-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FBsjNyfb3YxmtP6w+uRheeM9UGD9kE34EA9wwj2GDA1z0sikfs/aYr3JnET+enSx isdvtAg4b/QmRd86w4Jk/A== 0000950168-02-002163.txt : 20020812 0000950168-02-002163.hdr.sgml : 20020812 20020809175715 ACCESSION NUMBER: 0000950168-02-002163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT VILLAS PROPERTIES III LTD PARTNERSHIP CENTRAL INDEX KEY: 0000853274 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330365417 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-30084 FILM NUMBER: 02725584 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STE D 1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 2: 245 FISCHER AVE STE D1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-Q 1 d10q.htm AMERICAN RETIREMENT VILLAS III Prepared by R.R. Donnelley Financial -- American Retirement Villas III
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                  TO                 
 
COMMISSION FILE NUMBER: 0-26470
 
 
AMERICAN RETIREMENT VILLAS
PROPERTIES III, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
CALIFORNIA
  
33-0365417
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
  
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1 COSTA MESA, CA
  
92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
  
(ZIP CODE)
 
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
The aggregate market value of the voting units held by non-affiliates of the issuer, computed by reference to the price at which units were sold, was $18,666,480 (for purposes of calculating the preceding amount only, all directors, executive officers and shareholders holding 5% or greater of the registrant’s units are assumed to be affiliates). The number of units outstanding as of June 30, 2002 was 18,666.
 

 
PART I    FINANCIAL INFORMATION
 
Item 1    Financial Statements
 
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
(A California Limited Partnership)
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except units)
 
ASSETS
   
June 30,
2002
     
December 31,
2001
  
Properties, at cost:
                  
Land
   
$
1,549
 
   
$
1,549
 
Building and improvements, less accumulated depreciation of $2,859 and $2,822 at June 30, 2002 and December 31, 2001, respectively
   
 
9,628
 
   
 
9,811
 
Furniture, fixtures and equipment, less accumulated depreciation of $911 and $805 at June 30, 2002 and at December 31, 2001, respectively
   
 
436
 
   
 
453
 
    
  
Net properties
   
 
11,613
 
   
 
11,813
 
Cash and cash equivalents
   
 
897
 
   
 
2,903
 
Restricted cash
   
 
86
 
   
 
85
 
Loan fees, less accumulated amortization of $39 and $311 at June 30, 2002 and December 31, 2001 respectively
   
 
234
 
   
 
146
 
Collateral deposit
   
 
2,000
 
   
 
—  
 
Other assets
   
 
969
 
   
 
934
 
    
  
    
$
15,799
 
   
$
15,881
 
    
  
LIABILITIES AND PARTNERS’ CAPITAL
                  
Notes payable to banks
   
$
17,660
 
   
$
13,736
 
Accounts payable
   
 
93
 
   
 
262
 
Accrued expenses
   
 
470
 
   
 
565
 
Amounts payable to affiliates
   
 
64
 
   
 
43
 
Distributions payable
   
 
48
 
   
 
74
 
    
  
Total liabilities
   
 
18,335
 
   
 
14,680
 
    
  
Partners’ capital (deficit):
                  
General partners
   
 
(2
)
   
 
(2
)
Special Limited Partners
   
 
(182
)
   
 
(142
)
Limited partners, 18,666 units outstanding at June 30, 2002 and December 31, 2001
   
 
(2,352
)
   
 
1,345
 
    
  
Total partners’ capital (deficit)
   
 
(2,536
)
   
 
1,201
 
    
  
    
$
15,799
 
   
$
15,881
 
    
  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

2

 
American Retirement Villas Properties III, L.P.
(a California limited partnership)
 
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except unit data)
 
    
For The Three Months Ended June 30,
   
For The Six Months Ended June 30,
  
    
2002
       
2001
   
2002
     
2001
  
Revenues:
                                    
Rent
   
$
1,500
 
     
$
1,514
   
$
3,032
     
$
3,021
 
Assisted living
   
 
143
 
     
 
185
   
 
306
     
 
365
 
Interest
   
 
11
 
     
 
31
   
 
23
     
 
73
 
Other
   
 
72
 
     
 
32
   
 
108
     
 
74
 
    
    
  
    
Total revenues
   
 
1,726
 
     
 
1,762
   
 
3,469
     
 
3,533
 
    
    
  
    
Costs and expenses:
                                    
Community property operations
   
 
867
 
     
 
849
   
 
1,735
     
 
1,719
 
Assisted living
   
 
116
 
     
 
123
   
 
252
     
 
251
 
General and administrative
   
 
110
 
     
 
71
   
 
169
     
 
156
 
Depreciation and amortization
   
 
214
 
     
 
211
   
 
393
     
 
419
 
Property taxes
   
 
46
 
     
 
46
   
 
92
     
 
93
 
Advertising
   
 
23
 
     
 
10
   
 
46
     
 
27
 
Interest
   
 
363
 
     
 
308
   
 
712
     
 
612
 
    
    
  
    
Total operating costs and expenses
   
 
1,739
 
     
 
1,618
   
 
3,399
     
 
3,277
 
    
    
  
    
Income (loss) from operations before franchise tax expense and extraordinary loss
   
 
(13
)
     
 
144
   
 
70
     
 
256
 
Franchise tax expense
   
 
4
 
     
 
5
   
 
4
     
 
5
 
    
    
  
    
Income (loss) from operations before extraordinary loss
   
 
(17
)
     
 
139
   
 
66
     
 
251
 
Extraordinary loss from extinguishment of debt
   
 
—  
 
     
 
—  
   
 
—  
     
 
(66
)
    
    
  
    
Net income (loss)
   
$
(17
)
     
$
139
   
$
66
     
$
185
 
    
    
  
    
Income (loss) Per limited partner unit:
                                    
Income (loss) from operations before extraordinary loss
   
$
(0.90
)
     
$
7.37
   
$
3.50
     
$
13.31
 
Extraordinary loss
   
 
—  
 
     
 
—  
   
 
—  
     
 
(3.50
)
    
    
  
    
Net income (loss)
   
$
(0.90
)
     
$
7.37
   
$
3.50
     
$
9.81
 
    
    
  
    
 
See accompanying notes to the unaudited condensed consolidated financial statements.

3

 
American Retirement Villas Properties III, L.P.
(a California limited partnership)
 
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
 
    
FOR THE SIX MONTHS ENDED JUNE 30,
  
    
2002
       
2001
  
Cash flows from operating activities:
                    
Net income
   
$
66
 
     
$
185
 
Adjustments to reconcile net income to net cash provided by operating activities:
                    
Depreciation and amortization
   
 
393
 
     
 
419
 
Extraordinary loss from extinguishment of debt
   
 
—  
 
     
 
66
 
Change in assets and liabilities:
                    
(Increase) decrease in restricted cash
   
 
(1
)
     
 
85
 
(Increase) decrease in other assets
   
 
(22
)
     
 
60
 
Decrease in accounts payable and accrued expenses
   
 
(264
)
     
 
(32
)
Increase (decrease) in amounts payable to affiliate, net
   
 
21
 
     
 
(219
)
    
    
Net cash provided by operating activities
   
 
193
 
     
 
564
 
    
    
Cash flows from investing activities—Capital expenditures
   
 
(158
)
     
 
(254
)
    
    
Cash flows from financing activities:
                    
Principal repayments on notes payable to banks
   
 
(76
)
     
 
(5,156
)
Borrowing under refinancing
   
 
4,000
 
     
 
5,783
 
Capital expenditure replacement reserve
   
 
(13
)
     
 
(510
)
Loan fees paid
   
 
(123
)
     
 
(83
)
Mortgage insurance
   
 
—  
 
     
 
(29
)
Collateral deposit under refinancing
   
 
(2,000
)
     
 
—  
 
Distributions paid
   
 
(3,829
)
     
 
(5,673
)
    
    
Net cash used in financing activities
   
 
(2,041
)
     
 
(5,668
)
    
    
Net decrease in cash and cash equivalents
   
 
(2,006
)
     
 
(5,358
)
Cash and cash equivalents at beginning of period
   
 
2,903
 
     
 
8,458
 
    
    
Cash and cash equivalents at end of period
   
$
897
 
     
$
3,100
 
    
    
Supplemental schedule of cash flow information—Cash paid during the period for interest
   
$
678
 
     
$
654
 
    
    
 
See accompanying notes to the unaudited condensed consolidated financial statements.

