribute the proceeds thereof.

 

(k)          Reimburse
any party from the Mortgaged Property for payment of expenses or costs of the Project except for Reasonable Operating Expenses
and except for payments by means of Distributions.

 

(l)          Receive
any fee or payment of any kind from Operator or any management agent or employee of the Project, or other provider of Goods or
Services of the Project in exchange for the right to provide such Goods or Services.

 

(m)          Except
as provided in Section 33, enter into, or agree to the assignment of, any commercial lease for all or part of the Mortgaged Property.

 

(n)          Enter
into any amendment of any contract or lease relating to the Project, except to the extent such contract or lease does not require
HUD’s approval, including without limitation any amendment that (i) reduces the rent or other payments due to Borrower, (ii)
materially increases the obligations of Borrower or the rights of the other parties to such contract or lease, (iii) materially
decreases the rights of Borrower or the obligations of the other parties to such contract or lease, or (iv) alters any provision
of such contract or lease required by HUD to be included therein.

 

    	Previous versions obsolete	Page 25 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

VI. ENFORCEMENT.

 

35.         VIOLATION
OF AGREEMENT. The occurrence of any one or more of the following shall constitute a “Violation” under this
Agreement:

 

(a)          Any
failure by Borrower to comply with any of the provisions of this Agreement;

 

(b)          Any
failure by Borrower to comply with any of the provisions of any other of the Loan Documents;

 

(c)          Any
fraud or material misrepresentation or material omission by Borrower, any of its officers, directors, trustees, general partners,
members, managers, employees, representatives or managing agent in connection with (1) any financial statement, rent roll or other
report or information provided to HUD during the term of this Agreement or (2) any request for HUD’s consent to any proposed
action, including a request for disbursement of funds from any restricted account for which HUD’s prior written approval
is required; or

 

(d)          The
commencement of a forfeiture action or proceeding, whether civil or criminal, which, in HUD’s reasonable judgment, could
result in a forfeiture of the Mortgaged Property or otherwise materially impair Lender’s and/or HUD’s interest in the
Mortgaged Property.

 

36.         NOTICE
OF VIOLATION AND EVENT OF DEFAULT.

 

(a)          At
any time during the existence of a Violation, HUD may give written notice of such Violation to Borrower (the “Violation
Notice”), addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate
written Notice to HUD and Lender, be designated by Borrower as its legal business address. Borrower shall have thirty (30) days
to cure, or cause to be cured, any Violation described in the Violation Notice, provided that HUD shall extend such thirty (30)
day period by such time as HUD may reasonably determine is necessary to correct the Violation for so long as, HUD determines, in
its discretion, that: (i) Borrower is timely satisfying all payment obligations in the Loan Documents; (ii) none of the
Permits and Approvals is at substantial and imminent risk of being terminated; (iii) such violation cannot reasonably be corrected
during such thirty (30) day period, but can reasonably be corrected in a timely manner, and (iv) Borrower, Master Tenant,
or Operator commences to correct such Violation, or cause such correction to be commenced, during such thirty (30) day period and
thereafter diligently and continuously proceeds to correct, or cause correction of, such Violation. If, after delivery of such
Violation Notice and applicable cure period, the Violation is not corrected to the satisfaction of HUD, HUD may declare an Event
of Default under this Agreement without further Notice. Alternatively, if necessary in HUD’s determination to protect
the health and safety of the tenants or the financial or operational viability of the Healthcare Facility, HUD may declare an Event
of Default at any time during the existence of a Violation without providing prior written notice of the Violation.

 

    	Previous versions obsolete	Page 26 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

(b)          Notwithstanding
any other provisions of this Agreement, if HUD determines at any time that any of the Permits and Approvals are at substantial
and imminent risk of being terminated, suspended or otherwise restricted if such termination, suspension, or other restriction
would have a materially adverse effect on the Project, including without limitation, HUD’s determination that there is a
substantial risk that deficiencies identified by applicable state and/or federal regulatory and/or funding agencies cannot be cured
in such manner and within such time periods as would avoid the loss, suspension, or diminution of any of the Permits and Approvals
that would have a materially adverse effect on the Project, or if HUD determines at any time that, as a result of a Violation,
the value of the Mortgaged Property is at substantial and imminent risk of material adverse diminution, then HUD may immediately
(without thirty (30) days notice) declare an Event of Default of this Agreement and may immediately proceed to take actions to
pursue its remedies.

 

(c)          Upon
any declaration of an Event of Default, HUD may:

 

		(i)	If HUD holds the Note, declare the whole of the Indebtedness immediately due and payable and then
proceed with the foreclosure of the Borrower’s Security Instrument or otherwise dispose of HUD’s interest in the Note
and the Borrower’s Security Instrument pursuant to Program Obligations;

 

		(ii)	If
                                         the Note is not held by HUD, notify the holder of the Note of such default and require
                                         the holder to declare a default under the Note and the Borrower’s Security Instrument,
                                         and the holder after receiving such Notice and demand, shall declare the whole of the
                                         Indebtedness due and payable and thereupon proceed with foreclosure of the Borrower’s
                                         Security Instrument and/or the exercise of
                                         other remedies available to Lender under the Loan Documents or at law or equity, or assign
                                         the Note and the Borrower’s Security Instrument to HUD as provided in Program
                                         Obligations. Upon assignment of the Note and the Borrower’s Security Instrument
                                         to HUD, HUD may then proceed with the foreclosure of the Borrower’s Security Instrument
                                         or otherwise dispose of HUD’s interest in the Note and the Borrower’s Security
                                         Instrument pursuant to Program Obligations;

    	Previous versions obsolete	Page 27 of 32	form HUD-92466-ORCF (06/2014)

     

    

  

		(iii)	Collect
                                         all Rents and charges in connection with the Project or the operation of the Healthcare
                                         Facility, to the extent permitted by applicable law, and use such collections to pay
                                         obligations of Borrower under this Agreement and under the Note and the Loan Documents
                                         and the necessary expenses of preserving and operating the Project;

 

		(iv)	Take
possession of the Mortgaged Property, bring any action necessary to enforce any rights of Borrower growing out of the Mortgaged
Property’s operation, and maintain the Mortgaged Property in decent, safe, sanitary condition and good repair;

 

		(v)	Apply
to any court, state or federal, for specific performance of this Agreement, for an injunction against any Violations of this Agreement,
for the appointment of a receiver to take over and operate the Project in accordance with the terms of this Agreement, or for
such other relief as may be appropriate, as the injury to HUD arising from a default under any of the terms of this Agreement
would be irreparable and the amount of damage would be difficult to ascertain; and,

 

		(vi)	Collect
reasonable attorney fees related to enforcing Borrower’s compliance with this Agreement.

 

(d)          Any
forbearance by HUD in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be
a waiver of or preclude the exercise of any right or remedy.

