Document:

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                                                                    EXHIBIT 10.2

                                 LOAN AGREEMENT

         THIS LOAN AGREEMENT (this "Agreement") is made as of March 30, 2001, by
and between ARC POST OAK, L.P., a Tennessee limited partnership (together with
its successors and assigns, "Borrower"), and GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation (together with its successors and assigns,
"Lender").

                                    RECITALS

         A. Borrower has requested that Lender make a loan to Borrower in the
principal sum of $17,250,000.00.

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

                                    AGREEMENT

         NOW, THEREFORE, it is hereby agreed as follows:

                                   ARTICLE I
                 DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.

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

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

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

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

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

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

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

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              "CAP ASSIGNMENT" means an Interest Rate Cap Assignment and
Security Agreement to be executed by and between Borrower and Lender if Lender
requests a cap (as defined in Section 2.3 hereof), as such agreement may be
amended, modified or supplemented from time to time.

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

              "COMMITMENT LETTER" means the commitment letter issued by Lender
to Borrower dated March 27, 2001.

              "DEBT SERVICE COVERAGE FOR THE FACILITY" means a ratio in which
the first number is the sum of pre-tax "net income" of Borrower from the
operations of the Facility as set forth in the financial statements provided to
Lender (without deduction for Actual Management Fees or expenses paid or
incurred), calculated based upon the preceding twelve (12) months (or such
lesser period as shall have elapsed following the closing of the Loan), plus
interest expense and lease expense to the extent deducted in determining net
income and non-cash expenses or allowances for depreciation and amortization of
the Facility for said period, less either Assumed Management Fees or Actual
Management Fees (based upon the covenant to which such definition relates) for
said period, and the second number is the sum of the principal amounts due (even
if not paid) on the Loan (but which shall not include that portion associated
with the balloon payment of the Loan) for the applicable period plus the
interest amount due on the Loan for the applicable period not to exceed an
amount calculated at the applicable strike rate for which the cap provider, who
is obligated to make payments in accordance with the Cap Agreement (defined
below), agrees to make certain payments to or for the benefit of Borrower as set
forth in the Cap Documents (if applicable). In calculating "net income,"
Extraordinary Income and Extraordinary Expenses shall be excluded.

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

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

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

              "ENVIRONMENTAL PERMIT" means any permit, license, or other
authorization issued under any Hazardous Materials Law with respect to any
activities or businesses conducted on or in relation to the Land and/or the
Improvements.

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

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

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

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

              "FACILITY" means the facility known as "The Hampton at Post Oak",
presently a 244-unit continuing care facility comprised of 142 residential, 46
assisted living and 56 skilled nursing units, located on the Land, as it may now
or hereafter exist, together with any other general or specialized care
facilities, if any (including any Alzheimer's care unit, subacute, and any
nursing facility), now or hereafter operated on the Land.

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

              "GOVERNMENTAL AUTHORITY" means any board, commission, department
or body of any municipal, county, state or federal governmental unit, or any
subdivision of any of them, that has or acquires jurisdiction over the Land
and/or the Improvements or the use, operation or improvement of the Land and/or
the Facility.

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

              "GUARANTY AGREEMENT" means that certain Payment and Performance
Guaranty Agreement of even date herewith from Guarantor to Lender.

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

              "HAZARDOUS MATERIALS LAWS" means all federal, state, and local
laws, ordinances and regulations and standards, rules, policies and other
governmental requirements, administrative rulings and court judgments and
decrees in effect now or in the future and

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including all amendments, that relate to Hazardous Materials and apply to
Borrower or to the Land and/or the Improvements. Hazardous Materials Laws
include, but are not limited to, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic
Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33
U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, and their state analogs.

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

              "INDEBTEDNESS" means any (a) obligations for borrowed money, (b)
obligations, payment for which by their terms are being deferred by more than
sixty (60) days, representing the deferred purchase price of property other than
accounts payable arising in connection with the purchase of inventory customary
in the trade and in the ordinary course of Borrower's business, (c) obligations,
whether or not assumed, secured by Liens on or payable out of the proceeds or
production from the Accounts and/or property now or hereafter owned or acquired,
and (d) the amount of any other obligation (including obligations under
financing leases) which would be shown as a liability on a balance sheet
prepared in accordance with GAAP, except those obligations for resident security
deposits and pre-paid rent received from residents of the Facility and except
those obligations described in (b) above, payment for which by their terms are
being deferred by less than sixty (60) days.

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

              "LAND" means the real estate located in Houston, Harris County,
Texas, which is more particularly described in Exhibit "A" hereto, upon which
the Facility is located and which, concurrent with the Closing Date, will be
owned by the Borrower.

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

              "LOAN" means the Loan in the principal sum of $17,250,000.00 made
by Lender to Borrower as of the date hereof.

              "LOAN DOCUMENTS" means, collectively, this Agreement, the Note,
the Mortgage, the Assignment of Leases and Rents, the Guaranty Agreement, the
Debt Service Reserve Fund

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Agreement, and the Subordination Agreement, together with any and all other
documents executed by Borrower or others, evidencing, securing or otherwise
relating to the Loan.

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

              "MANAGEMENT AGREEMENT" means that certain Management Agreement
dated January 1, 1999, by and between Fort Austin Limited Partnership and
Guarantor, which agreement was assigned by Guarantor to Manager pursuant to an
Assignment of Management Agreement dated March 1, 2000 and has been assigned by
such limited partnership to Borrower pursuant to an Assignment of Management
Agreement of even date herewith; the Management Agreement obligates Manager to
operate and manage the Facility.

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

              "MATURITY DATE" means July 1, 2002.

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

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

              "MORTGAGE" means that certain Deed of Trust and Security Agreement
of even date herewith from Borrower in favor of or for the benefit of Lender,
encumbering the real estate located in Harris County, Texas, which is more
particularly described in Exhibit "A" hereto, and upon which the Facility is
located.

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

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

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

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

              "PERMITTED ENCUMBRANCES" has the meaning given to that term in
Section 5.2 hereof.

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

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

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

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

              "SINGLE PURPOSE ENTITY" means a Person, which owns no interest or
property other than the Mortgaged Property or interests in Borrower.

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

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

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

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

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

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

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

                                   ARTICLE II
                                TERMS OF THE LOAN

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

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

         2.3. INTEREST RATE PROTECTION To protect against fluctuations in
interest rates, upon request by Lender, the Borrower shall make arrangements for
an interest rate cap (a "Cap") to be in place and maintained at all times with
respect to the Note. The Cap must be in place within ten (10) days after a
request therefor and shall not terminate earlier than the Maturity Date. The Cap
shall be secured and documented on terms and conditions approved by, and with a
counterparty (who is obligated to make payments in accordance with the rate cap
agreement pertaining to the Cap) acceptable to Lender. The Cap shall be
evidenced and governed by such documents (the "Cap Documents") as shall be
acceptable to, and which shall be in form and content acceptable to, Lender.