4

 
American Retirement Villas Properties III, L.P.
(a California limited partnership)
 
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
June 30, 2002
 
(1)    SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements of American Retirement Villas Properties III, L.P. pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America can be condensed or omitted.
 
The condensed consolidated financial statements include all normal and recurring adjustments that the Partnership considers necessary for the fair presentation of the partnership’s financial position and operating results. These are condensed consolidated financial statements. To obtain a more detailed understanding of our results, one should also read the condensed consolidated financial statements and notes in the partnership’s Form 10-K for 2001, which is on file with the SEC.
 
The results of operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements are not necessarily an indication of the results for the full year.
 
Principles of Consolidation
 
The condensed consolidated financial statements of American Retirement Villas Properties III, L.P. (the “Partnership” or “ARVPIII”) include the accounts of the Partnership, Retirement Inns III, LLC and ARV Chandler Villas, L.P. The Retirement Inns III, LLC and ARV Chandler Villas L.P. all of which are 100% owned and therefore consolidated into the Partnership.
 
Basis of Accounting
 
The Partnership maintains the records on the accrual method of accounting for financial reporting and Federal and state tax purposes.
 
Carrying Value of Real Estate
 
Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows:
 
Buildings and improvements
   
27.5 to 35 years
Furniture, fixtures and equipment
   
3 to 7 years
 
The Partnership reviews the long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Partnership estimates the future cash flows expected to result from using the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the asset’s fair value.
 
Use of Estimates
 
In the preparation of the partnership’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management has made estimates and assumptions that affect the following:
 
 
•
 
reported amounts of assets and liabilities at the date of the financial statements;
 
 
•
 
disclosure of contingent assets and liabilities at the date of the financial statements; and
 
 
•
 
reported amounts of revenues and expenses during the reporting period.

5

 
Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
For purposes of reporting cash balances, the Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
Capital Expenditures
 
The Partnership capitalizes all assets obtained by purchase, trade or capital lease that have a useful life of more than one year and costs exceeding $500, or a group of similar assets purchased together where the total purchase price exceeds $1,000 and the cost of each asset exceeds $50. Improvements or additions to existing assets are also capital expenditures when they extend the useful life of the assets beyond their original life. Repair expenditures are expensed as incurred.
 
Impound Accounts
 
Our lenders hold certain of the partnership’s funds in impound accounts for payment of property taxes, insurance premiums and future property improvements (replacement reserves) on these properties. The Partnership includes these impound accounts in other assets.
 
Collateral Deposits
 
The Partnership was required by the lender to deposit $2.0 million dollars into a collateral deposit account held by the lender as part of the modification agreement to extend the maturity date, increase the debt and change the interest rate on one of the partnership’s loans.
 
Loan Fees
 
The Partnership amortizes loan fees using the effective interest method over the term of the respective notes payable, with the expense records in amortization expense.
 
General Insurance Liability
 
The Partnership utilizes third-party insurance for losses and liabilities associated with general and professional liability claims subject to established deductible levels on a per occurrence basis. Losses up to these deductible levels are accrued based upon the partnership’s estimates of the aggregate liability for claims incurred based on the partnership’s experience.
 
Revenue Recognition
 
ARVPIII enters into residency agreements with residents on a month-to-month basis. ARVPIII applies advance deposits to the first month’s rent. Revenue is recognized in the month earned for rent and assisted living services.
 
Advertising Costs
 
The Partnership expenses all advertising costs as they are incurred.
 
Net Income (Loss) Per Limited Partner Unit
 
Net income (loss) per limited partner unit was based on the weighted-average number of limited partner units outstanding of 18,666 for the three and six months ended June 30, 2002 and June 30, 2001.
 
New Accounting Pronouncements
 
The Partnership adopted SFAS No. 141 “Business Combinations”, SFAS No. 142 “Goodwill and Other Intangible Assets”, SFAS No. 143 “Accounting for Asset Retirement Obligations”, and SFAS No. 144 “Accounting for the Impairment and Disposal of Long Lived Assets” on January 1, 2002. The adoption of SFAS Nos. 141, 142, 143, and 144 did not have a material effect on the partnership’s financial position, results of operations, or cash flows.

6

 
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical Corrections.” SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The only impact we expect of adopting SFAS No. 145 is the reclassification of prior year extraordinary losses to interest expense and income taxes.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 is required to be applied prospectively after the adoption date, the Partnership cannot determine the potential effects that adoption of SFAS No. 146 will have on the partnership’s consolidated financial statements.
 
(2)    TRANSACTIONS WITH AFFILIATES
 
The Partnership has an agreement with ARV Assisted Living, Inc. (“ARV”), the partnership’s Managing General Partner, providing for a property management fee of five percent of gross revenues. These payments amounted to $168,000 and $173,000 for the six-month period and $83,000 and $86,000, for the three-month period ended June 30, 2002 and 2001, respectively. Additionally, the Partnership pays ARV a partnership management fee of 10 percent of cash flow before distributions, as provided for in the Partnership Agreement. These payments amounted to $28,000 and $58,000 for the six-month period and $13,000 and $19,000 for the three-month period ended June 30, 2002 and 2001, respectively.
 
(3)    NOTES PAYABLE:
 
At June 30, 2002 and December 31, 2001, notes payable to banks included the following (in thousands):
 
    
June 30, 2002
   
December 31, 2001
Note payable, bearing interest at 8.50% and 9.15% at June 30, 2002 and December 31, 2001, respectively; monthly principal and interest payment of $96 and $69 for 2002 and 2001, respectively. Due July 2003. Collateralized by an ALC and as described below.
   
$
11,919
   
$
7,979
Note payable, bearing interest at 8.06%, monthly principal and interest payment of $41. Due February 2036. Collateralized by an ALC.
   
 
5,741
   
 
5,757
    
  
Total notes payable
   
$
17,660
   
$
13,736
    
  
 
The annual principal payments of notes payable as of June 30, 2002 are as follows (in thousands):
 
For twelve months ended June 30,
       
2003
   
$
184
2004
   
 
11,807
2005
   
 
40
2006
   
 
44
2007
   
 
47
Thereafter
   
 
5,538
    
    
$
17,660
    
 
On January 9, 2001 ARVPIII refinanced one of the two ALCs with a thirty-five year HUD insured loan, bearing interest at 8.06% per annum. The prior debt was extinguished, resulting in an extraordinary loss due to the remaining costs, which were written off at the time of the refinancing. With respect to the loan on the other ALC, on February 1, 2002, the lender agreed to increase the principal

7

sum of the loan to $11,980,000, the maturity date was extended to July 1, 2003 and the interest rate was changed to 8.50% per annum. As a condition to the extension, the principal increase and the rate change, the lender required a $2.0 million cash collateral deposit, and the partnership’s Managing General Partner to guaranty $1.0 million of the loan, which was secured in part by (i) a pledge of partnership interests in ARVPIII, and (ii) a pledge of partnership interests in San Gabriel Retirement Villa, a California Limited Partnership (“SGRV”).
 