 

(e)          HUD
agrees to honor the provisions of Sections 4, 5 and 7 of that certain Master Lease Subordination, Non-Disturbance and Attornment
Agreement relating to the Project by and between Lender and Borrower, among others, insofar as such sections call for HUD’s
consent for the release of the Project from the Master Lease and/or the Loan Documents, on the terms and subject to the limitations
set forth in such sections.

 

37.         MEASURE
OF DAMAGES. The damage to HUD as a result of Borrower’s breach of duties and obligations under this Agreement shall
be, in the case of failure to maintain, or cause to be maintained, the Project as required by this Agreement, the cost of the
repairs required to return the Project to decent, safe and sanitary condition and good repair. This contractual provision
shall not abrogate or limit any other remedy or measure of damages available to HUD under any civil, criminal or common law.

 

38.         NONRECOURSE
DEBT. The following individuals or entities identified in the Firm Commitment: Summit Healthcare REIT, Inc., as identified
in the Firm Commitment does not assume personal liability for payments due under the Note and the Borrower’s Security
Instrument, or for the payments to the Reserve for Replacement, or for matters not under its control, provided that each said individual
or entity shall remain personally liable under this Agreement only with respect to the matters hereinafter stated; namely: (a)
for funds or property of the Project coming into its hands which, by the provisions of this Agreement, it is not entitled to retain;
(b) for authorizing the conveyance, assignment, transfer, pledge, encumbrance, or other disposition of the Mortgaged Property or
any interest therein in violation of this Agreement without the prior written approval of HUD; and (c) for its own acts and deeds,
or acts and deeds of others, which it has authorized in violation of the provisions of this Section. The obligations of the individuals
or entities listed in this Section shall survive any foreclosure proceeding, any foreclosure sale, any delivery of any deed in
lieu of foreclosure, any termination of this Agreement, and any release of record of the Borrower’s Security Instrument.

 

[signature on following page]

 

    	Previous versions obsolete	Page 28 of 32	form HUD-92466-ORCF (06/2014)

     

    

  

	 	SUMMIT HEALTHCARE REIT, INC.,	 
	 	a Maryland corporation	 
	 	 	 	 
	 	By: 	/s/ Elizabeth Pagliarini	 
	 	Name:	Elizabeth Pagliarini	 
	 	Title: 	CFO/Treasurer	 

 

ACKNOWLEDGMENT

 

 

A notary public or other officer completing
this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and
not the truthfulness, accuracy, or validity of that document.

 

 

State of California

 

County of Orange)

 

On November 16, 2015 before me,
Juli Davenport, Notary Public (insert name and title of the officer) personally appeared  Elizabeth
Pagliarini, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the
within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted,
executed the instrument.

 

I certify under PENALTY OF PERJURY under
the laws of the State of California that the foregoing paragraph is true and correct.

 

WITNESS my hand and official seal.

 

Signature /s/ Juli Davenport___________________________________(Seal)

 

[continued on following page]

 

    	Previous versions obsolete	Page 29 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

VII. MISCELLANEOUS.

 

39.         COMPLIANCE
WITH LAWS.

 

(a)          Borrower
shall comply with all applicable: laws; ordinances; regulations; requirements of any Governmental Authority; lawful covenants and
agreements (including the Borrower’s Security Instrument) recorded against the Mortgaged Property; and Program Obligations;
including but not limited to those of the foregoing pertaining to: health and safety; construction of improvements on the Mortgaged
Property; fair housing; civil rights; zoning and land use; Leases; lead-based paint maintenance requirements of 24 C.F.R. Part
35 and maintenance and disposition of resident security deposits; and, with respect to all of the foregoing, all subsequent amendments,
revisions, promulgations or enactments. Borrower shall at all times maintain records sufficient to demonstrate compliance with
the provisions of this Section 39. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit,
any illegal activities at the Mortgaged Property including those that could endanger residents or visitors, result in damage to
the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise impair the lien created by the Borrower’s
Security Instrument or Lender’s interest in the Mortgaged Property. To the best of Borrower’s knowledge, Borrower represents
and warrants to HUD that no portion of the Mortgaged Property has been or shall be purchased with the proceeds of any illegal activity.

 

(b)          There
shall be full compliance with the provisions of (1) any State or local laws prohibiting discrimination in housing on the basis
of race, color, creed, or national origin; and (2) the regulations of HUD providing for non-discrimination and equal opportunity
in housing. It is understood and agreed that failure or refusal to comply with any such provisions shall be a proper basis for
HUD to take any corrective action it may deem necessary including, but not limited to, the rejection of applications for FHA mortgage
insurance and the refusal to enter into future contracts of any kind with which Borrower is identified; and further, if Borrower
is a corporation or any other type of business association or organization which may fail or refuse to comply with the aforementioned
provisions, HUD shall have a similar right of corrective action (1) with respect to any individuals who are officers, directors,
trustees, managers, partners, associates or principal stockholders of Borrower; and (2) with respect to any other type of business
association, or organization with which the officers, directors, trustee, managers, partners, associates or principal stockholders
of Borrower may be identified.

 

(c)          HUD
and Lender shall be entitled to invoke any remedies available by law or equity to redress any breach or to compel compliance by
Borrower with these requirements, including any remedies available hereunder.

 

    	Previous versions obsolete	Page 30 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

40.         BINDING
EFFECT. This Agreement shall bind, and the benefits shall inure to, Borrower, its heirs, legal representative, executors, administrators,
successors in office or interest, and assigns, and to HUD and HUD’s successors, so long as the Contract of Insurance continues
in effect, and during such further time as HUD shall be Lender, holder, coinsurer, or reinsurer of the Borrower’s Security
Instrument, or obligated to reinsure the Note or the Borrower’s Security Instrument.

 

41.         PARAMOUNT
RIGHTS AND OBLIGATIONS. Borrower warrants that it has not, and shall not, execute any other agreement with provisions contradictory
of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling
as to the rights and obligations set forth and supersede any other requirements in conflict therewith.

 

42.         SEVERABILITY.
The invalidity of any clause, part, or provision of this Agreement shall not affect the validity of the remaining portions hereof.

 

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

 

44.         PRESENT
ASSIGNMENT. To the extent permitted by applicable law, Borrower irrevocably and unconditionally assigns, pledges, mortgages
and transfers to HUD its rights to Rents, charges, fees, carrying charges, Project accounts, security deposits, and other revenues
and receipts of whatsoever sort that it may receive or be entitled to receive from the operation of the Mortgaged Property, subject
to the assignment of Rents and other provisions in the Borrower’s Security Instrument and, if Borrower is also Operator,
subject to the rights of any accounts receivable lender under accounts receivable financing that has been approved by HUD.
 Until a default is declared under this Agreement, a revocable license is granted to Borrower to collect and retain such
Rents, charges, fees, carrying charges, Project accounts, security deposits, and other revenues and receipts, but upon an Event
of Default under this Agreement or under the Borrower’s Security Instrument, such revocable license is automatically terminated.