                                  ARTICLE III
                    BORROWER'S REPRESENTATIONS AND WARRANTIES

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

         3.1. EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized
and validly existing limited partnership, has the power to own its properties
and to carry on its business as is now being conducted, and is duly qualified to
do business and is in good standing in every

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jurisdiction in which the character of the properties owned by it or in which
the transaction of its business makes its qualification necessary.

         3.2. POWER AND AUTHORITY. Borrower has full power and authority to
borrow the indebtedness evidenced by the Note and to incur the Loan Obligations
provided for herein, all of which have been authorized by all proper and
necessary action. All consents, approvals, authorizations, orders or filings of
or with any court or governmental agency or body, if any, required for the
execution, delivery and performance of the Loan Documents by Borrower have been
obtained or made.

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

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

         3.5. PENDING MATTERS.

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

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

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

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operations, or prospects of Borrower since the dates of such statements except
as fully disclosed in writing with or prior to the delivery of such statements.
All financial statements of the operations of the Facility heretofore or
hereafter provided to Lender are and will be true and complete in all material
respects as of their respective dates.

         3.7. COMPLIANCE WITH FACILITY LAWS. The Facility is currently operated
as a 244-unit continuing care facility and is comprised of 142 independent
living units, 46 assisted living units and 56 skilled nursing units duly
licensed under the applicable laws of the State of Texas. Borrower is the lawful
owner of all Permits for the Facility, including, without limitation, any
applicable certificate of need, other than the license for the assisted living
beds and the license for the skilled nursing beds, which licenses have been
applied for by Borrower and under which licenses Borrower may operate the
Facility until such licenses are issued to the Borrower; all Permits (a) are in
full force and effect, (b) constitute all of the permits, licenses and
certificates required for the use, operation and occupancy thereof, (c) have not
been pledged as collateral for any other loan or Indebtedness, (d) are held free
from any restriction or any encumbrance which would materially adversely affect
the use or operation of the Facility, and (e) are not provisional, probationary
or restricted in any way. Borrower and Manager as well as the operation of the
Facility are in compliance in all material respects with the applicable
provisions of independent living facility, skilled nursing and/or assisted
living facility laws, rules, regulations and published interpretations to which
the Facility is subject. No waivers of any laws, rules, regulations, or
requirements (including, but not limited to, minimum area requirements per unit)
are required for the Facility to operate at the foregoing licensed unit
capacity. All Reimbursement Contracts with respect to the Facility are in full
force and effect, and Borrower and Manager are in good standing with all the
respective agencies governing such applicable Facility licenses, program
certification, and Reimbursement Contracts.

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

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

         3.10. THIRD PARTY PAYORS. There is no threatened or pending revocation,
suspension, termination, probation, restriction, limitation, or nonrenewal
affecting Borrower, Manager or the Facility or any participation or provider
agreement with any third-party payor, including Medicare, Medicaid, Blue Cross
and/or Blue Shield, and any other private commercial insurance managed care and
employee assistance program (such programs, the "Third-Party Payors' Programs")
to which Borrower or Manager presently is subject. All applicable Medicare,
Medicaid and private insurance cost reports and financial reports submitted by
Borrower or

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Manager are and will be materially accurate and complete and have not been and
will not be misleading in any material respects. No cost reports for the
Facility remain "open" or unsettled, except as otherwise disclosed.

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

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

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

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

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

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

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

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

         3.16. PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien
against the real and personal property described therein, prior to all other
liens or encumbrances, including those which may hereafter accrue, excepting
only Permitted Encumbrances.

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

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

         3.19. TRADE NAMES. Neither Borrower nor the Facility, which operates
under the trade name "The Hampton at Post Oak", has changed its name, been known
by any other name, or been a party to a merger, reorganization or similar
transaction within the last two (2) years.

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

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

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

              The execution and delivery of the Loan Documents, and the
borrowing of indebtedness hereunder, does not constitute a non-exempt prohibited
transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"). Borrower shall not engage in a non-exempt
prohibited transaction described in Section 406 of ERISA or Section 4975 of the
Code, as such sections relate to Borrower, or in any transaction that would
cause any obligation or action taken or to be taken hereunder or the exercise by
Lender of any of its rights under the Loan Documents) to be a non-exempt
prohibited transaction under ERISA.

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

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

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

         3.24. MANAGEMENT AGREEMENT. The Management Agreement is in full force
and effect, and there are no defaults (either monetary or non-monetary) by
Manager or Borrower thereunder.

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

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

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

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

                                       12
<PAGE>   13

                                   ARTICLE IV
                        AFFIRMATIVE COVENANTS OF BORROWER

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

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

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

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

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

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

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

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

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

                                       13
<PAGE>   14

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

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

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

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

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

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

              (j) All insurance required under this Section 4.5 shall have a
term of not less than one year and shall be in the form and amount and with
deductibles as, from time to time, shall be acceptable to Lender in its
commercially reasonable discretion, under valid and enforceable policies issued
by financially responsible insurers either licensed to transact business in the
State where the Facility is located, or obtained through a duly authorized
surplus lines insurance agent or otherwise in conformity with the laws of such
State and such insurer must have a long term senior debt rating of at least "AA"
by Standard & Poor's Ratings Group. Originals or certified copies of all
insurance policies shall be delivered to and held by Lender. All such policies
shall name Lender as an additional insured, shall provide for loss payable
solely

                                       14
<PAGE>   15

to Lender and shall contain: (a) standard "non-contributory mortgagee"
endorsement or its equivalent relating, inter alia, to recovery by Lender
notwithstanding the negligent or willful acts or omissions of Borrower and
notwithstanding (i) occupancy or use of the Facility for purposes more hazardous
than those permitted by the terms of such policy, (ii) any foreclosure or other
action taken by Lender pursuant to the Mortgage upon the occurrence of an Event
of Default, or (iii) any change in title or ownership of the Facility; and (b) a
provision that such policies shall not be canceled or amended, including,
without limitation, any amendment reducing the scope or limits of coverage, or
failed to be renewed, without at least thirty (30) days prior written notice to
Lender in each instance. With respect to insurance policies which require
payment of premiums annually, not less than thirty (30) days prior to the
expiration dates of the insurance policies obtained pursuant to this Agreement,
Borrower shall pay such amount, except to the extent Lender is escrowing sums
therefor pursuant to the Loan Documents. Not less than thirty (30) days prior to
the expiration dates of the insurance policies obtained pursuant to this
Agreement, originals or certified copies of renewals of such policies (or
certificates evidencing such renewals) bearing notations evidencing the payment
of premiums or accompanied by other evidence satisfactory to Lender of such
payment, which premiums shall not be paid by Borrower through or by any
financing arrangement, shall be delivered by Borrower to Lender. Borrower shall
not carry separate insurance, concurrent in kind or form or contributing in the
event of loss, with any insurance required under this Section 4.5. If the limits
of any policy required hereunder are reduced or eliminated due to a covered
loss, Borrower shall pay the additional premium, if any, in order to have the
original limits of insurance reinstated, or Borrower shall purchase new
insurance in the same type and amount that existed immediately prior to the
loss.