 
Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS
 
The following table sets forth a comparison of the six months ended June 30, 2002 and the six months ended June 30, 2001. The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.
 
    
For The Six Months Ended
  
(DOLLARS IN MILLIONS)
   
June 30, 2002
   
June 30, 2001
   
Increase/ (decrease)
  
Revenues:
                     
Rent
   
$
3.03
   
$
3.02
   
0.4
%
Assisted living
   
 
0.31
   
 
0.36
   
(16.2
)%
Interest and other revenue
   
 
0.13
   
 
0.15
   
(10.9
)%
    
  
  
Total revenue
   
 
3.47
   
 
3.53
   
(1.8
)%
    
  
  
Costs and expenses:
                     
Community property operations
   
 
1.78
   
 
1.74
   
2.0
%
Assisted living
   
 
0.25
   
 
0.25
   
0.4
%
General and administrative
   
 
0.17
   
 
0.16
   
8.3
%
Depreciation and amortization
   
 
0.40
   
 
0.42
   
(6.2
)%
Property taxes
   
 
0.09
   
 
0.09
   
(1.1
)%
Interest
   
 
0.71
   
 
0.61
   
16.3
%
    
  
  
Total costs and expenses
   
 
3.40
   
 
3.27
   
3.7
%
    
  
  
Income before taxes and extraordinary loss
   
 
0.07
   
 
0.26
   
(72.7
)%
    
  
  
 
The increase in assisted living community rental revenue of $0.01 million from $3.02 million for the six-month period ended June 30, 2001 to $3.03 million for six-month period ended June 30, 2002, or 0.4%, is primarily attributable to:
 
 
•
 
an increase in the average rental rate per occupied unit to $2,030 for the six-month period ended June 30, 2002 as compared with $1,801 for the six-month period ended June 30, 2001; offset by
 
•
 
a decrease in the average occupancy for our assisted living communities from 97.4% for the six-month period ended June 30, 2001 as compared with 86.9% for the six-month period ended June 30, 2002.
 
The decrease in assisted living revenue of $0.05 million from $0.36 million for the six-month period ended June 30, 2001 to $0.31 million for the six-month period ended June 30, 2002, or (16.2)%, is primarily attributable to:
 
 
•
 
a decrease in the average number of assisted living residents to 75 residents for the six-month period ended June 30, 2002 as compared with 98 residents for the six-month period ended June 30, 2001; offset in part by
 
•
 
an increase in the assisted living rate from $620 per month for the six-month period ended June 30, 2001 as compared with $681 per month for the six-month period ended June 30, 2002.
 
The increase in community property operations and assisted living operating expenses of $0.04 million from $1.99 million for the six-month period ended June 30, 2001 to $2.03 million for the six-month period ended June 30, 2002, or 2.0%, is primarily attributable to:
 
 
•
 
the increased salaries of staff and fringe benefits;
 
•
 
an increase in worker’s compensation insurance;
 
•
 
the increase in advertising and marketing expenses; and
 
•
 
the increase in utilities and auto rental; offset by
 
•
 
the decrease in variable expenses as result of the decrease in occupancy.

8

 
The increase in general and administrative expense of $0.01 million from $0.16 million for the six-month period ended June 30, 2001 to $0.17 million for the six-month period ended June 30, 2002, or 8.3%, is primarily attributable to:
 
 
•
 
an increase in property general liability insurance premiums; and
 
•
 
the increase in professional fees and accounting fees; offset by
 
•
 
the decrease in partnership administrative fees paid to our affiliate; and
 
•
 
a decrease in bad debt expense.
 
The decrease in depreciation and amortization of $0.03 million from $0.42 million for the six-month period ended June 30, 2001 to $0.39 million for the six-month period ended June 30, 2002, or (6.2)%, is primarily due to:
 
 
•
 
a decrease in amortization of loan fees; offset by
 
•
 
the increase in depreciation related to capital improvements of our ALCs.
 
The increase in interest expense of $0.10 million from $0.61 million for the six-month period ended June 30, 2001 to $0.71 million for the six-month period ended June 30, 2002, or 16.3%, is primarily due to:
 
 
•
 
a higher loan balance resulting from refinancing; offset in part by
 
•
 
a lower interest rate.
 
The following table sets forth a comparison of the three months ended June 30, 2002 (the “2002 Quarter”) and the three months ended June 30, 2001 (the “2001 Quarter”). The percentage increase (decrease) is based upon our Condensed Consolidated Statements of Operations and will not compute using the rounded amounts below.
 
    
For The Three Months Ended
  
(DOLLARS IN MILLIONS)
   
June 30, 2002
     
June 30, 2001
   
Increase/ (decrease)
  
Revenues:
                       
Rent
   
$
1.50
 
   
$
1.51
   
(0.9
)%
Assisted living
   
 
0.15
 
   
 
0.18
   
(22.7
)%
Interest and other revenue
   
 
0.08
 
   
 
0.07
   
31.7
%
    
  
  
Total revenue
   
 
1.73
 
   
 
1.76
   
(2.0
)%
    
  
  
Costs and expenses:
                       
Community property operations
   
 
0.89
 
   
 
0.86
   
3.6
%
Assisted living
   
 
0.11
 
   
 
0.12
   
(5.7
)%
General and administrative
   
 
0.11
 
   
 
0.07
   
54.9
%
Depreciation and amortization
   
 
0.21
 
   
 
0.21
   
1.4
%
Property taxes
   
 
0.05
 
   
 
0.05
   
(0.0
)%
Interest
   
 
0.37
 
   
 
0.31
   
17.9
%
    
  
  
Total costs and expenses
   
 
1.74
 
   
 
1.62
   
7.5
%
    
  
  
Income (loss) before taxes and extraordinary loss
   
$
(0.01
)
   
$
0.14
   
(109.0
)%
    
  
  
 
The decrease in assisted living community rental revenue of $0.01 million from $1.51 million for the three-month period ended June 30, 2001 to $1.50 million for the three-month period ended June 30, 2002, or (0.9)%, is primarily attributable to:
 
 
•
 
a decrease in the average occupancy for our assisted living communities to 85.5% for the three-month period ended June 30, 2002 as compared with 96.8% for the three-month period ended June 30, 2001; offset by
 
•
 
an increase in the average rental rate per occupied unit to $2,045 for the three-month period ended June 30, 2002 as compared with $1,817 for the three-month period ended June 30, 2001.
 
The decrease in assisted living revenue of $0.03 million from $0.18 million for the three-month period ended June 30, 2001 to $0.15 million for the three-month period ended June 30, 2002, or (22.7)%, is primarily attributable to:
 
 
•
 
a decrease in the average number of assisted living residents to 71 residents for the three-month period ended June 30, 2002 as compared with 98 residents for the three-month period ended June 30, 2001; offset by
 
•
 
an increase in the assisted living rate from $626 per month for the three-month period ended June 30, 2001 compared to $674 per month for the three-months ended June 30, 2002.

9

 
The increase in community property operations and assisted living operating expenses of $0.02 million from $0.98 million for the three-month period ended June 30, 2001 to $1.00 million for the three-month period ended June 30, 2002, or 2.0%, is primarily attributable to:
 
 
•
 
the increased salaries of staff and fringe benefits;
 
•
 
an increase in worker’s compensation insurance;
 
•
 
the increase in advertising and marketing expenses; and
 
•
 
the increase in utilities and auto rental; offset by
 
•
 
the decrease in variable expenses as result of the decrease in occupancy.
 
The increase in general and administrative expense of $0.04 million from $0.07 million for the three-month period ended June 30, 2001 to $0.11 million for the three-month period ended June 30, 2002, or 54.9%, is primarily attributable to:
 
 
•
 
the increase in property general liability insurance premiums; and
 
•
 
the increase in professional fees and accounting fees; offset by
 
•
 
the decrease in partnership administrative fees paid to our affiliate.
 