 

    	Previous versions obsolete	Page 31 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

45.         NOTICE.

 

(a)          All
notices, demands and other communications (“Notice”) under or concerning this Agreement shall be in writing.
A courtesy copy of any Notice given by Borrower or HUD shall be sent simultaneously to Lender. Each Notice shall be addressed to
the intended recipients at their respective addresses set forth below, and shall be deemed given on the earliest to occur of (i)
the date when the Notice is received by the addressee; (ii) the first or second Business Day after the Notice is delivered to a
recognized overnight courier service, with arrangements made for payment of charges for next or second Business Day delivery, respectively,
or (iii) the third Business Day after the Notice is deposited in the United States mail with postage prepaid, certified mail, return
receipt requested. As used in this Section 45, the term “Business Day” means any day other than a Saturday or
a Sunday, a federal holiday or holiday in the state where the Project is located or other day on which the federal government or
the government of the state where the Project is located is not open for business. When not specifically designated as a Business
Day, the term “day” shall refer to a calendar day.

 

(b)          Any
party to this Agreement and Lender may change the address to which Notices intended for it are to be directed by means of Notice
given to the other party in accordance with this Section 45. Each party agrees that it shall not refuse or reject delivery of any
Notice given in accordance with this Section 45, that it shall acknowledge, in writing, the receipt of any Notice upon request
by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 45 to have been received
by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service
or the courier service.

 

 

	BORROWER:	HP Winston-Salem LLC
	 	2 South Pointe Dr., Suite 100
	 	Lake Forest, California 92614
	 	Attn: Elizabeth Pagliarini

  

	HUD:	U.S. Department of Housing and Urban Development
	 	c/o Office of Residential Care Facilities
	 	451 7th Street, S.W.
	 	Washington, DC 20410
	 	 
	LENDER:	Lancaster Pollard Mortgage Company, LLC
	 	65 East State Street, 16th Floor
	 	Columbus, OH 43215
	 	Attn: Loan Servicing

 

[continued on following page]

 

    	Previous versions obsolete	Page 32 of 32	form HUD-92466-ORCF (06/2014)

     

    

 

IN WITNESS WHEREOF, the parties hereto have set their
hands and seals on the date first herein above written.

 

Borrower hereby certifies that the statements and representations
contained in this instrument and all supporting documentation thereto are true, accurate, and complete and that each signatory
has read and understands the terms of this instrument. This instrument has been made, presented, and delivered for the purpose
of influencing an official action of HUD in insuring the Loan, and may be relied upon by HUD as a true statement of the facts contained
therein.

 

	 	BORROWER:
	 	 
	 	HP WINSTON-SALEM LLC,
	 	a Delaware limited liability company
	 	 	 
	 	By:	Summit Healthcare REIT, Inc.,
	 	 	a Maryland corporation
	 	Its:  	Manager

 

	 	By:	/s/ Elizabeth Pagliarini
	 	Name:	Elizabeth Pagliarini
	 	Title:	CFO/Treasurer

 

ACKNOWLEDGMENT

 

 

A notary public or other officer completing
this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and
not the truthfulness, accuracy, or validity of that document.

 

 

State of California

 

County of  Orange)

 

On  November 16, 2015 before me, Juli
Davenport, Notary Public (insert name and title of the officer) personally appeared  Elizabeth Pagliarini, who proved to me
on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged
to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on
the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

 

I certify under PENALTY OF PERJURY under
the laws of the State of California that the foregoing paragraph is true and correct.

 

WITNESS my hand and official seal.

 

Signature /s/Juli Davenport_________________________________(Seal)

 

Signature Page 1

to

Healthcare Regulatory Agreement - Borrower

 

     

     

    

 

 

	 	HUD:
	 	 
	 	Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner
	 	 	 
	 	By:  	Patrick G. Berry
	 	 	Patrick G. Berry
	 	 	Authorized Agent
	 	 	Office of Residential Care Facilities

 

ACKNOWLEDGEMENT

STATE OF MICHIGAN     )

                               ) ss:

COUNTY OF WAYNE       )

 

The foregoing instrument was
acknowledged before me Rasheedah C. Dix, a Notary Public, this 16th day of
December, 2015 by Patrick G. Berry as the Authorized Agent for
the Secretary of the U.S. Department of Housing and Urban Development, acting by and through the Federal Housing
Commissioner, and a Supervisory Account Executive in the Office of Residential Care Facilities, U.S. Department of Housing
and Urban Development, and that he, being authorized to do so by virtue of such office, executed the foregoing instrument on
behalf of the Federal Housing Commissioner, acting for the Secretary of the U.S. Department of Housing and Urban
Development.

 

	 	 	 
	[SEAL]	 	/s/ Rasheeda C. Dix
	 	 	Notary Public, State of Michigan
	 	 	 
	 	(Print Name)    	Rasheeda C. Dix
	 	 	 
	 	[Acting in the] County of    	Wayne

 

	My commission expires:  	August 15, 2018	 

 

Signature Page 2

to

Healthcare Regulatory Agreement - Borrower

 

     

     

    

 

EXHIBIT A

 

All that certain piece parcel or tract
of land, situate, lying and being in the City of Winston-Salem, County of Forsyth and the State of North Carolina, having 2.749
acres and being more fully described having metes and bounds as follows, to-wit:

 

Beginning at an iron pin found on the southwestern
right of way of Burke Mill Road, a common corner with the property of HCRI NC Properties III Limited Partnership, said point being
located North 79 Degrees 41 Minutes 15 Seconds East, 1728.92 feet from an NCGS Monument known as “Vanhoy”, North Carolina
NAD 27 Grid coordinate of N 841,781.755, E 1,612,840.598; thence running along the right of way of Burke Mill Road, South 46 Degrees,
38 Minutes, 44 Seconds East, 285.07 feet, to an iron pin found; thence continuing along said right of way, South 49 Degrees, 36
Minutes, 43 Seconds East, 64.73 feet, to an iron pin found at the intersection with the right of way of Bethel Church Road; thence
leaving the right of way of Burke Mill Road and turning and running along the right of way of Bethel Church Road, South 00 Degrees,
16 Minutes, 07 Seconds East, 320.08 feet, an iron pin found; thence continuing along the right of way of Bethel Church Road, South
00 Degrees, 52 Minutes, 43 Seconds West, 30.01 feet, to an iron pin found at the common corner with the property of Bethel United
Methodist Church; thence leaving the right or way of Bethel Church Road and running along the common boundary with the property
of Bethel United Methodist Church, South 89 Degrees, 24 Minutes, 31 Seconds West, 255.30 feet, to an iron pin found a the common
corner with the property of HCRI NC Properties III Limited Partnership; thence turning and running along the common boundary with
the property of HCRI NC Properties III Limited Partnership, North 00 Degrees, 13 Minutes, 34 Seconds West, 590.37 feet, to the
POINT OF BEGINNING, as shown on the plat of the survey by Smith Surveyors, Inc., on the 20th Day of November 2012.