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

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

              (m) Neither Lender nor its agents or employees shall be liable for
any loss or damage insured by the insurance policies required to be maintained
under this Agreement; it being understood that (a) Borrower shall look solely to
its insurance company for the recovery of

                                       15
<PAGE>   16

such loss or damage, (b) such insurance company shall have no rights of
subrogation against Lender, its agents or employees, and (c) Borrower shall use
its best efforts to procure from such insurance company a waiver of subrogation
rights against Lender. If, however, such insurance policies do not provide for a
waiver of subrogation rights against Lender (whether because such a waiver is
unavailable or otherwise), then Borrower hereby agrees, to the extent permitted
by law and to the extent not prohibited by such insurance policies, to waive its
rights of recovery, if any, against Lender, its agents and employees, whether
resulting from any damage to the Facility, any liability claim in connection
with the Facility or otherwise. If any such insurance policy shall prohibit
Borrower from waiving such claims, then Borrower must obtain from such insurance
company a waiver of subrogation rights against Lender.

         4.6. PROCEEDS OF INSURANCE OR CONDEMNATION. Satisfy the following
conditions, if Lender, at its sole option, makes the net Proceeds of insurance
or condemnation (after payment of Lender's reasonable costs and expenses)
available to Borrower for Borrower's repair, restoration and replacement of the
Improvements, Equipment and Inventory damaged or taken:

              (a) The aggregate amount of all such Proceeds shall not exceed the
aggregate amount of all such Loan Obligations;

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

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

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

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

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

                  (ii) if loss or damage exceeds Fifty Thousand ($50,000),
fixed-price or guaranteed maximum cost bonded construction contracts for
completion of the repair and restoration work in accordance with such plans and
specifications,

                                       16
<PAGE>   17

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

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

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

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

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

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

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

              (j) Lender shall have a first lien and security interest in all
building materials and completed repair and restoration work and in all fixtures
and equipment acquired with such Proceeds, and Borrower shall execute and
deliver such mortgages, deeds of trust, security agreements, financing
statements and other instruments as Lender shall request to create, evidence, or
perfect such lien and security interest.

              (k) In the event and to the extent such Proceeds are not used or
permitted to be used (for any reason) for the repair, restoration and
replacement of the Improvements, Equipment and Inventory for which a loss or
damage has occurred, or, if the conditions set forth herein for such application
are otherwise not satisfied, then Lender shall be entitled without notice to or
consent from Borrower to apply such Proceeds, or the balance thereof, at
Lender's option either (a) to the full or partial payment or prepayment of the
Loan Obligations (without premium) in the manner aforesaid, or (b) to the
repair, restoration and/or replacement of all or any part of such Improvements,
Equipment and Inventory for which a loss or damage has occurred.

                                       17
<PAGE>   18

Notwithstanding the foregoing, all net proceeds of insurance or condemnation
(after payment of Lender's reasonable costs and expenses, including without
limitation, inspection fees) in an amount equal to Two Hundred Fifty Thousand
Dollars ($250,000.00) or less, per occurrence, shall be made available to
Borrower to be applied to repair or rebuild the Improvements, Equipment and
Inventory damaged or taken, if such repair or rebuilding is "economically
feasible". For purposes hereof, "economically feasible" shall mean that the
Improvements, Equipment, and Inventory for which loss or damage has resulted
shall be capable of being restored to their preexisting condition and utility in
all material respects with a value equal to or greater than the which existed
prior to such loss or damage and such restoration shall be capable of being
completed prior to the earlier to occur of (i) the expiration of business
interruption income insurance for the Facility (as described in Section 4.5(d)
above) as determined by the Lender or its operating adviser or (ii) the date
which is one hundred eighty (180) days prior to the Maturity Date.

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

         4.7. FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause
Guarantor and Manager to provide to Lender, at its address set forth in Section
8.7 and at GMAC Commercial Mortgage Corporation, 8333 Douglas Avenue, Suite
1460, Dallas, Texas 75225, the following financial statements and information on
a continuing basis during the term of the Loan:

              (a) Within one hundred twenty (120) days after the end of each
fiscal year of the Guarantor, consolidated financial statements for the
Guarantor and its subsidiaries, including Manager, Borrower and the Facility (if
different from the Borrower), prepared in accordance with generally accepted
accounting principles consistently applied, audited by a nationally recognized
accounting firm or independent certified public accounting firm acceptable to
the Lender, which statements shall include a balance sheet and a statement of
income and expenses for the year then ended. In lieu of its obligations
hereunder, Guarantor may submit to Lender, upon its filing thereof, a copy of
its Form 10 K as filed with the United States Securities and Exchange
Commission.

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

              (c) Within forty-five (45) days after the end of each fiscal
quarter of Borrower, unaudited interim financial statements of Borrower,
certified as true and correct in all

                                       18
<PAGE>   19

material respects by a financial officer of Borrower, subject to customary year
end adjustments, which statements shall be prepared in accordance with generally
accepted accounting principles consistently and shall include a balance sheet
and statement of income and expenses for the quarter then ended.

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

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

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

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

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

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

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

                                       19
<PAGE>   20

              (k) If and to the extent applicable, within ten (10) days of
receipt, a statement of the number of resident days for which the Facility has
received the Medicare default rate for any applicable period. For purposes
herein, "default rate" shall have the meaning ascribed to it in that certain
applicable Medicare rate notification letter prepared in connection with any
review or survey of the Facility.

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

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

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

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

              (p) If and to the extent applicable, Lender reserves the right to
require that the annual financial statements of Borrower be audited and prepared
by a nationally recognized accounting firm or independent certified public
accountant acceptable to Lender, at their respective sole cost and expense, if
(i) an Event of Default exists, (ii) if required by internal policy or by any
investor in any securities backed in whole or in part by the Loan or any rating
agency rating such securities, (iii) if Lender has reasonable grounds to believe
that the unaudited financial statements do not accurately represent the
financial condition of Borrower, Guarantor or Manager as the case may be, or
(iv) the financial results of the Borrower and/or Manager (as the case may be)
are no longer consolidated into Guarantor's audited financial statements.

              (q) Lender further reserves the right to require such other
financial information of Borrower, Guarantor, Manager and/or the Facility, in
such form and at such other times (including monthly or more frequently) as
Lender shall reasonably deem necessary, and Borrower agrees promptly to provide
or to cause to be provided, such information to Lender. All

                                       20
<PAGE>   21

financial statements must be in the form and detail as Lender may from time to
time reasonably request.

         4.8. COMPLIANCE CERTIFICATE. At the time of furnishing the quarterly
operating statements required under the foregoing section, furnish to Lender a
compliance certificate in the form attached hereto as Exhibit "E" executed by
its chief financial officer.