The increase in interest expense of $0.06 million from $0.31 million for the three-month period ended June 30, 2001 to $0.37 million for the three-month period ended June 30, 2002, or 17.9%, is primarily due to:
 
 
•
 
a higher loan balance resulting from refinancing; offset in part by
 
•
 
a lower interest rate.
 
LIQUIDITY AND CAPITAL RESOURCES
 
We expect that cash generated from the operations of our properties will be adequate to pay operating expenses, make necessary capital improvements, make required principal reductions of debt and provide distributions to our partners. On a long-term basis, our liquidity is sustained primarily from cash flow provided by operating activities.
 
For the six-month period ended June 30, 2002, net cash provided by operating activities was $0.19 million compared to $0.56 million for the corresponding period in 2001. The decrease was primarily due to:
 
 
•
 
a decrease in net income; adjusted by
 
•
 
an increase in the net change in amounts payable to affiliates, net; offset by
 
•
 
an increase in the net change in other assets; and
 
•
 
a decrease in the net change in accounts payable and accrued expenses.
 
During the six-month period ended June 30, 2002, our net cash used in investing activities was $0.16 million compared to cash used in investing activities of $0.25 million for the corresponding period in 2001. In 2001, there was a large capital improvement made on one of our ALCs as part of the requirement of the refinancing.
 
During the six-month period ended June 30, 2002, our net cash used in financing activities was $2.04 million compared to cash used in financing activities of $5.67 million for the corresponding period in 2001. The financing activities for the six-month period ended June 30, 2002 consist of:
 
 
•
 
distribution of the excess cash generated from the refinancing;
 
•
 
a collateral deposit made related to the amendment on one of our mortgage notes;
 
•
 
principal repayments on notes payable; and
 
•
 
loan fees paid and an increase in the capital expenditure replacement reserve; offset by
 
•
 
an increase in the principal amount of one of our existing loans.
 
We estimate that we will incur approximately $346,000 for capital expenditures during 2002 for physical improvements at our two assisted living communities. As of June 30, 2002 we have made approximately $158,000 in capital expenditures. The funds for these improvements should be available from operations and existing reserve funds.

10

 
In order to protect itself against lawsuits and claims relating to general and professional liability, we currently maintain third party insurance policies in amounts and covering risks that are consistent with industry practice. Under the terms of such insurance policies, our coverage is provided subject to varying deductible levels and liability amounts. As the results of poor industry loss experience, a number of insurance carriers have stopped providing insurance coverage to the assisted living industry, and those remaining have drastically increased premiums and deductible amounts. Consistent with this trend, our general liability coverage is subject to significant deductible levels on a per occurrence basis, for the nine months ended December 31, 2001 and the three months ended March 31, 2002. For the three months ended June 30, 2002, our general liability deductible per occurrence has again been materially increased. Losses up to these deductible levels are accrued based upon our estimates of the aggregate liability for claims incurred based on our experience. As the result of these continuing increases in both deductible amounts and premiums, there can be no assurance that we will be able to obtain all desired insurance coverage in the future on commercially reasonable terms or at all.
 
IMPACT OF INFLATION AND CHANGING PRICES
 
To date, inflation has not had a significant impact on the Partnership. Inflation could, however, affect our future revenues and operating income due to our dependence on the senior resident population, most of who rely on relatively fixed incomes to pay for our services. The monthly charges for the resident’s unit and assisted living services are influenced by the location of the community and local competition. Our ability to increase revenues in proportion to increased operating expenses may be limited. We typically do not rely to a significant extent on governmental reimbursement programs. In pricing our services, we attempt to anticipate inflation levels, but there can be no assurance that we will be able to respond to inflationary pressures in the future.
 
FORWARD-LOOKING STATEMENTS
 
A number of matters and subject areas discussed in this report, that are not historical or contain current facts, deal with potential future circumstances, operations, and prospects. The discussion of these matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from our actual future experience as a result of such factors as: the effects of competition and economic conditions on the occupancy levels in our communities; our ability under current market conditions to maintain and increase our resident charge without adversely affecting the occupancy level; our ability to control community operation expenses without adversely affecting the occupancy level and the level of resident charges; the ability of our operations to generate cash flow sufficient to service our debt, capital expenditures and other fixed payment requirements; our ability to find sources of financing and capital on satisfactory terms to meet our cash requirements to the extent that they are not met by operations. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future results to differ from our current expectations regarding the matters or subject areas discussed in this report. These and other risks and uncertainties are detailed in our reports filed with the Securities and Exchange Commission, including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
 
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
The Partnership is exposed to market risks related to fluctuations in the interest rates on the partnership’s fixed rate notes payable. With respect to the partnership’s fixed rate notes payable, changes in the interest rates affect the fair value of the notes payable, but not the partnership’s earnings or cash flows. The Partnership does not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair value should not have a significant impact on the fixed rate debt until the earlier of maturity and any required refinancing of such debt. The Partnership does not currently have any variable interest rate debt and, therefore, is not subject to interest rate risk associated with variable interest rate debt. Currently, the Partnership does not utilize interest rate swap or exchange agreements and, therefore, is not subjected to interest rate risk associated with interest rate swaps.
 
None of the partnership’s total assets and total contract revenues as of and for the periods ended June 30, 2002 and 2001 were denominated in currencies other than the U.S. Dollar; accordingly, the Partnership believes that ARVPIII has no material exposure to foreign currency exchange risk. This materiality assessment is based on the assumption that the foreign currency exchange rates could change unfavorably by 10%. The Partnership has no foreign currency exchange contracts.

11

 
PART II    OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
The Partnership is from time to time subject to ordinary routine legal proceedings that arise in the normal course of business. While the Partnership cannot predict the results with certainty, the Partnership does not believe that any liability from any such lawsuits or other matters will have a material effect on the partnership’s financial position, results of operations, or liquidity.
 
Item 2.    Changes in Securities and Use of Preceeds
 
None.
 
Item 3.    Defaults Upon Senior Securities
 
None.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
None.
 
Item 5.    Other Information
 
None.
 
Item 6.    Exhibits and Reports on Form 8-K
 
 
(a)
 
The following documents are filed as a part of this Report:
 
10.17
   
Second Amendment to Multifamily Note between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.18
   
Second Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.19
   
Master Modification Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.20
   
Guaranty Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
10.21
   
Cash Collateral Pledge Agreement between Retirement Inns III, LLC and Red Mortgage Capital, Inc.
 
 
(b)
 
Reports on Form 8-K
 
We did not file any reports on Form 8-K for the quarter ended June 30, 2002.

12

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. A CALIFORNIA LIMITED PARTNERSHIP, BY THE FOLLOWING PERSONS ON OUR BEHALF.
 