 

Exhibit AConverted by EDGARwiz

EQUITY PURCHASE AGREEMENT

BY AND BETWEEN

SAUER ENERGY, INC.

AND

BEAUFORT CAPITAL PARTNERS, LLC

THIS EQUITY PURCHASE AGREEMENT entered into as of the 21st day of December, 2015, (this "AGREEMENT"), by and between Beaufort Capital Partners, LLC, a New York limited liability corporation ("INVESTOR"), and Sauer Energy, Inc., a Nevada corporation (the "COMPANY").

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to Investor, from time to time as provided herein, and Investor shall purchase up to Three Million Dollars ($3,000,000) of the Company's Common Stock (as defined below); and

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I CERTAIN DEFINITIONS

Section 1.1 DEFINED TERMS 

As used in this Agreement, the following terms shall have the following meanings specified or indicated (such meanings to be equally applicable to both the singular and plural forms of the terms defined)

"AGREEMENT" shall have the meaning specified in the preamble hereof.

"BY-LAWS" shall have the meaning specified in Section 4.7.

"CLAIM NOTICE" shall have the meaning specified in Section 9.3(a).

"CLEARING DATE" shall be the date in which the Estimated Put Shares (as defined in Section 2.2(a)) have been deposited into the Investor's brokerage account.

"CLOSING" shall mean one of the closings of a purchase and sale of shares of Common Stock pursuant to Section 2.3.

"CLOSING CERTIFICATE" shall mean the closing certificate of the Company in the form of Exhibit B hereto.

"CLOSING PRICE" shall mean the closing bid price for the Company's common stock on the Principal Market on a Trading Day as reported by Bloomberg Finance L.P.

"COMMITMENT PERIOD" shall mean the period commencing on the Effective Date, and ending on the earlier of (i) the date on which Investor shall have purchased Put Shares pursuant to this Agreement for an aggregate Purchase Price of the Maximum Commitment Amount, (ii) the date occurring thirty six (36) months from the date of commencement of the Commitment Period; or (iii) such date as the Registration Statement is no longer effective and no post effective amendment thereto has been effective for forty five (45) days. .

"COMMON STOCK" shall mean the Company's common stock, $0.001 par value per share, and any 

1

shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of dividends (as and when declared) and assets (upon liquidation of the Company).

"COMMON STOCK EQUIVALENTS" shall mean any securities that are convertible into or exchangeable for Common Stock or any options or other rights to subscribe for or purchase Common Stock or any such convertible or exchangeable securities. 

"COMPANY" shall have the meaning specified in the preamble to this Agreement.

"DAMAGES" shall mean any loss, claim, damage, liability, cost and expense (including, without limitation, reasonable attorneys' fees and disbursements and costs and expenses of expert witnesses and investigation).

"DISPUTE PERIOD" shall have the meaning specified in Section 9.3(a).

"DOLLAR VOLUME" shall mean the product of (a) the Closing Price multiplied by (b) the trading volume on the Principal Market on a Trading Day.

"DTC" shall have the meaning specified in Section 2.3.

"DWAC" shall have the meaning specified in Section 2.3.

"EFFECTIVE DATE" shall mean the date that the Registration Statement is declared effective by the SEC.

"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder.

"FAST" shall have the meaning specified in Section 2.3.

"FINRA" shall mean the Financial Industry Regulatory Authority, Inc.

"INDEMNIFIED PARTY" shall have the meaning specified in Section 9.3(a).

"INDEMNIFYING PARTY" shall have the meaning specified in Section 9.3(a).

"INDEMNITY NOTICE" shall have the meaning specified in Section 9.3(b).

"INVESTMENT AMOUNT" shall mean the dollar amount to be invested by Investor to purchase Put Shares with respect to any Put as notified by the Company to Investor in accordance with Section 2.2.

"INVESTOR" shall have the meaning specified in the preamble to this Agreement.

"LEGEND" shall have the meaning specified in Section 8.1.

"MARKET PRICE" shall mean the lowest Closing Price on the Principal Market for any Trading Day during the Valuation Period, as reported by Bloomberg Finance L.P.

"MATERIAL ADVERSE EFFECT" shall mean any effect on the business, operations, properties, or financial condition of the Company that is material and adverse to the Company and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform its obligations under any of this Agreement.

"MAXIMUM COMMITMENT AMOUNT" shall mean Three Million Dollars ($3,000,000).

“MAXIMUM PUT AMOUNT” shall mean 250% of the average daily trading volume of the shares for 

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the five (5) trading days preceding the Put Notice. 

"PERSON" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

"PRINCIPAL MARKET" shall mean any of the national exchanges (i.e. NYSE, NYSE AMEX, Nasdaq), OTCQX, the OTC Bulletin Board, OTCQB or other principal exchange which is at the time the principal trading exchange or market for the Common Stock.

"PURCHASE PRICE" shall mean 72% of the Market Price on such date on which the Purchase Price is calculated in accordance with the terms and conditions of this Agreement.

"PUT" shall mean the right of the Company to require the Investor to purchase shares of Common Stock, subject to the terms and conditions of this Agreement.

"PUT DATE" shall mean any Trading Day during the Commitment Period that a Put Notice is deemed delivered pursuant to Section 2.2(b).

"PUT NOTICE" shall mean a written notice, substantially in the form of Exhibit A hereto, to Investor setting forth the Investment Amount with respect to which the Company intends to require Investor to purchase shares of Common Stock pursuant to the terms of this Agreement.

"PUT SHARES" shall mean all shares of Common Stock issued or issuable pursuant to a Put that has been exercised or may be exercised in accordance with the terms and conditions of this Agreement.

"REGISTERED SECURITIES" shall mean the (a) Put Shares, and (b) any securities issued or issuable with respect to any of the foregoing by way of exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registered Securities, once issued such securities shall cease to be Registrable Securities when (i) a Registration Statement has been declared effective by the SEC and such Registrable Securities have been disposed of pursuant to a Registration Statement, (ii) such Registrable Securities have been sold under circumstances under which all of the applicable conditions of Rule 144 are met, (iii) such time as such Registrable Securities have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act or (iv) in the opinion of counsel to the Company, which counsel shall be reasonably acceptable to Investor, such Registrable Securities may be sold without registration under the Securities Act or the need for an exemption from any such registration requirements and without any time, volume or manner limitations pursuant to Rule 144(b)(i) (or any similar provision then in effect) under the Securities Act.

"REGISTRATION STATEMENT" shall mean the Company's effective registration statement on file with the SEC, and any follow up registration statement or amendment thereto.

"REGULATION D" shall mean Regulation D promulgated under the Securities Act.

"RULE 144" shall mean Rule 144 under the Securities Act or any similar provision then in force under the Securities Act.