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

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

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

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

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

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

                                       21
<PAGE>   22

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

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

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

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

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

         4.14. DEBT SERVICE COVERAGE REQUIREMENTS.

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

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

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

              (b) If Borrower fails to achieve or provide evidence of
achievement of the Debt Service Coverage for the Facility as required above upon
fifteen (15) days written notice to Borrower, Borrower will deposit with Lender
additional cash or other liquid collateral in an amount which, when added to the
first number of the debt service coverage calculation, would have resulted in
the noncomplying debt service requirement having been satisfied. If such failure
continues for two (2) consecutive quarters, on the third consecutive quarter, if
Borrower again fails to achieve or provide evidence of the achievement of the
Debt Service Coverages required

                                       22
<PAGE>   23

above, upon fifteen (15) days written notice to Borrower, Borrower will deposit
with Lender additional cash or other liquid collateral (with credit for amounts
currently being held by Lender pursuant to the foregoing sentence), in an amount
which, if the same had been applied on the first (1st) day of the first quarter
for which such noncompliance of the debt service coverage requirement occurred,
is sufficient to reduce the outstanding principal indebtedness of the Loan
Obligations to an amount that, upon recalculating principal amortization
accordingly, the noncomplying debt service coverage requirement would have been
satisfied, and Borrower agrees promptly to provide such additional cash or other
liquid collateral. Such additional collateral shall constitute and will be held
by Lender in a standard custodial account, and shall constitute additional
collateral for the Loan Obligations and an "Account" as defined in this
Agreement, and, upon the occurrence of an Event of Default, may be applied by
Lender, in such order and manner as Lender may elect, to the reduction of the
Loan Obligations. Borrower shall not be entitled to any interest earned on such
additional collateral. Provided that there is no outstanding Default or Event of
Default, such additional collateral which has not been applied to the Loan
Obligations will be released by Lender at such time as Borrower provides Lender
with evidence that the required debt service coverage requirements outlined
above have been achieved and maintained (without regard to any cash deposited
pursuant to this Section 4.14) as of the end of each of two (2) consecutive
quarters.

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

         4.16. CAPITAL EXPENDITURES. Maintain and/or cause Manager to maintain
the Facility in good condition and make minimum capital expenditures for the
Facility in each fiscal year, in the amount of $365.00 per residential unit
(which such capital expenditures may include ordinary repairs and routine
maintenance), commencing the first year of the Loan term, and within forty-five
(45) days of the end of such fiscal year, provide evidence thereof satisfactory
to Lender. In the event that Borrower shall fail to do so, Borrower shall, upon
Lender's written request, immediately establish and maintain a capital
expenditures reserve fund with Lender equal to the difference between the
required amount per unit and the amount per unit actually spent by Borrower.
Borrower grants to Lender a right of setoff against all moneys in the capital
expenditures reserve fund, and Borrower shall not permit any other Lien to exist
upon such fund. The proceeds of such capital expenditures reserve fund will be
disbursed monthly upon Lender's receipt of satisfactory evidence that Borrower
has caused to be made the required capital expenditures. Upon Borrower's or
Manager's failure to adequately maintain the Facility in good condition as
required hereby, Lender may, but shall not be obligated to, make such capital
expenditures and may apply the moneys in the capital expenditures reserve fund
for such purpose. To the extent there are insufficient moneys in the capital
expenditures reserve fund for such purposes, all funds advanced by Lender to
make such capital expenditures shall constitute a portion of the Loan
Obligations, shall be secured by the Mortgage and shall accrue interest at the
Default Rate until paid. Upon an Event of Default, Lender may apply any moneys
in the capital

                                       23
<PAGE>   24

expenditures reserve fund to the Loan Obligations, in such order and manner as
Lender may elect. For any partial fiscal year during which the Loan is
outstanding, the required expenditure amount shall be prorated by multiplying
the required amount per unit amount by a fraction, the numerator of which is the
number of days during such year for which all or part of the Loan is outstanding
and the denominator of which is the number of days in such year. During the term
of the Loan, Lender may, from time to time, engage a professional building
inspector to conduct an inspection of the Facility. If the inspector's report
indicates that repairs or replacements are necessary over and above the $365.00
per unit requirement in this paragraph, then Lender shall require a non-interest
bearing repair escrow fund to insure completion of the repairs. The amount of
any repair escrow shall be one hundred twenty-five percent (125%) of the
estimated cost of repairs as determined by the inspector and Lender. Lender also
shall require an agreement satisfactory to Lender, which will provide for
completion of the repairs and the disbursement of the escrow funds. All fees and
costs associated with the inspection, report and subsequent inspections (if
required) shall be paid by Borrower.

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

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

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

                                       24
<PAGE>   25

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

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

         4.22. CERTIFICATE. Upon Lender's written request, furnish Lender with a
certificate stating that Borrower has complied with and is in compliance with
all terms, covenants and conditions of the Loan Documents to which Borrower is a
party and that there exists no Default or Event of Default or, if such is not
the case, that one or more specified events have occurred, and that the
representations and warranties contained herein are true and correct with the
same effect as though made on the date of such certificate, or if not, then
stating the reasons which such representations and/or warranties are no longer
true and correct.

         4.23. DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service Reserve
Fund Agreement, establish and maintain a debt service reserve fund with Lender
equal to approximately three (3) months of debt service payments with respect to
the Note as reasonably estimated by Lender, rounded upward to the nearest One
Thousand Dollars ($1,000).

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

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

         4.26. CAP ASSIGNMENT: DELIVERY OF CAP PAYMENTS. Assign any Cap in
effect pursuant to this Agreement to Lender pursuant to a Cap Assignment and/or
other documentation that is acceptable in form and content to Lender. The
counterparty (described in Section 2.3 above) shall make any and all payments
under the Cap (and the Cap Documents and such Cap Assignment shall direct the
counterparty to make any such payments) directly to the Lender and must provide
for any collateral posted by the Cap Provider to be delivered to and held by
Lender, or its designee.

                                       25
<PAGE>   26

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

                                   ARTICLE V
                         NEGATIVE COVENANTS OF BORROWER

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

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

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

              (a) Liens at any time existing in favor of Lender;

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

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

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

              (e) Liens for current year's taxes, assessments or governmental
charges or levies provided payment thereof shall not be delinquent; and

                                       26
<PAGE>   27

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

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

         5.4. Maintain Single Purpose Entity.

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

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

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

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

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

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

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

                                       27
<PAGE>   28

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

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

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

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

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

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

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

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

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

              (q) Fail to maintain adequate capital for the normal obligations
reasonably foreseeable in a business of its size and character and in light of
its contemplated business operations.

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

                                       28
<PAGE>   29

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

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

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

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

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

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

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

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

                                       29
<PAGE>   30

                                   ARTICLE VI
                              ENVIRONMENTAL HAZARDS

         6.1. PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters covered
by an O&M Program or matters described in Section 6.2, Borrower shall not cause
or permit any of the following:

              (a) The presence, use, generation, release, treatment, processing,
storage (including storage in above ground and underground storage tanks),
handling, or disposal-of any Hazardous Materials in, on or under the Land, any
Improvements, or any other property of Borrower that is adjacent to the Land,
subject to Section 6.2 below;

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

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

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

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

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

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

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

                                       30
<PAGE>   31

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

         6.5. BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to Lender that, except as previously disclosed by
Borrower to Lender in writing:

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

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

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

              (d) Borrower has complied with all Hazardous Materials Laws,
including all requirements for notification regarding releases of Hazardous
Materials. Without limiting the generality of the foregoing, Borrower has
obtained all Environmental Permits required for the operation of the Land and
the Improvements in accordance with Hazardous Materials Laws now in effect and
all such Environmental Permits are in full force and effect. No event has
occurred with respect to the Land and/or Improvements that constitutes, or with
the passing of time or the giving of notice would constitute, noncompliance with
the terms of any Environmental Permit.