Date: August 9, 2002
 
ARV ASSISTED LIVING, INC.,
its Managing General Partner
By:
  
/s/    DOUGLAS M. PASQUALE        
   
Douglas M. Pasquale
Chief Executive Officer
 
 
By:
  
/s/    ABDO H. KHOURY        
   
Abdo H. Khoury
President and Chief Financial Officer

13
EX-10.17 3 dex1017.txt SECOND AMENDMENT TO MULITFAMILY NOTE Exhibit 10.17 SECOND AMENDMENT TO MULTIFAMILY NOTE THIS SECOND AMENDMENT TO MULTIFAMILY NOTE (this "Amendment") is made as of this day of February, 2002 and effective as between the parties hereto as of January 1, 2002, between RETIREMENT INNS III, LLC, a Delaware limited liability company (the "Borrower"), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, formerly known as Provident Mortgage Capital, Inc., successor-in-interest to Banc One Capital Funding Corporation (the "Lender"). RECITALS WHEREAS, the Lender has previously made a loan to the Borrower in the original principal sum of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars ($8,209,900) (the "Loan") pursuant to the terms of that certain Multifamily Note dated as of June 27, 1999, by the Borrower to the order of the Lender (the "Original Note"), as amended pursuant to the terms of that certain First Amendment to Multifamily Note dated as of December 28, 2000 between Borrower and Lender (the "First Amendment to Note" and together with the Original Note, the "Existing Note") and is secured, in part, by a first mortgage lien on the real property (the "Mortgaged Property") described on Exhibit A to that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 27, 1999 by the Borrower and for the benefit of the Lender (the "Original Deed of Trust"), recorded among the Official Records of Ventura County, California (the "Land Records") on June 28, 1999 as Instrument No. 99-122405, as amended by that certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of August 31, 1999 between the Borrower and the Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records on September 10, 1999 as Instrument No. 99-173435, as affected by that certain Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of December 12, 2000, effective as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage Capital, Inc. (the "Confirmatory Assignment", and together with the Original Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of Trust"), recorded among the Land Records on January 31, 2001 as Instrument No. 2001-0018605-00; and WHEREAS, pursuant to the terms of that certain Confirmatory Agreement dated as of December 28, 2000 by and among the Borrower, ARV Assisted Living, Inc., a Delaware corporation (the "Guarantor"), and the Lender (the "Confirmatory Agreement"), and the First Amendment to Note, the Maturity Date (as such term is defined in the Original Note) of the Loan was extended to January 1, 2002; and WHEREAS, the Borrower has requested and the Lender has agreed pursuant to the terms and conditions of that certain Master Modification Agreement dated as of the date hereof by and among Borrower, Guarantor, and Lender (the "Modification Agreement") to (i) increase the principal sum of the Loan to $11,980,000 (the "Increase"), (ii) extend the Maturity Date (as such term is defined in the Existing Note) of the Loan to July 1, 2003 (the "Extension"), and (iii) change the interest rate of the Loan to 8.50% (the "Rate Change"); and WHEREAS, Borrower and Lender have agreed to enter into this Amendment in accordance with the terms and conditions of the Modification Agreement. NOW, THEREFORE, for and in consideration of the premises, the mutual entry of the Modification Agreement by the parties thereto, the Extension, the Increase, the Rate Change, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by each party hereto, the parties hereby agree as follows: Section 1. Recitals. The Recitals are hereby incorporated into this Amendment as a substantive part hereof. Section 2. Modification to the Existing Note. (a) The first paragraph of the Existing Note is hereby deleted in its entirety and the following is inserted in lieu thereof: "FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the order of RED MORTGAGE CAPITAL, INC., an Ohio corporation, or any successor holder of this Multifamily Note, the principal sum of ELEVEN MILLION NINE HUNDRED EIGHTY THOUSAND and 00/100 DOLLARS (US $11,980,000.00), with interest on the unpaid principal balance at the annual rate of Eight and 50/100ths percent (8.50%)." (b) Section 3(b) of the Existing Note is hereby deleted in its entirety and the following is inserted in lieu thereof: "Consecutive monthly installments of principal and interest, each in the amount of Ninety-Six Thousand Three Hundred Eighty-Seven and 22/100 Dollars (US $96,387.22), shall be payable on the first day of each month beginning on March 1, 2002 until the Maturity Date or the Extended Maturity Date (as defined in Section 20 herein), if applicable, until the entire unpaid principal balance evidenced by this Note is fully paid. Any accrued interest remaining past due for 30 days or more shall be added to and become part of the unpaid principal balance and shall bear interest at the rate or rates specified in this Note, and any reference below to "accrued interest" shall refer to accrued interest which has not become part of the unpaid principal balance. Subject to Section 20 herein, any remaining principal and interest shall be due and payable on July 1, 2003 or on any earlier date on which the unpaid principal balance of this Note becomes due and payable, by acceleration or otherwise (the "Maturity Date"). The unpaid principal balance shall continue to bear interest after the Maturity Date or the Extended Maturity Date, if applicable, at the Default Rate set forth in this Note until and including the date on which it is paid in full." Section 3. Ratification. Except as may be amended or modified hereby, the terms of the Existing Note are hereby ratified, affirmed and confirmed and shall otherwise remain in full force and effect. Section 4. Amendments. This Amendment may be amended or supplemented by and only by an instrument executed and delivered by each party hereto. Section 5. Waiver. The Lender shall not be deemed to have waived the exercise of any right which it holds under the Original Loan Documents (as such term is defined in the Modification Agreement) unless such waiver is made expressly and in writing (and no delay or omission by the Lender in exercising any such right shall be deemed a waiver of its future exercise). No such waiver made as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. Without limiting the operation and effect of the foregoing provisions hereof, no act done or omitted by the Lender pursuant to the powers and rights granted to it hereunder shall be deemed a waiver by the Lender of any of its rights and remedies under any of the provisions of the Original Loan Documents executed in connection with the Loan, and this Assignment is made and accepted without prejudice to any of such rights and remedies. Section 6. Governing Law. This Agreement shall be given effect and construed by application of the law of the State of California. Section 7. Headings. The headings of the sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 2 Section 8. References. As used herein, all references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well. Section 9. Severability. No determination by any court, governmental body or otherwise that any provision of this Amendment or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (i) any other such provision or (ii) such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. Section 10. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest in the Original Loan Documents without the prior written consent of the Lender. Section 11. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same instrument. Section 12. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH (i) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS AMENDMENT, THE NOTE, ANY OTHER ORIGINAL LOAN DOCUMENT, OR THE RELATIONSHIP BETWEEN THE PARTIES, AS LENDER AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (ii) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Amendment under their respective seals as of the day and year first written above. WITNESS: BORROWER: RETIREMENT INNS III, LLC, __________________________ a Delaware limited liability company By:_________________________________ Name: Abdo H. Khoury Title: Manager WITNESS: LENDER: RED MORTGAGE CAPITAL, INC., __________________________ an Ohio corporation, formerly known as Provident Mortgage Capital, Inc., successor-in-interest to Banc One Capital Funding Corporation By:_________________________________ Name: Title: 3 EX-10.18 4 dex1018.txt SECOND AMENDMENT TO MULTIFAMILY DEED OF TRUST Exhibit 10.18 SECOND AMENDMENT TO MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (CALIFORNIA) THIS SECOND AMENDMENT TO MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Amendment") is made as of the ___ day of February, 2002 and effective as between the parties hereto as of January 1, 2002, by and between RETIREMENT INNS III, LLC, a Delaware limited liability company ("Borrower"), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, formerly known as Provident Mortgage Capital, Inc., successor-in-interest to Banc One Capital Funding Corporation ("Lender"). WHEREAS, Lender has previously made a loan to Borrower in the original principal sum of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars ($8,209,900) pursuant to the terms of that certain Multifamily Note dated as of June 27, 1999 by the Borrower to the order of Lender (the "Original Note"), as