"SEC" shall mean the Securities and Exchange Commission.

"SECURITIES ACT" shall have the meaning specified in the recitals of this Agreement.

"SEC DOCUMENTS" shall mean, as of a particular date, all reports and other documents filed by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act since the end of the Company's then 

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most recently completed and reported fiscal year as of the time in question (provided that if the date in question is within ninety days of the beginning of the Company's fiscal year, the term shall include all documents filed since the beginning of the preceding fiscal year).

"SHORT SALES" shall mean all "short sales" as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).

"SUBSCRIPTION DATE" shall mean the date on which this Agreement is executed and delivered by the Company and Investor.

"THIRD PARTY CLAIM" shall have the meaning specified in Section 9.3(a).

"TRADING DAY" shall mean a day on which the Principal Market shall be open for business.

"TRANSACTION DOCUMENTS" shall mean this Agreement and the Registration Rights Agreement.

"TRANSFER AGENT" shall mean the transfer agent for the Common Stock (and to any substitute or replacement transfer agent for the Common Stock upon the Company's appointment of any such substitute or replacement transfer agent).

"UNDERWRITER" shall mean any underwriter participating in any disposition of the Registered Securities on behalf of Investor pursuant to the Registration Statement.

"VALUATION EVENT" shall mean an event in which the Company at any time during a Valuation Period takes any of the following actions:

(a) subdivides or combines the Common Stock;

(b) pays a dividend in shares of Common Stock or makes any other distribution of shares of Common Stock, except for dividends paid with respect to any series of preferred stock authorized by the Company, whether existing now or in the future;

(c) issues any options or other rights to subscribe for or purchase shares of Common Stock other than pursuant to this Agreement, and other than options or stock grants issued or issuable to directors, officers and employees pursuant to a stock option program, whereby the price per share for which shares of Common Stock may at any time thereafter be issuable pursuant to such options or other rights shall be less than the Closing Price in effect immediately prior to such issuance;

(d) issues any securities convertible into or exchangeable for shares of Common Stock and the consideration per share for which shares of Common Stock may at any time thereafter be issuable pursuant to the terms of such convertible or exchangeable securities shall be less than the Closing Price in effect immediately prior to such issuance;

(e) issues shares of Common Stock otherwise than as provided in the foregoing subsections (a) through (d), at a price per share less, or for other consideration lower, than the Closing Price in effect immediately prior to such issuance, or without consideration; or

(f) makes a distribution of its assets or evidences of indebtedness to the holders of Common Stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections (a) through (e).

"VALUATION PERIOD" shall mean the period of ten (10) Trading Days immediately preceding the 

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Clearing Date associated with the applicable Put Notice during which the Purchase Price of the Common Stock is valued; provided, however, that if a Valuation Event occurs during any Valuation Period, a new Valuation Period shall begin on the Trading Day immediately after the occurrence of such Valuation Event and end on the tenth (10th) Trading Day thereafter. Investor shall notify the Company in writing of the occurrence of the Clearing Date associated with a Put Notice. The Valuation Period shall begin the first Trading Day following such written notice from Investor.

"VWAP" shall mean the daily volume weighted average price for the Company's common stock on the Principal Market on a Trading Day as reported by Bloomberg Finance L.P.

ARTICLE II PURCHASE AND SALE OF COMMON STOCK

Section 2.1 INVESTMENTS.

PUTS. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII), on any Put Date the Company may exercise a Put by the delivery of a Put Notice. The number of Put Shares that Investor shall purchase pursuant to such Put shall be determined by dividing the Investment Amount specified in the Put Notice by the Purchase Price with respect to such Put Notice.

Section 2.2 MECHANICS.

(a) PUT NOTICE. At any time and from time to time during the Commitment Period, the Company may deliver a Put Notice to Investor, subject to the conditions set forth in Section 7.2; provided, however, that the Investment Amount identified in the applicable Put Notice, when taken together with all prior Put Notices, shall not exceed the Maximum Commitment Amount and no Put Notice shall exceed the Maximum Put Amount. On the Put Date the Company shall deliver to Investor's brokerage account estimated put shares equal to the Investment Amount indicated in the Put Notice divided by the Closing Price on the Trading Day immediately preceding the Put Date, multiplied by one hundred twenty five percent (125%) (the "Put Shares"). On the Trading Date immediately following delivery of the Put Shares, Investor shall deliver payment by check or wire transfer to the Company as the Company may request in an amount equal to the par value of the Put Shares ("Par Value Payment"). 

(b) DATE OF DELIVERY OF PUT NOTICE. A Put Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by Investor if such notice is received on or prior to 12:00 noon New York time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon New York time on a Trading Day or at any time on a day which is not a Trading Day.

Section 2.3 CLOSINGS. The Closing of a Put shall occur upon the Trading Day following the day that the Put Shares are deposited in the Investor’s account and on such day the Investor shall deliver the Investment Amount specified in the Put Notice, less the Par Value Payment, by wire transfer of immediately available funds to an account designated by the Company.  In lieu of delivering physical certificates representing the Common Stock issuable in accordance with clause (a) of this Section 2.3, and provided that the Transfer Agent then is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of Investor, but subject to the applicable provisions of Article VIII hereof, the Company shall use its commercially reasonable efforts 

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to cause the Transfer Agent to electronically transmit the applicable Put Shares by crediting the account of the Investor's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system, and provide proof satisfactory to the Investor of such delivery. In addition, on or prior to such Closing Date, each of the Company and Investor shall deliver to each other all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein.

ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR

Investor represents and warrants to the Company that:

Section 3.1  INTENT. Investor is entering into this Agreement for its own account and Investor has no present arrangement (whether or not legally binding) at any time to sell the Registered Securities to or through any person or entity; provided, however, that Investor reserves the right to dispose of the Registered Securities at any time in accordance with federal and state securities laws applicable to such disposition.

Section 3.2 NO LEGAL ADVICE FROM THE COMPANY. The Investor acknowledges that it has had the opportunity to review this Agreement and the transactions contemplated by this Agreement with its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction.

Section 3.3 SOPHISTICATED INVESTOR. Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule 501 of Regulation D), and Investor has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Registered Securities. Investor acknowledges that an investment in the Registered Securities is speculative and involves a high degree of risk.

Section 3.4 AUTHORITY. (a) Investor has the requisite power and authority to enter into and perform its obligations under this Agreement and the transactions contemplated hereby in accordance with its terms; (b) the execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action and no further consent or authorization of Investor or its partners is required; and (c) this Agreement has been duly authorized and validly executed and delivered by Investor and constitutes a valid and binding obligation of Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application.

Section 3.5 NOT AN AFFILIATE. Investor is not an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company.

Section 3.6 ORGANIZATION AND STANDING. Investor is a limited liability company duly organized, validly existing and in good standing under the laws of New York and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Investor is duly qualified and in good standing in every jurisdiction in which the nature of 

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the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a material adverse effect on Investor.