              (e) There are no actions, suits, claims or proceedings pending or,
to the best of Borrower's knowledge after reasonable and diligent inquiry,
threatened that involve the Land and/or the Improvements and allege, arise out
of, or relate to any Prohibited Activity and Condition.

              (f) Borrower has not received any complaint, order, notice of
violation or other communication from any Governmental Authority with regard to
air emissions, water discharges, noise emissions or Hazardous Materials, or any
other environmental, health or safety matters affecting the Land, the
Improvements or any other property of Borrower that is adjacent to the Land. The
representations and warranties in this Article VI shall be continuing
representations and warranties that shall be deemed to be made by Borrower
throughout the term of the Loan evidenced by the Note, until the Loan
Obligations have been paid in full.

                                       31
<PAGE>   32

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

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

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

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

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

         6.7. COSTS OF INSPECTION. Borrower shall pay promptly the costs of any
environmental inspections, tests or audits ("Environmental Inspections")
required by Lender in connection with any foreclosure or deed in lieu of
foreclosure, or, if required by Lender, as a condition of Lender's consent to
any "Transfer" (as defined in the Mortgage), or required by Lender following a
reasonable determination by Lender that Prohibited Activities and Conditions may
exist. Any such costs incurred by Lender (including the fees and out-of-pocket
costs of attorneys and technical consultants whether incurred in connection with
any judicial or administrative process or otherwise) which Borrower fails to pay
promptly shall become an additional part of the Loan Obligations. The results of
all Environmental Inspections made by Lender shall at all times remain the
property of Lender, and Lender shall have no obligation to disclose or otherwise
make available to Borrower or any other party such results or any other
information obtained by Lender in connection with its Environmental Inspections.
Lender hereby reserves the right, and Borrower hereby expressly authorizes
Lender, to make available to any party, including any prospective bidder at a
foreclosure sale of the Mortgaged Property, the results of any Environmental
Inspections made by Lender with respect to the Mortgaged Property. Borrower
consents to Lender notifying any party (either as part of a notice of sale or
otherwise) of the results of any of Lender's Environmental Inspections. Borrower
acknowledges that Lender cannot control or otherwise assure the truthfulness or
accuracy of the results of any of its Environmental Inspections and that the
release of such results to prospective bidders at a foreclosure sale of the
Mortgaged Property may have a material and adverse effect upon the amount which
a party may bid at such sale. Borrower agrees that Lender shall have no
liability whatsoever as a result of delivering the results of any of its
Environmental Inspections to any third party, and Borrower hereby releases and
forever discharges Lender from any and all claims, damages, or causes of action,
arising out of, connected with or incidental to the results of, the delivery of
any of Lender's Environmental Inspections.

                                       32
<PAGE>   33

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

         6.9. COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall
cooperate with any inquiry by any Governmental Authority and shall comply with
any governmental or judicial order which arises from any alleged Prohibited
Activity and Condition. Borrower, at its own expense, may contest by appropriate
legal proceedings, conducted diligently and in good faith, the amount or
validity of any such order, if (i) Borrower notifies Lender of the commencement
or expected commencement of such proceedings, (ii) the Mortgaged Property is not
in danger of being sold or forfeited, as determined by Lender, (iii) if
requested by Lender, Borrower deposits with Lender cash reserves or other
collateral sufficient to pay the contested order, (iv) Borrower furnishes
whatever security is required in the proceedings or is reasonably requested by
Lender, which may include the delivery to Lender of the reserves established by
Borrower to pay the contested order, as additional security, and (v) such
contest operates to suspend enforcement of such order.

         6.10. INDEMNITY.

              (a) Borrower shall hold harmless, defend and indemnify (i) Lender,
(ii) any prior owner or holder of the Note, (iii) any Person who is or will have
been involved in the servicing of the Note, (iv) the officers, directors,
partners, agents, shareholders, employees and trustees of any of the foregoing,
and (v) the heirs, legal representatives, successors and assigns of each of the
foregoing (together, the "Indemnitees") from and against all proceedings,
claims, damages, losses, expenses, penalties and costs (whether initiated or
sought by any Governmental Authority or private parties), including fees and out
of pocket expenses of attorneys and expert witnesses, investigatory fees, and
remediation costs, whether incurred in connection with any judicial or
administrative process or otherwise, arising directly or indirectly from any of
the following:

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

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

                                       33
<PAGE>   34

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

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

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

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

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

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

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

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

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

                  (iv) The release of Borrower or any other person, by Lender or
by operation of law, from performance of any obligation under any of the Loan
Documents;

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

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

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

                                       34
<PAGE>   35

                  (i) Pay or satisfy any judgment or decree that may be entered
against any Indemnitee or Indemnitees in any legal or administrative proceeding
incident to any matters against which Indemnitees are entitled to be indemnified
under this Article VI;

                  (ii) Reimburse Indemnitees for any expenses paid or incurred
in connection with any matters against which Indemnitees are entitled to be
indemnified under this Article VI; and

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

              (f) In any circumstances in which the indemnity under this Article
VI applies, Lender may employ its own legal counsel and consultants to
prosecute, defend or negotiate any claim or legal or administrative proceeding
and Lender, with the prior written consent of Borrower (which shall not be
unreasonably withheld, delayed or conditioned) may settle or compromise any
action or legal or administrative proceeding. Borrower shall reimburse Lender
upon demand for all costs and expenses incurred by Lender, including all costs
of settlements entered into in good faith, and the fees and out of pocket
expenses of such attorneys and consultants.

              (g) The provisions of this Article VI shall be in addition to any
and all other obligations and liabilities that Borrower may have under the
applicable law or under the other Loan Documents, and each Indemnitee shall be
entitled to indemnification under this Article VI without regard to whether
Lender or that Indemnitee has exercised any rights against the Land and/or the
Improvements or any other security, pursued any rights against any guarantor, or
pursued any other rights available under the Loan Documents or applicable law.
If Borrower consists of more than one person or entity, the obligation of those
persons or entities to indemnify the Indemnitees under this Article VI shall be
joint and several. The obligations of Borrower to indemnify the Indemnitees
under this Article VI shall survive any repayment or discharge of the Loan
Obligations, any foreclosure proceeding, any foreclosure sale, any delivery of
any deed in lieu of foreclosure, and any release of record of the lien of the
Mortgage. Notwithstanding anything in this Article VI to the contrary, the
liability of Borrower hereunder shall not extend to any Prohibited Activity and
Condition arising solely after the date the Lender, or its duly authorized
agents, take possession of the Land and the Improvements pursuant to a
receivership action, foreclosure or deed-in-lieu of foreclosure.