amended by that certain First Amendment to Multifamily Note dated as of December 28, 2000 between Borrower and Lender (the "First Amendment to Note" together with the Original Note, the "Existing Note"), and is secured by a first mortgage lien on the real property described on Exhibit A attached hereto pursuant to that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 27, 1999 by Borrower for the benefit of Lender (the "Original Deed of Trust") and recorded among the Land Records of Ventura County on June 28, 1999 as Instrument No. 99-122405, as amended by that certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of August 31, 1999 between Borrower and Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records on September 10, 1999 as Instrument No. 99-173435, as affected by that certain Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of December 12, 2000, effective as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage Capital, Inc. (the "Confirmatory Assignment", and together with the Original Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of Trust"), recorded among the Land Records on January 31, 2001 as Instrument No. 2001-0018605-00; and WHEREAS, the Borrower has requested and the Lender has agreed pursuant to the terms and conditions of that certain Master Modification Agreement dated as of the date hereof by and among Borrower, Lender and ARV Assisted Living, Inc., a Delaware corporation ("Modification Agreement"), to (i) increase the principal sum of the Loan to $11,980,000 ) (the "Increase"), (ii) extend the Maturity Date (as such term is defined in the Existing Note) of the Loan to July 1, 2003 (the "Extension"), and (iii) change the interest rate of the Loan to 8.50% (the "Rate Change"); and 1 WHEREAS, the Borrower and the Lender have agreed to enter into this Amendment in accordance with the terms and conditions of the Modification Agreement. NOW, THEREFORE, for and in consideration of the premises, the mutual entry of the Modification Agreement and this Amendment, the Extension, the Increase, the Rate Change, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by each party hereto, the parties hereby agree as follows:: Section 1. Amendment to Existing Deed of Trust. Paragraph 3 of the Existing Deed of Trust is hereby amended to change the amount of "Indebtedness" (as defined therein) secured thereby from $8,209,900 to $11,980,000. Section 2. Ratification. Except as may be amended or modified hereby, the terms of the Existing Deed of Trust are hereby ratified, affirmed and confirmed and shall otherwise remain in full force and effect. Section 3. Amendments. This Amendment may be amended or supplemented by and only by an instrument executed and delivered by each party hereto. Section 4. Waiver. The Lender shall not be deemed to have waived the exercise of any right which it holds under the Original Loan Documents (as such term is defined in the Modification Agreement) unless such waiver is made expressly and in writing (and no delay or omission by the Lender in exercising any such right shall be deemed a waiver of its future exercise). No such waiver made as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. Without limiting the operation and effect of the foregoing provisions hereof, no act done or omitted by the Lender pursuant to the powers and rights granted to it hereunder shall be deemed a waiver by the Lender of any of its rights and remedies under any of the provisions of the Original Loan Documents executed in connection with the Loan, and this Assignment is made and accepted without prejudice to any of such rights and remedies. Section 5. Governing Law. This Agreement shall be given effect and construed by application of the law of the State of California. Section 6. Headings. The headings of the sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. Section 7. References. As used herein, all references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well. 2 Section 8. Severability. No determination by any court, governmental body or otherwise that any provision of this Amendment or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (i) any other such provision or (ii) such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. Section 9. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest in the Original Loan Documents without the prior written consent of the Lender. Section 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same instrument. Section 11. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH (i) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS AMENDMENT, THE NOTE, ANY OTHER ORIGINAL LOAN DOCUMENT, OR THE RELATIONSHIP BETWEEN THE PARTIES, AS LENDER AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (ii) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. 3 IN WITNESS WHEREOF, the undersigned parties have signed and delivered this instrument or have caused this instrument to be signed and delivered by its duly authorized representative. BORROWER: RETIREMENT INNS III, LLC, a Delaware limited liability company By:_________________________________ Name: Abdo H. Khoury Title: Manager LENDER: RED MORTGAGE CAPITAL, INC., an Ohio Corporation, formerly known as Provident Mortgage Capital, Inc., successor-in-interest to Banc One Capital Funding Corporation By:_________________________________ Name: Title: 4 EX-10.19 5 dex1019.txt MASTER MODIFICATION AGREEMENT Exhibit 10.19 MASTER MODIFICATION AGREEMENT THIS MASTER MODIFICATION AGREEMENT (this "Agreement") is made as of this day of February, 2002 and effective as between the parties hereto as of January 1, 2002, by and among RETIREMENT INNS III, LLC, a Delaware limited liability company (the "Borrower"), ARV ASSISTED LIVING, INC., a Delaware corporation (the "Guarantor"), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, formerly known as Provident Mortgage Capital, Inc., successor-in-interest to Banc One Capital Funding Corporation (the "Lender"). RECITALS WHEREAS, the Lender has previously made a loan to the Borrower in the original principal sum of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars ($8,209,900) (the "Loan") pursuant to the terms of that certain Multifamily Note dated as of June 27, 1999, by the Borrower to the order of the Lender (the "Original Note"), as amended pursuant to the terms of that certain First Amendment to Multifamily Note dated as of December 28, 2000 between Borrower and Lender (the "First Amendment to Note" and together with the Original Note, the "Existing Note"), and is secured, in part, by a first mortgage lien on the real property (the "Mortgaged Property") described on Exhibit A to that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 27, 1999 by the Borrower for the benefit of the Lender (the "Original Deed of Trust"), recorded among the Official Records of Ventura County, California (the "Land Records") on June 28, 1999 as Instrument No. 99-122405, as amended by that certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of August 31, 1999 between the Borrower and the Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records on September 10, 1999 as Instrument No. 99-173435, as affected by that certain Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of December 12, 2000, effective as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage Capital, Inc. (the "Confirmatory Assignment", and together with the Original Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of Trust"), "), recorded among the Land Records on January 31, 2001 as Instrument No. 2001-0018605-00; and WHEREAS, the Guarantor, in order to induce the Lender to make the Loan to the Borrower, executed and delivered that certain Limited Guaranty dated as of June 27, 1999 to and for the benefit of the Lender, thereby guaranteeing, under certain enumerated circumstances set forth therein, the payment and performance obligations of the Borrower to the Lender under the Original Note (which Limited Guaranty, as the same may be from time to time renewed, extended, amended, restated, supplemented or otherwise modified is herein called the "Limited Guaranty"); and WHEREAS, as additional security for the Borrower's obligations under the Original Note to the Lender, the Borrower and the Lender entered into that certain Replacement Reserve and Security Agreement dated as of June 27, 1999 (the "Replacement Reserve Agreement") whereby the Borrower agreed to make monthly deposits into the Replacement Reserve (as such term is defined in the Replacement Reserve Agreement) to maintain the Mortgaged Property; and WHEREAS, as additional security for the Borrower's obligations under the Original Note to the Lender, the Borrower, the Guarantor and the Lender also entered into that certain Assignment and Subordination of Management Agreement dated as of June 27, 1999 (the "Assignment and Subordination") whereby the Borrower assigned all of its right, title and interest in and to the Management Agreement (as such term is defined in the Assignment and Subordination) and the Guarantor agreed, among other things, (i) to subordinate its right of payment to certain fees under the Management Agreement to the Loan and to the liens terms, covenants and conditions of the Existing Deed of Trust, (ii) 1 to attorn to the Lender upon an Event of Default (as such term is defined in the Existing Deed of Trust) under the Existing Deed of Trust and continue to manage and operate the Mortgaged Property upon the occurrence of an Event of Default at the request of, and in cooperation with the Lender, due to the special regulatory requirements of the Mortgaged Property as a seniors housing facility, until