Section 3.7 ABSENCE OF CONFLICTS. The execution and delivery of this Agreement and any other document or instrument contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, and compliance with the requirements hereof and thereof, will not (a) violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Investor, (b) violate any provision of any indenture, instrument or agreement to which Investor is a party or is subject, or by which Investor or any of its assets is bound, or conflict with or constitute a material default thereunder, (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Investor to any third party, or (d) require the approval of any third-party (that has not been obtained) pursuant to any material contract, instrument, agreement, relationship or legal obligation to which Investor is subject or to which any of its assets, operations or management may be subject.

Section 3.8 DISCLOSURE; ACCESS TO INFORMATION. Investor had an opportunity to review copies of the SEC Documents filed on behalf of the Company and has had access to all publicly available information with respect to the Company.

Section 3.9 MANNER OF SALE. At no time was Investor presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising.

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Investor that, except as disclosed in the SEC Documents:

Section 4.1 ORGANIZATION OF THE COMPANY. The Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Nevada and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect.

Section 4.2 AUTHORITY. (a) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and to issue the Put Shares; (b) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required; and (c) each of this Agreement and has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. 

Section 4.3 CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of 650,000,000 shares of Common Stock, $0.0001 par value per share, of which 176,164,232 

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shares were issued and outstanding as of December 21, 2015, and no other class of securities.  Except as otherwise disclosed in the SEC Documents, there are no outstanding securities which are convertible into shares of Common Stock, whether such conversion is currently exercisable or exercisable only upon some future date or the occurrence of some event in the future.  All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. 

Section 4.4 COMMON STOCK. The Company is in full compliance with all reporting requirements of the Exchange Act, and the Company has maintained all requirements for the continued listing or quotation of the Common Stock, and such Common Stock is currently listed or quoted on the Principal Market which is presently the OTCQB.

Section 4.5 SEC DOCUMENTS. The Company may make available to Investor true and complete copies of the SEC Documents (including, without limitation, proxy information and solicitation materials). To the Company's knowledge, the Company has not provided to Investor any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and other federal laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form and substance in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (a) as may be otherwise indicated in such financial statements or the notes thereto or (b) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 

Section 4.6 VALID ISSUANCES. When issued and paid for as herein provided, the Put Shares shall be duly and validly issued, fully paid, and non-assessable. The sales of the Put Shares pursuant to this Agreement, and the Company's performance of its obligations hereunder, shall not (a) result in the creation or imposition of any liens, charges, claims or other encumbrances upon the Put Shares, or any of the assets of the Company, or (b) entitle the holders of outstanding shares of Common Stock to preemptive or other rights to subscribe to or acquire the Common Stock or other securities of the Company. The Put Shares shall not subject Investor to personal liability, in excess of the subscription price by reason of the ownership thereof.

Section 4.7 NO CONFLICTS. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, including without limitation the issuance of the Put Shares, do not and will not (a) result in a violation of the Company's Articles of Incorporation or By-Laws or (b) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to 

8

which the Company is a party, or (c) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect) nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Common Stock in accordance with the terms hereof (other than any SEC, FINRA or state securities filings that may be required to be made by the Company subsequent to any Closing, any registration statement that may be filed pursuant hereto); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of Investor herein.

Section 4.8 NO MATERIAL ADVERSE CHANGE. Since November , 2015 no event has occurred that would have a Material Adverse Effect on the Company. 

Section 4.9 LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the Company's SEC filings there are no lawsuits or proceedings pending or to the knowledge of the Company threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which would have a Material Adverse Effect. No judgment, order, writ, injunction or decree or award has been issued by or, so far as is known by the Company, requested of any court, arbitrator or governmental agency which would have a Material Adverse Effect. 

Section 4.10 DILUTION. The number of shares of Common Stock issuable as Put Shares may increase substantially in certain circumstances, including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines during the period between the Effective Date and the end of the Commitment Period. The Company's executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded in its good faith business judgment that such issuance is in the best interests of the Company.

ARTICLE V COVENANTS OF INVESTOR

Section 5.1 COMPLIANCE WITH LAW; TRADING IN SECURITIES. Investor's trading activities with respect to shares of the Common Stock will be in compliance with all applicable state and federal securities laws, rules and regulations and the rules and regulations of FINRA and the Principal Market on which the Common Stock is listed or quoted.

Section 5.2 SHORT SALES AND CONFIDENTIALITY. Neither Investor nor any affiliate of the Investor acting on its behalf or pursuant to any understanding with it will execute any Short Sales during the period from the date hereof to the end of the Commitment Period. For the purposes hereof, and in accordance with Regulation SHO, the sale after delivery of a Put Notice of such number of shares of Common Stock reasonably expected to be purchased under a Put Notice shall not be deemed a Short Sale.  Other than to other Persons party to this Agreement, Investor has maintained the 

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confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).

ARTICLE VI COVENANTS OF THE COMPANY

Section 6.1 RESERVATION OF COMMON STOCK. The Company will, from time to time as needed in advance of a Closing Date, reserve and keep available until the consummation of such Closing, free of preemptive rights sufficient shares of Common Stock for the purpose of enabling the Company to satisfy its obligation to issue the Put Shares to be issued in connection therewith. The number of shares so reserved from time to time, as theretofore increased or reduced as hereinafter provided, may be reduced by the number of shares actually delivered hereunder.

Section 6.2 LISTING OF COMMON STOCK. If the Company applies to have the Common Stock traded on any other Principal Market, it shall include in such application the Put Shares, and shall take such other action as is necessary to cause the Common Stock to be listed on such other Principal Market as promptly as possible. The Company shall use its commercially reasonable efforts to continue the listing and trading of the Common Stock on the Principal Market (including, without limitation, maintaining sufficient net tangible assets) and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the FINRA and the Principal Market.

ARTICLE VII CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING

Section 7.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO ISSUE AND SELL COMMON STOCK. The obligation hereunder of the Company to issue and sell the Put Shares to Investor is subject to the satisfaction of each of the conditions set forth below.

(a) ACCURACY OF INVESTOR'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of Investor shall be true and correct in all material respects as of the date of this Agreement and as of the date of each such Closing as though made at each such time.

(b) PERFORMANCE BY INVESTOR. Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Investor at or prior to such Closing.

(c) PRINCIPAL MARKET REGULATION. The Company shall not issue any Put Shares, and the Investor shall not have the right to receive any Put Shares, if the issuance of such shares would exceed the aggregate number of shares of Common Stock which the Company may issue without breaching the Company's obligations under the rules or regulations of the Principal Market (the "EXCHANGE CAP").