                                  ARTICLE VII
                         EVENTS OF DEFAULT AND REMEDIES

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

                                       35
<PAGE>   36

              (a) The failure by Borrower to pay any installment of principal,
interest, or other payments required under the Note, within five (5) days after
the same becomes due;

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

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

              (d) The failure of Borrower properly and timely to perform or
observe any covenant or condition set forth in this Agreement (other than those
specified in subsections (a), (b) and (c) of this Section 7.1) or any other Loan
Documents which is susceptible of being cured and is not cured within any
applicable cure period as set forth herein or, if no cure period is specified
therefor, is not cured within thirty (30) days of Lender's notice to Borrower of
such Default provided, however, that if such default cannot be cured within such
thirty (30) day period, such cure period shall be extended for an additional
sixty (60) days, as long as Borrower is diligently and in good faith prosecuting
said cure to completion;

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

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

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

                                       36
<PAGE>   37

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

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

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

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

              (j) Borrower, Manager, or the Facility should be assessed fines or
penalties by any state or any Medicare, Medicaid, health or licensing agency
having jurisdiction over such Persons or the Facility in excess of $50,000.00;
or

              (k) A final judgment shall be rendered by a court of law or equity
against Borrower, Guarantor or Manager in excess of $25,000.00, and the same
shall remain undischarged for a period of thirty (30) days, unless such judgment
is either (i) fully covered by collectible insurance and such insurer has within
such period acknowledged such coverage in writing, or (ii) although not fully
covered by insurance, enforcement of such judgment has been effectively stayed,
such judgment is being contested or appealed by appropriate proceedings and
Borrower, Guarantor or Manager as the case may be, has established reserves
adequate for payment of the reasonably estimated probable liability in the event
such Person is ultimately unsuccessful in such contest or appeal, and evidence
thereof is provided to Lender; or

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

                                       37
<PAGE>   38

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

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

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

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

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

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

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

                                       38
<PAGE>   39

                                  ARTICLE VIII
                                  MISCELLANEOUS

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

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

                                       39
<PAGE>   40

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

         8.4. INDEMNIFICATION. Borrower shall, at its sole cost and expense,
protect, defend, indemnify and hold harmless the Indemnified Parties from and
against any and all claims, suits, liabilities (including, without limitation,
strict liabilities), actions, proceedings, obligations, debts, damages, losses,
costs, expenses, diminutions in value, fines, penalties, charges, fees,
expenses, judgments, awards, amounts paid in settlement, punitive damages,
foreseeable and unforeseeable consequential damages, of whatever kind or nature
(including but not limited to reasonable attorneys' fees and other costs of
defense) imposed upon or incurred by or asserted against Lender by reason of (a)
ownership of the Note, the Mortgage, the Loan Documents or any interest therein
or receipt of any Rents, (b) any amendment to, or restructuring of, the Loan
Obligations and/or any of the Loan Documents, (c) any and all lawful action that
may be taken by Lender in connection with the enforcement of the provisions of
the Mortgage or the Note or any of the other Loan Documents, whether or not suit
is filed in connection with same, or in connection with Borrower, any Guarantor,
Manager and/or any partner, joint venturer, member or shareholder thereof
becoming a party to a voluntary or involuntary federal or state bankruptcy,
insolvency or similar proceeding, (d) any accident, injury to or death of
persons or loss of or damage to property occurring in, on or about the Land, the
Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent
property or adjacent parking areas, streets or ways, (e) any use, nonuse or
condition in, on or about the Land, the Improvements or any part thereof or on
the adjoining sidewalks, curbs, adjacent property or adjacent parking areas,
streets or ways, (f) any failure on the part of Borrower, any Guarantor or
Manager to perform or comply with any of the terms of this Agreement or any of
the other Loan Documents, (g) any claims by any broker, person or entity
claiming to have participated in arranging the making of the Loan evidenced by
the Note, (h) any failure of the Land and/or Improvements to be in compliance
with any applicable laws, (i) any and all claims and demands whatsoever which
may be asserted against Lender by reason of any alleged obligations or
undertakings on its part to perform or discharge any of the terms, covenants, or
agreements contained in the Management Agreement or any replacement or renewal
thereof or substitution therefor, (j) performance of any labor or services or
the furnishing of any materials or other property with respect to the Land, the
Improvements or any part thereof, (k) the failure of any person to file timely
with the Internal Revenue Service an accurate Form 1099-b, statement for
recipients of proceeds from real estate, broker and barter exchange
transactions, which may be required in connection with the Mortgage, or to
supply a copy thereof in a timely fashion to the recipient of the proceeds of
the transaction in connection with which the Loan is made, (l) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents, (m) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (n) the violation of any

                                       40
<PAGE>   41

requirements of the Employee Retirement Income Security Act of 1974, as amended,
(o) any fines or penalties assessed or any corrective costs incurred by Lender
if the Facility or any part of the Land and/or Improvements is determined to be
in violation of any covenants, restrictions of record, or any applicable laws,
ordinances, rules or regulations, or (p) the enforcement by any of the
Indemnified Parties of the provisions of this Section 8.4. Any amounts payable
to Lender by reason of the application of this Section 8.4, shall become
immediately due and payable, and shall constitute a portion of the Loan
Obligations, shall be secured by the Mortgage and shall accrue interest at the
Default Rate (as defined in the Note). The obligations and liabilities of
Borrower under this Section 8.4 shall survive any termination, satisfaction,
assignment, entry of a judgment of foreclosure or exercise of a power of sale or
delivery of a deed in lieu of foreclosure of the Mortgage. Notwithstanding
anything contained herein, the liabilities and obligations of the Borrower under
Section 8.4(d), (e), (h) or (o) shall not extend to any activity or condition
giving rise to any such liability or obligation which activity or condition
arises solely after the date the Lender, or its duly authorized agents, take
possession of the Land and the Improvements pursuant to a receivership action,
foreclosure or deed in lieu of foreclosure. For purposes of this Section 8.4,
the term "Indemnified Parties" means Lender and any Person who is or will have
been involved in the origination of the Loan, any Person who is or will have
been involved in the servicing of the Loan, any Person in whose name the
encumbrance created by the Mortgage is or will have been recorded, any Person
who may hold or acquire or will have held a full or partial interest in the Loan
(including, without limitation, any investor in any securities backed in whole
or in part by the Loan) as well as the respective directors, officers,
shareholder, partners, members, employees, agents, servants, representatives,
contractors, subcontractors, affiliates, subsidiaries, participants, successors
and assigns of any and all of the foregoing (including, without limitation, any
other Person who holds or acquires or will have held a participation or other
full or partial interest in the Loan or the Mortgaged Property, whether during
the term of the Mortgage or as a part of or following a foreclosure of the Loan
and including, without limitation, any successors by merger, consolidation or
acquisition of all or a substantial portion of Lender's assets and business).