a replacement manager/operator has been obtained, and (iii) to assign to the Lender all of its right, title and interest in and to all permits, licenses, operating contracts, certificates and agreements of any nature relating to the ownership, occupancy, use, operation or management of the Mortgaged Property; and WHEREAS, as additional security for the Borrower's obligations under the Original Note to the Lender, the Borrower and Lender also entered into that certain (i) Note and Agreement dated as of June 27, 1999 (the "Additional Note"), (ii) Letter Agreement dated June 27, 1999 (the "Side Letter Agreement") and (iii) Agreement to Amend or Comply dated as of June 27, 1999 (the "Agreement to Amend or Comply"); and WHEREAS, pursuant to the terms of that certain Confirmatory Agreement dated as of December 28, 2000 by and among the Borrower, the Guarantor and the Lender (the "Confirmatory Agreement"), and the First Amendment to Note, the Maturity Date (as such term was defined in the Original Note) of the Loan was extended to January 1, 2002; and WHEREAS, the Original Note, the Original Deed of Trust, the Limited Guaranty, the Replacement Reserve Agreement, the Assignment and Subordination, the Additional Note, the Side Letter Agreement, the Agreement to Amend or Comply and any and all other documents, instruments, agreements and certificates (including, but not limited to, the Certificate of Borrower dated June 27, 1999 executed by Borrower) originally executed in connection with the Loan, as well as the First Amendment to Note, the First Amendment to Deed of Trust, the Confirmatory Assignment and the Confirmatory Agreement may sometimes be collectively referred to herein as the "Original Loan Documents"; and WHEREAS, the Borrower has requested and the Lender has agreed, subject to the terms and conditions of this Agreement, to (i) increase the principal sum of the Loan to $11,980,000 ) (the "Increase"), (ii) extend the Maturity Date (as such term is defined in the Existing Note) of the Loan to July 1, 2003 (the "Extension"), and (iii) change the interest rate of the Loan to 8.50% (the "Rate Change"); and WHEREAS, as a condition to granting the Extension, the Increase and the Rate Change, Lender has required the Borrower to make a cash deposit to the Lender and the Guarantor to guaranty a portion of Loan, such guaranty secured in part by a pledge of certain partnership interests owned by the Guarantor. NOW, THEREFORE, for and in consideration of the mutual entry of this Agreement by the parties hereto, the Extension, the Increase and the Rate Change and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by each party hereto, the parties hereby agree as follows: Section 1. Recitals. The Recitals are hereby incorporated into this Agreement as a substantive part hereof. Section 2. Loan Modifications. The Borrower, the Guarantor and the Lender hereby acknowledge and agree: (a) The Maturity Date of the Loan (defined in Paragraph 3(b) thereof) is hereby extended to July 1, 2003; (b) The interest rate of the Loan (referenced in the first paragraph thereof) is changed to 8.50%; and (c) The principal sum of the Loan (referenced in the first paragraph thereof) is increased to $11,980,000. 2 Section 3. Amendments to Existing Note. The Existing Note shall be amended in accordance with the provisions of Section 2 hereof and as further set forth in the Second Amendment to Multifamily Note dated as of the date hereof between the Borrower and the Lender (the "Second Amendment to Note") in the form attached hereto as Exhibit A. Section 4. Amendment to Existing Deed of Trust. The Existing Deed of Trust shall be amended as set forth in the Second Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of the date hereof between the Borrower and the Lender (the "Second Amendment to Deed of Trust") in the form attached hereto as Exhibit B. Section 5. Amendments to Original Loan Documents. To the extent not amended by Sections 2, 3 and 4 hereof, all references to the principal sum of the Loan in the Original Loan Documents (referenced therein as $8,209,900) is hereby changed to $11,980,000. From and after the date hereof, references to the terms "Note" and "Deed of Trust" in the Original Loan Documents shall mean Existing Note as amended by the Second Amendment to Note on the one hand, and the Existing Deed of Trust as amended by the Second Amendment to Deed of Trust on the other hand. Section 6. Clarification of the Agreement to Amend or Comply. The Residual Savings (as defined in the Agreement to Amend or Comply), as calculated in the Agreement to Amend or Comply, shall be calculated utilizing the interest rate set forth in the Original Note (i.e., 9.15%). Section 7. Conditions and Requirements for the Extension, the Increase and the Rate Change. Section 7.1. The obligation of the Lender to enter into this Agreement is subject to the satisfaction by Borrower and Guarantor, as applicable, of the following requirements, each in form and content satisfactory to the Lender in its sole discretion: (a) Receipt by the Lender of the Second Amendment to Note executed by the Borrower; (b) Receipt by the Lender of the Second Amendment to Deed of Trust executed by the Borrower; (c) Receipt by the Lender of that certain Cash Collateral Pledge Agreement executed by the Borrower for the benefit of the Lender dated as of the date hereof (the "Cash Pledge Agreement"), pursuant to which the Borrower will deposit the sum of Two Million Dollars ($2,000,000) (the "Deposit") with the Lender; (d) Receipt by the Lender of the Deposit pursuant to the Cash Pledge Agreement; (e) Receipt by the Lender of that certain Guaranty Agreement executed by Guarantor for the benefit of the Lender dated as of the date hereof (the "Guaranty"); (f) Receipt by the Lender of that certain San Gabriel Retirement Villa Partnership Interest Pledge Agreement executed by Guarantor for the benefit of the Lender dated as of the date hereof (the "SGRV Pledge Agreement"); (g) Receipt by the Lender of that certain American Retirement Villas Properties III, L.P. Partnership Interest Pledge Agreement executed by Guarantor for the benefit of the Lender dated as of the date hereof (the "ARV PIII Pledge Agreement "); (h) Receipt by the Lender of a "date-down" endorsement to Policy Number 27-042-92-1219845 issued by Fidelity National Title Company ("Fidelity") on June 28, 1999 (the "Title Policy") (or a new title policy if so elected by Fidelity in lieu of a date-down endorsement) showing 3 no other exceptions to title than as excepted in Schedule B-II of the Title Policy and increasing the insured amount thereof to $11,980,000; (i) Receipt by the Lender of an Extension Fee in the amount of Fifty-Nine Thousand Eight Hundred Fifty and 00/100 Dollars ($59,850.00); and (j) Receipt by the Lender of a Financing Fee of Forty Thousand and 00/100 Dollars ($40,000.00). The Second Amendment to Note, the Second Amendment to Deed of Trust, the Guaranty, the ARV PIII Pledge Agreement (ARV), the SGRV Pledge Agreement, the Cash Pledge Agreement and any and all other documents, instruments, agreements and certificates executed by Borrower or Guarantor in connection with this Agreement, the Extension, the Increase or the Rate Change may sometimes be collectively referred to herein as the "New Loan Documents", and together with the Original Loan Documents, the "Loan Documents". Section 7.2. The obligation of the Lender to enter into this Agreement shall be further subject to the requirement that the Borrower and the Guarantor, as applicable, or any other party, execute and deliver to the Lender such other documents in addition to the New Loan Documents as the Lender may reasonably require in connection with this Agreement. In addition, the Borrower shall also pay to the Lender on demand, all costs and expenses both now and hereafter paid or incurred in connection with the extension and modification of the Loan pursuant hereto, including, but not limited to, attorney's fees and expenses, title fees and expenses, recording costs, and surveyor fees and expenses. Section 8. Representations and Warranties. The Borrower and the Guarantor represent and warrant to the Lender as of the date hereof that: (a) No Event of Default exists under any of the Loan Documents and no event or circumstance has occurred which with the passage of time would constitute an Event of Default under any of the Loan Documents; (b) All of the representations and warranties given by each such party in the Original Loan Documents are true and complete in all material respects on the date hereof as if made on the date hereof; (c) As of the date hereof, there are no actions, suits or proceedings pending, or to the knowledge of the Borrower and the Guarantor, threatened, (i) against or affecting the Mortgaged Property, or (ii) involving the validity or enforceability of the Deed of Trust or the priority of the lien thereof, or (iii) against the Borrower or the Guarantor, at law or in equity or before or by any governmental authority except (a) actions, suits and proceedings against the Borrower or the Guarantor fully covered by insurance and as to each of which the Borrower or the Guarantor has provided information satisfactory to the Lender, (b) actions, suits and proceedings against the Borrower or the Guarantor which will not materially adversely affect their respective business, financial condition or operations, or (c) otherwise previously disclosed to the Lender in the Original Loan Documents; and to the knowledge of the Borrower or the Guarantor, neither the Borrower nor the Guarantor is in default with respect to any order, writ, injunction, decree