Section 7.2 CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER A PUT NOTICE AND THE OBLIGATION OF INVESTOR TO PURCHASE PUT SHARES. The right of the Company to deliver a Put Notice and the obligation of Investor hereunder to acquire and pay for the Put Shares is subject to the satisfaction of each of the following conditions:

(a) EFFECTIVE REGISTRATION STATEMENT. The Registration Statement, and any amendment or supplement thereto, shall remain effective for the sale by Investor of the Registered Securities subject to such Put Notice, and (i) neither the Company nor Investor shall have received notice that the SEC 

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has issued or intends to issue a stop order with respect to such Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or intends or has threatened to do so and (ii) no other suspension of the use or withdrawal of the effectiveness of such Registration Statement or related prospectus shall exist.

(b) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company shall be true and correct in all material respects (except for representations and warranties specifically made as of a particular date), except for any conditions which have temporarily caused any representations or warranties herein to be incorrect and which have been corrected with no continuing impairment to the Company or Investor.

(c) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company.

(d) NO  INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or adopted by any court or governmental authority of competent jurisdiction that prohibits or directly and materially adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or materially adversely affecting any of the transactions contemplated by this Agreement.

(e) ADVERSE CHANGES. Since the date of filing of the Company's most recent SEC Document, no event that had or is reasonably likely to have a Material Adverse Effect has occurred.

(f) NO SUSPENSION OF TRADING IN OR DE-LISTING OF COMMON STOCK. The trading of the Common Stock shall not have been suspended by the SEC, the Principal Market or the FINRA and the Common Stock shall have been approved for listing or quotation on and shall not have been de-listed from the Principal Market.

(g) FIVE PERCENT LIMITATION. On each Closing Date, the number of Put Shares then to be purchased by Investor shall not exceed the number of such shares that, when aggregated with all other shares of Common Stock then owned by Investor beneficially or deemed beneficially owned by Investor, would result in Investor owning more than 4.99% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Section 16 of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section, in the event that the amount of Common Stock outstanding as determined in accordance with Section 16 of the Exchange Act and the regulations promulgated thereunder is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether Investor, when aggregating all purchases of Common Stock made pursuant to this Agreement, would own more than 4.99% of the Common Stock following such Closing Date.

(h) PRINCIPAL MARKET REGULATION.  The Company shall not issue any Put Shares, and the Investor shall not have the right to receive any Put Shares, if the issuance of such shares would exceed the Exchange Cap.

(i) NO KNOWLEDGE. The Company shall have no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective (which event is more likely than not to occur within the fifteen (15) Trading Days following the Trading Day on which such Put Notice is deemed delivered).

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(j) NO VIOLATION OF SHAREHOLDER APPROVAL REQUIREMENT. The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market.

(k) NO VALUATION EVENT. No Valuation Event shall have occurred since the Put Date. 

(l) PUT NOTICE CERTIFICATE. On the date of delivery of each Put Notice, Investor shall have received a certificate in substantially the form and substance of Exhibit B hereto, executed by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate.

ARTICLE VIII LEGENDS

Section 8.1 NO STOCK LEGEND OR STOCK TRANSFER RESTRICTIONS. No legend shall be placed on the share certificates representing the Put Shares.

Section 8.2  INVESTOR'S COMPLIANCE. Nothing in this Article VIII shall affect in any way Investor's obligations under any agreement to comply with all applicable securities laws upon the sale of the Common Stock.

ARTICLE IX NOTICES; INDEMNIFICATION

Section 9.1 NOTICES. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (a) personally served, (b) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (c) delivered by reputable air courier service with charges prepaid, or (d) transmitted by hand delivery, telegram, facsimile, or email as a PDF, addressed as set forth below or to such other address as such party shall have specified most recently by written notice given in accordance herewith. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (i) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, or email as a PDF, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (ii) on the second business day following the date of mailing by express courier service or on the fifth business day after deposited in the mail, in each case, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.

The addresses for such communications shall be: If to the Company:

Sauer Energy, Inc., 1620 Emerson Avenue, Oxnard, CA 93033;  Attn.: Dieter Sauer, Jr., CEO; Tel and Fax: 888-829-8748 EMAIL: Dieter@SauerEnergy.com

Copy to (which shall not constitute notice): Frank J. Hariton, Esq., 1065 Dobbs Ferry Road, White Plains, NY 10607; Tel: 914-674-4373 Fax: 914-693-7353 EMAIL: hariton@sprynet.com.

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If to Investor:

Beaufort Capital Partners, LLC, 660 White Plains Road, Suite 455, Tarrytown, NY 10591, Attn.: Robert P. Marino, Managing Member; Tel 914 332 4500; Fax 914 332 4577 EMAIL Rmarino@beaufortcp.com

Either party hereto may from time to time change its address or facsimile number for notices under this Section 9.1 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto.

Section 9.2 INDEMNIFICATION. Each party (an "Indemnifying Party") agrees to indemnify and hold harmless the other party along with its officers, directors, employees, and authorized agents, and each Person or entity, if any, who controls such party within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (an "Indemnified Party") from and against any Damages, joint or several, and any action in respect thereof to which the Indemnified Party becomes subject to, resulting from, arising out of or relating to (i) any misrepresentation, breach of warranty or non-fulfillment of or failure to perform any covenant or agreement on the part of Indemnifying Party contained in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or supplement thereto, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in the light of the circumstances under which the statements therein were made, not misleading, or (iv) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law, as such Damages are incurred, except to the extent such Damages result primarily from Indemnified Party's failure to perform any covenant or agreement contained in this Agreement or Indemnified Party's negligence, recklessness or bad faith in performing its obligations under this Agreement; provided, however, that the foregoing indemnity agreement shall not apply to any Damages of an Indemnified Party to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made by an Indemnifying Party in reliance upon and in conformity with written information furnished to the Indemnifying Party by the Indemnified Party expressly for use in the Registration Statement, any post-effective amendment thereof or supplement thereto, or any preliminary prospectus or final prospectus (as amended or supplemented).

Section 9.3 METHOD OF ASSERTING INDEMNIFICATION CLAIMS. All claims for indemnification by any Indemnified Party (as defined below) under Section 9.2 shall be asserted and resolved as follows:

(a) In the event any claim or demand in respect of which an Indemnified Party might seek indemnity under Section 9.2 is asserted against or sought to be collected from such Indemnified Party by a person other than a party hereto or an affiliate thereof (a "THIRD PARTY CLAIM"), the Indemnified Party shall deliver a written notification, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim for indemnification that is being asserted under any provision of Section 9.2 against an Indemnifying Party, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in 

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good faith, of such Third Party Claim (a "CLAIM NOTICE") with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party's ability to defend has been prejudiced by such failure of the Indemnified Party. The Indemnifying Party shall notify the Indemnified Party as soon as practicable within the period ending thirty (30) calendar days following receipt by the Indemnifying Party of either a Claim Notice or an Indemnity Notice (as defined below) (the "DISPUTE PERIOD") whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party under Section 9.2 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim.