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

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

         8.7. NOTICES, ETC. Any notice or other communication required or
permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below) with receipt acknowledged by the recipient thereof, (b) three
(3) Business Days following the date deposited in U.S. mail, certified or
registered, with

                                       41
<PAGE>   42

return receipt requested, or (c) one (1) Business Day following the date
deposited with Federal Express or other national overnight carrier, and in each
case addressed as follows:

              If to Borrower:

                       c/o American Retirement Corporation
                       111 Westwood Place, Suite 402
                       Brentwood, Tennessee  37027
                       Attn:  George Hicks, Executive Vice President

              with a copy to:

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

              If to Lender:

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

              with a copy to:

                       Katherine L. Bishop, Esquire
                       Ballard Spahr Andrews & Ingersoll, LLP
                       601 13th Street, NW, Suite 1000 South
                       Washington, D.C. 20005-3807

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

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

         8.9. PARTICIPATION. Borrower acknowledges that Lender may, at its
option, sell participation interests in the Loan or to other participating banks
or Lender may (but shall not be obligated to) assign its interest in the Loan to
its affiliates, or to other assignees (the "Assignee") to be included as a pool
of properties to be financed in a proposed Real Estate Mortgage Investment
Conduit (REMIC). Borrower agrees with each present and future participant in the

                                       42
<PAGE>   43

Loan or Assignee of the Loan that if an Event of Default should occur, each
present and future participant or Assignee shall have all of the rights and
remedies of Lender with respect to any amount due from Borrower pursuant to the
Loan Documents. The execution by a participant of a participation agreement with
Lender, and the execution by Borrower of this Agreement, regardless of the order
of execution, shall evidence an agreement between Borrower and said participant
in accordance with the terms of this Section. If the Loan is assigned to the
Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will
be responsible for the due diligence, documentation, preparation and execution
of certain documents required in connection with the offering of interests in
the REMIC. Borrower agrees that Lender may, at its sole option and without
notice to or consent of Borrower, assign its interest in the Loan to the
Assignee for inclusion in the REMIC and, in such event, Borrower agrees to
provide the Assignee with such information as may be reasonably required by the
Underwriter in connection therewith or by an investor in any securities backed
in whole or in part by the Loan or any rating agency rating such securities.
Borrower irrevocably waives any and all right it may have under applicable law
to prohibit such disclosure, including, but not limited to, any right of
privacy, and consents to the disclosure of such information to the Underwriter,
to potential investors in the REMIC, and to such rating agencies.

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

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

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

                                       43
<PAGE>   44

CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES OF AMERICA, OR IF THERE IS A
DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES THERETO, SO THAT IT IS TO BE
BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL BE BROUGHT IN THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS OR ANY SUCCESSOR
FEDERAL COURT HAVING ORIGINAL JURISDICTION.

         8.13. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
BORROWER HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY
CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT
OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN, OR (B) IN ANY WAY
CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF
LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH
THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS
AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES
HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING
AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AGREES THAT LENDER
MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE
KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF BORROWER IRREVOCABLY TO WAIVE ITS
RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN, AND THAT,
TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER
(WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE
TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       44
<PAGE>   45

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

WITNESS:                            BORROWER:

                                    ARC POST OAK, L.P., a Tennessee limited
                                    partnership

                                    By: ARC HAMPTON POST OAK, INC., a Tennessee
                                        corporation

                                        By:
-------------------------------             ------------------------------------
                                            George Hicks
Print Name:                                 President
            -------------------

                                    LENDER:

WITNESS:                            GMAC COMMERCIAL MORTGAGE CORPORATION, a
                                    California corporation

                                    By:                                   (Seal)
-------------------------------         ----------------------------------
                                        Monique Bimler
Print Name:                             Vice President
            -------------------

                                       45
<PAGE>   46

                                   EXHIBIT "A"

                                LEGAL DESCRIPTION

                                      A-1

<PAGE>   47

                                   EXHIBIT "B"

                     BORROWER'S PRINCIPAL PLACE OF BUSINESS

                           AND CHIEF EXECUTIVE OFFICE

1.       Principal Place of Business:
         111 Westwood Place, Suite 402
         Brentwood, Tennessee  37027

2.       Chief Executive Office:
         111 Westwood Place, Suite 402
         Brentwood, Tennessee  37027

3.       Facility address:
         2929 Post Oak Boulevard
         Houston, Texas  77056-6113

                                      B-1
<PAGE>   48

                                   EXHIBIT "C"

                               OWNERSHIP INTERESTS

ARC Hampton Post Oak, Inc., a Tennessee corporation           1% General Partner

ARC Partners, Inc., a Florida corporation                    99% Limited Partner

                                      C-1

<PAGE>   49

                                   EXHIBIT "D"

                  QUARTERLY FINANCIAL STATEMENT AND CENSUS DATA

Facility Name:  The Hampton at Post Oak
Management Company:  Arc Management, LLC
Report Date:
            ---------------------

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

CASH FLOW ANALYSIS
Total Routine Resident Revenue:          ________    ________    ________    ________    ________
Total Net Revenue:                       ________    ________    ________    ________    ________
Total Expenses:                          ________    ________    ________    ________    ________
Pre-Tax Income:                          ________    ________    ________    ________    ________

ADD BACK
Depreciation and Amortization:           ________    ________    ________    ________    ________
Interest on Mortgage:                    ________    ________    ________    ________    ________
Facility Lease Expense (if applicable):  ________    ________    ________    ________    ________
Management Fees:                         ________    ________    ________    ________    ________
Extraordinary Items:                     ________    ________    ________    ________    ________
Net Operating Income:                    ________    ________    ________    ________    ________
</TABLE>

                                      D-1
<PAGE>   50

         I hereby certify the above to be true and correct. Dated this ____ day
of _________, _____.

                                     ARC POST OAK, L.P.

                                     By: ARC Hampton Post Oak, Inc.

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

                                      D-2
<PAGE>   51

                                   EXHIBIT "E"

                             COMPLIANCE CERTIFICATE

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

         Re:      Loan Agreement dated March 30, 2001 (together with amendments,
                  if any, the "Loan Agreement"), by and between GMAC Commercial
                  Mortgage Corporation, as Lender, and ARC Post Oak, L.P., as
                  Borrower.

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

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

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

            Required: 1.0 to 1.0

            Actual: ___ to 1.0

            THE MANNER OF CALCULATION IS ATTACHED.

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

            Required: 1.25 to 1.0

            Actual: ___ to 1.0

            THE MANNER OF CALCULATION IS ATTACHED.

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

            Required: Not less than 80%

            Actual: __________

                                      E-1
<PAGE>   52

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

            Required: $365 per unit.

            Actual: $______ per unit.

            EVIDENCE OF SUCH CAPITAL EXPENDITURES IS ATTACHED.

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

         7. All information provided herein is true and correct.

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

         Dated this ______ day of _____________________, _______.

                                     ARC HAMPTON POST OAK, INC.,

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

                                      E-2
<PAGE>   53

                                   EXHIBIT "F"

                             PERMITTED ENCUMBRANCES

1.       Restrictions filed for record under Clerk's File Nos. K208035,
         K208036, S916412 and refiled under Clerk's File No. S957251, Official
         Public Records of Real Property of Harris County.

2.       Taxes for the year 2001 and thereafter.

3.       Easement filed under Clerk's File No. F925384.

4.       Easement filed under Clerk's File No. F925385.

5.       Easement filed under Clerk's File No. F506646, as amended by File Nos.
         F979043 and K211555.

6.       Permit for use and occupancy filed under Clerk's File No. F415487,
         subject to terms of Ordinance No. 68-115.