(i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 9.3(a), then the Indemnifying Party shall have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party shall not be indemnified in full pursuant to Section 9.2). The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this clause (i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this clause (i), and except as provided in the preceding sentence, the Indemnified Party shall bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may takeover the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under Section 9.2 with respect to such Third Party Claim.

(ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to Section 9.3(a), or if the Indemnifying Party gives such notice but fails to prosecute vigorously and diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party(with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third 

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Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this clause (ii), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability or the amount of its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this clause (ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this clause (ii), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation.

(iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability or the amount of its liability to the Indemnified Party with respect to the Third Party Claim under Section 9.2 or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party with respect to such Third Party Claim, the amount of Damages specified in the Claim Notice shall be conclusively deemed a liability of the Indemnifying Party under Section 9.2 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute; provided, however, that if the dispute is not resolved within thirty (30) days after the Claim Notice, the Indemnifying Party shall be entitled to institute such legal action as it deems appropriate.

(b) In the event any Indemnified Party should have a claim under Section 9.2 against the Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver a written notification of a claim for indemnity under Section 9.2 specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim (an "INDEMNITY NOTICE") with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that the Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim or the amount of the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim or the amount of the claim described in such Indemnity Notice, the amount of Damages specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under Section 9.2 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute; provided, however, that if the dispute is not resolved within thirty (30) days after the Claim Notice, the Indemnifying Party shall be entitled to institute such legal action as it deems appropriate.

(c) The Indemnifying Party agrees to pay the Indemnified Party, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. 

(d) The indemnity provisions contained herein shall be in addition to (i) any cause of action or similar 

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rights of the Indemnified Party against the Indemnifying Party or others, and (ii) any liabilities the Indemnifying Party may be subject to.

ARTICLE X MISCELLANEOUS

Section 10.1 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflicts of law. Each of the Company and Investor hereby submit to the exclusive jurisdiction of the United States Federal and state courts located in Westchester County New York with respect to any dispute arising under this Agreement, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby.

Section 10.2 JURY TRIAL WAIVER. The Company and the Investor hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Transaction Documents.

Section 10.3 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and Investor and their respective successors. Neither this Agreement nor any rights of Investor or the Company hereunder may be assigned by either party to any other person.

Section  10.4 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the Company and Investor and their respective successors, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 10.5 TERMINATION. The Company may terminate this Agreement at any time by written notice to the Investor. Additionally, this Agreement shall terminate at the end of Commitment Period or as otherwise provided herein; provided, however, that the provisions of Articles IX, and Sections 10.1 and 10.2 shall survive the termination of this Agreement for a period of twenty four (24) months.

Section 10.6 ENTIRE AGREEMENT, AMENDMENT; NO WAIVER. This Agreement and the instruments referenced herein contain the entire understanding of the Company and Investor with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.

Section 10.7 FEES AND EXPENSES. The Company agrees to pay its own expenses in connection with the preparation of this Agreement and performance of its obligations hereunder. The Company shall pay all stamp or other similar taxes and duties levied in connection with issuance of the Put Shares pursuant hereto.

Section 10.8 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. This Agreement may be delivered to the other parties hereto by facsimile transmission or email of a copy of this Agreement bearing the signature of the parties so delivering this Agreement.

Section 10.9 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall 

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continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party.

Section 10.10 FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

Section 10.11 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

Section 10.12 EQUITABLE RELIEF. The Company recognizes that in the event that it fails to perform, observe, or discharge any or all of its obligations under this Agreement, any remedy at law may prove to be inadequate relief to Investor. The Company therefore agrees that Investor shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

Section 10.13 TITLE AND SUBTITLES. The titles and subtitles used in this Agreement are used for the convenience of reference and are not to be considered in construing or interpreting this Agreement.

Section 10.14 REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity relied upon for the determination of the Closing Price for the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg Finance L.P. or any successor thereto. The written mutual consent of Investor and the Company shall be required to employ any other reporting entity.

Section 10.15 PUBLICITY. The Company and Investor shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other parties with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the name of Investor without the prior written consent of such Investor, except to the extent required by law. Investor acknowledges that this Agreement and all or part of the Transaction Documents may be deemed to be "material contracts" as that term is defined by Item 601(b)(10) of Regulation S-K, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the Securities Act or the Exchange Act. Investor further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel.

IN WITNESS WHEREOF, the parties hereto have caused this Equity Purchase Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above.

Beaufort Capital Partners, LLC

By:__________________________________

        Robert P. Marino, Managing Member

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Sauer Energy, Inc.

By: _____________________

        Dieter R. Sauer, Jr., CEO

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EXHIBITS

EXHIBIT A Put Notice

EXHIBIT B Closing Certificate

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EXHIBIT A

FORM OF PUT NOTICE

TO: Beaufort Capital Partners, LLC

We refer to the Equity Purchase Agreement dated February --, 2015 (the "Agreement") entered into by Sauer Energy, Inc. (the "Company") and you. Capitalized terms defined in the Agreement shall, unless otherwise defined, have the same meaning when used herein.

We hereby:

1. Give you notice that we require you to purchase $_________ (the "Investment Amount") in Put Shares;

2. Determine the Purchase Price for this Put, as defined in Section 2.2(c) of the Agreement, to be $___________; 

3.  Determine the Maximum Put Amount to be ______ shares; and

4. Certify that, as of the date hereof, to the best of our knowledge, the conditions set forth in Section 7.2 of the Agreement are satisfied.

Date: _____________, 20__

Sauer Energy, Inc.

By: ______________________ 

          Dieter Sauer, Jr., CEO

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EXHIBIT B

FORM OF

CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER

OF

Sauer Energy, Inc.

Pursuant to Section 7.2(m) of that certain Equity Purchase Agreement dated February___2015 (the "Agreement") by and between the Company and Beaufort Capital Partners, LLC (the "Investor"), the undersigned, in his capacity as the Chief Executive Officer of Sauer Energy, Inc. (the "Company"), and not in his individual capacity, hereby certifies, as of the date hereof (such date, the "Condition Satisfaction Date"), the following:

1. The representations and warranties of the Company are true and correct in all material respects as of the Condition Satisfaction Date as though made on the Condition Satisfaction Date (except for representations and warranties specifically made as of a particular date) with respect to all periods, and as to all events and circumstances occurring or existing to and including the Condition Satisfaction Date, except for any conditions which have temporarily caused any representations or warranties of the Company set forth in the Agreement to be incorrect and which have been corrected with no continuing impairment to the Company or Investor; and

2. All of the Company's conditions to Closing set forth in Section 7.2 of the Agreement have been satisfied as of the Condition Satisfaction Date.

Capitalized terms used herein shall have the meanings set forth in the Agreement unless otherwise defined herein. IN WITNESS WHEREOF, the undersigned has hereunto affixed his hand as of the ___ day of ____________, 20__.

By: _______________

      Dieter R. Sauer, Jr., 

      Chief Executive Officer

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