7.       Easement filed under Clerk's No. H797009.

8.       Controlled access to Interstate Highway 610, West Loop South Highway,
         as granted to the State of Texas pursuant to Article 6674 W-1, V.A.T.S.

9.       Memorandum of Agreement filed under Clerk's File No. S458702.

10.      Easement filed under Clerk's File No. T915567.

11.      Agreement filed under Clerk's File No. U065056.

12.      Order of Commissioners Court recorded in Volume 3154, page 268.

                                      F-1<PAGE>   1

                                                                     EXHIBIT 4.1

                              [SIMCALA LETTERHEAD]

April 18, 2001

The Bank of New York
101 Barclay Street, 21st Floor
New York, New York 10286

         Re:  Notice of Defaulted Interest Payment and Officer's Certificate

Ladies and Gentlemen:

Pursuant to Section 4.04 of the Indenture (the "Indenture") dated as of March
31, 1998 by and between SAC Acquisition Corp., as Acquirer of Simcala, Inc.
(the "Company"), and The Bank of New York (as successor trustee to IBJ Schroder
Bank & Trust Company)(the "Trustee"), the Company hereby notifies Trustee that
the Company has defaulted on the payment of interest due on the 9-5/8% Senior
Notes due 2006 (the "Notes"). The present installment of interest on the Notes
was due on or before April 16, 2001. Enclosed please find an Officers'
Certificate executed by C. Edward Boardwine and R. Myles Cowan describing the
nature of the default and the action the Company intends to take with respect
thereto.

Please note that Section 6.01(a) of the Indenture provides that failure to make
a timely payment of the interest due on the Notes does not constitute an Event
of Default unless such default continues for a period of 30 days. The Company
proposes to make a payment of all of the defaulted interest, plus interest
payable on the defaulted interest (at the rate of 10-5/8% per annum), on each
Note on Tuesday, May 15, 2001 (the "Payment Date"). The special record date for
payment of the defaulted interest, and for interest payable on the defaulted
interest, shall be Friday, May 4, 2001 (the "Special Record Date").

<PAGE>   2

                                    SIMCALA

Pursuant to Section 2.12 of the Indenture, the Company must mail or cause the
Trustee to mail to Holders of the Notes a notice stating the Payment Date, the
Special Record Date, and the amount of interest to be paid. Enclosed please
find a proposed notice to the Holders including that information. As the notice
must be mailed no less than 15 days before the Special Record Date, we will
require your immediate assistance to distribute the notice no later than this
Thursday, April 19, 2001, and hereby request that you deliver such notice to
all Holders of recorded on such date.

Thank you for your assistance with respect to this matter.

Very truly yours,

SIMCALA, INC.

By: /s/ R. Myles Cowan
    ------------------------------------------------
    R. Myles Cowan
    Chief Financial Officer

                                     - 2 -
<PAGE>   3
                             OFFICERS' CERTIFICATE

         We, C. Edward Boardwine and R. Myles Cowan, certify that we are the
Chief Executive Officer and Chief Financial Officer, respectively, of Simcala,
Inc., a Delaware corporation (the "Company"), and that, as such, we are
authorized to execute this Officers' Certificate on behalf of the Company, and
do hereby further certify that:

         1.       We are delivering this Officers' Certificate pursuant to
                  Section 4.04(c) of that certain Indenture dated as of March
                  31, 1998 (the "Indenture") between the Company and The Bank of
                  New York, as Trustee (f/k/a IBJ Schroder Bank & Trust Company)
                  pursuant to which the Company has issued its 9-5/8% Senior
                  Notes (the "Notes");

         2.       We have reviewed the applicable provisions of the Indenture;

         3.       We have, in our opinion, made such examination and inquiry as
                  is necessary to enable us to make the certifications set forth
                  herein;

         4.       On April 16, 2001, the Company failed to make a timely payment
                  of interest on the Notes which constitutes a Default (but not
                  an Event of Default) under the Indenture;

         5.       Pursuant to Section 2.12 of the Indenture, the Company has
                  established a proposed new payment date of May 15, 2001, at
                  which time the Company intends to pay to the Holders (as that
                  term is defined in the Indenture) as of a special record date
                  of May 4, 2001, all of the defaulted interest, plus interest
                  payable on the defaulted interest calculated at a rate of
                  10-5/8% per annum;

<PAGE>   4

         6     The Company shall deliver notice specifying the special record
               date, the proposed new payment date, and the amount of interest
               to be paid to all Holders no later than Thursday, April 19, 2001;
               and

         7     The taking of the foregoing actions will cure the Default that
               has occurred within the applicable grace period set forth in the
               Indenture such that no Event of Default shall occur.

         IN WITNESS WHEREOF, we have executed this Certificate and affixed the
seal of the Company this 18th day of April, 2001.
                         ----

                                   SIMCALA, INC.

                                   By: /s/ C. Edward Boardwine
                                       -----------------------------------------
                                       C. Edward Boardwine, Chief Executive
                                       Officer

                                   By: /s/ R. Myles Cowan
                                       -----------------------------------------
                                       R. Myles Cowan, Chief Financial Officer
<PAGE>   5
                              [SIMCALA LETTERHEAD]

April 19, 2001

         RE:  9-5/8% SENIOR NOTES DUE 2006 ISSUED BY SIMCALA, INC.

To the Holders of the below-referenced Notes:

Reference is made to that certain Indenture dated as of March 31, 1998 (the
"Indenture") by and between SAC Acquisition Corp., as Acquirer of Simcala, Inc.
(the "Company"), and The Bank of New York (as successor trustee to IBJ Schroder
Bank & Trust Company) (the "Trustee"), pursuant to which the Company issued its
9-5/8% Senior Notes due 2006 (the "Notes").

On April 16, 2001, the Company failed to pay the installment of interest on the
Notes in the amount of $3,609,375.00 that was then due and payable on the Notes.

The Company intends to pay this installment of interest in full on May 15, 2001,
together with post-default interest on such past-due interest at the rate of
10-5/8% per annum. Accordingly, and pursuant to Section 2.12 of the Indenture,
the Company hereby establishes (i) a new payment date of May 15, 2001 (the
"Payment Date") for the payment of such past-due interest (and interest thereon)
and (ii) a special record date for such payment (the "Special Record Date") of
May 4, 2001. On the Payment Date, the Company intends to pay to all Holders of
record as of the Special Record Date the above amount of such past-due interest,
plus interest on the defaulted interest (calculated at the rate of 10-5/8% per
annum) equal to $31,958.01. Such payment shall be made in the same manner as
prior payments of interest on the Notes.

For further information regarding the payment, you may call The Bank of New
York at 800-438-5473.

Very truly yours,

SIMCALA, INC.

By: /s/ R. Myles Cowan
    ------------------
R. Myles Cowan
Chief Financial Officer

-------------------------------------------------------------------------------
P.O. Box 68                                                Phone: (334) 215-7560
Ohio Ferro-Alloys Road                                       Fax: (334) 216-8969
Mt. Meigs, Alabama 36057

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