or demand of any court or any governmental authority. (d) All federal, state and local tax returns and reports of the Borrower and the Guarantor required by law to be filed have been duly filed, and all taxes, assessments, fees and other governmental charges upon the Borrower and the Guarantor and their respective properties, assets, income and franchises which are due and payable have been paid in full. The Borrower and the Guarantor maintain adequate reserves and/or accruals in respect of federal, state and local taxes for all fiscal periods, and neither the Borrower nor the Guarantor know of any unpaid assessments for any taxes or any basis therefor. Section 9. Ratification, No Novation, Effect of Modifications. Except as may be amended or modified by this Agreement, the Second Amendment to Note and the Second Amendment to 4 Deed of Trust, the terms of the Original Loan Documents are hereby ratified, affirmed and confirmed and shall otherwise remain in full force and effect. To the extent not otherwise specifically provided herein, it is the intention of the Borrower, the Guarantor and the Lender that nothing in this Agreement shall be construed to extinguish, release, or discharge or constitute, create or effect a novation of, or an agreement to extinguish, release or discharge, any of the obligations, indebtedness and liabilities of the Borrower or the Guarantor or any other party under the provisions of the Original Loan Documents. In the event of any conflict between the terms of the Original Loan Documents and this Agreement, the terms of this Agreement shall control. Section 10. Amendments. This Agreement may be amended or supplemented by and only by an instrument executed and delivered by each party hereto. Section 11. Waiver. The Lender shall not be deemed to have waived the exercise of any right which it holds under the Original Loan Documents unless such waiver is made expressly and in writing (and no delay or omission by the Lender in exercising any such right shall be deemed a waiver of its future exercise). No such waiver made as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. Without limiting the operation and effect of the foregoing provisions hereof, no act done or omitted by the Lender pursuant to the powers and rights granted to it hereunder shall be deemed a waiver by the Lender of any of its rights and remedies under any of the provisions of the Original Loan Documents executed in connection with the Loan, and this Agreement is made and accepted without prejudice to any of such rights and remedies. Section 12. Governing Law. This Agreement shall be given effect and construed by application of the law of the State of California. Section 13. Headings. The headings of the sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. Section 14. References. As used herein, all references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well. Section 15. Severability. No determination by any court, governmental body or otherwise that any provision of this Agreement or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (i) any other such provision or (ii) such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. Section 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Guarantor, and the Lender and their respective successors and assigns. Section 17. Effectiveness. This Agreement shall become effective on and only on its execution and delivery by each party hereto. Section 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same instrument. Section 19. WAIVER OF JURY TRIAL. THE BORROWER, THE GUARANTOR, THE ADDITIONAL GUARANTOR AND THE LENDER EACH (i) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS AMENDMENT, THE NOTE, ANY OTHER ORIGINAL LOAN DOCUMENT, OR THE RELATIONSHIP BETWEEN THE PARTIES, AS LENDER, GUARANTOR AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (ii) WAIVES ANY RIGHT TO TRIAL BY 5 JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. 6 IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Agreement under their respective seals as of the day and year first written above. WITNESS: BORROWER: RETIREMENT INNS III, LLC, ____________________ a Delaware limited liability company By:________________________________(SEAL) Name: Abdo H. Khoury Title: Manager WINTESS: GUARANTOR: ARV ASSISTED LIVING, INC., _____________________ a Delaware corporation By:________________________________(SEAL) Name: Abdo H. Khoury Title: President WITNESS: LENDER: RED MORTGAGE CAPITAL, INC., _____________________ an Ohio corporation, formerly known as Provident Mortgage Capital, Inc., successor-in-interest to Banc One Capital Funding Corporation By:________________________________(SEAL) Name: Title: 7 EX-10.20 6 dex1020.txt GUARANTY AGREEMENT Exhibit 10.20 GUARANTY AGREEMENT THIS GUARANTY AGREEMENT (this "Agreement") is made this day of February, 2002, by ARV ASSISTED LIVING, INC., a Delaware corporation ("Guarantor"), to and for the benefit of RED MORTGAGE CAPITAL, INC., an Ohio corporation ("Lender"). RECITALS WHEREAS, Lender has previously made a loan (the "Loan") to Retirement Inns III, LLC, a Delaware limited liability company ("Borrower"), in the principal sum of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars ($8,209,900) evidenced by that certain Multifamily Note dated June 27, 1999, issued by Borrower to the order of Lender (the "Original Note"), as amended by that certain First Amendment to Multifamily Note dated December 28, 2000 between Borrower and Lender (the "First Amendment to Note" and together with the Original Note, the "Existing Note"), as further amended by that certain Second Amendment to Multifamily Note dated as of even date herewith between Borrower and Lender (the "Second Amendment to Note") (the Original Note, as amended by the First Amendment to Note and the Second Amendment to Note, is herein called the "Note"), secured in part, by that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 27, 1999 by the Borrower for the benefit of Lender (the "Original Deed of Trust"), recorded among the Official Records of Ventura County, California (the "Land Records") on June 28, 1999 as Instrument No. 99-122405, as amended by that certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of August 31, 1999 between Borrower and Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records on September 10, 1999 as Instrument No. 99-173435, as affected by that certain Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of December 12, 2000, effective as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage Capital, Inc. (the "Confirmatory Assignment", and together with the Original Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of Trust"), recorded among the Land Records on January 31, 2001 as Instrument No. 2001-0018605-00, as further amended by that certain Second Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of even date herewith between Borrower and Lender (the "Second Amendment to Deed of Trust"), recorded among the Land Records simultaneously with the execution of this Agreement (the Existing Deed of Trust, as amended by the Second Amendment to Deed of Trust, is herein called the "Deed of Trust"); and WHEREAS, Borrower has requested and Lender has agreed pursuant to the terms and conditions of that certain Master Modification Agreement dated as of the date 1 hereof by and among the Borrower, the Lender and the Guarantor (the "Modification Agreement") to (i) increase the principal sum of the Loan to $11,980,000 (the "Increase"), (ii) extend the Maturity Date (as defined in the Existing Note) of the Loan to July 1, 2003 (the "Extension") and (iii) change the interest rate of the Loan to 8.50% (the "Rate Change"); and WHEREAS, Guarantor is the parent company of Borrower and has obtained material benefits from the Loan and will obtain material benefits from the Loan as increased, extended and otherwise amended pursuant to the Modification Agreement; and WHEREAS, Lender has required that Guarantor guaranty a portion of the Loan pursuant to the terms of this Agreement as a condition to agreeing to the Increase, the Extension and the Rate Change, and entering into the Modification Agreement. NOW, THEREFORE, in consideration of the premises, the mutual entry of the Modification Agreement by the parties thereto, the Increase, the Extension, the Rate Change and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor and Lender hereby agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION SECTION 1.1. Definitions. All capitalized terms which are not specifically defined in this Agreement shall have the meanings assigned to such terms in the Deed of Trust. In addition, the terms defined in the Preamble and Recitals hereto and elsewhere herein shall have the respective meanings specified therein or elsewhere herein, and the following terms shall have the following meanings: "ARVP III" means American Retirement Villas Properties III, L.P., a California limited partnership. "ARVP III Pledge Agreement" means that certain American Retirement Villas Properties III, L.P. Partnership Interest Pledge Agreement dated as of the date hereof by Guarantor to and for the benefit of Lender. "Cash Collateral Agreement" means that certain Cash Collateral Pledge Agreement dated as of the date hereof by Borrower for the benefit of Lender. "Collateral" means (a) (i) the partnership unit certificates of ARV PIII and SGRV now owned or in the future acquired by Guarantor, (ii) any (if any) certificates representing or evidencing the partnership units of ARVP III and SGRV owned by Guarantor, (iii) any and all other property which may be delivered to or held by Lender pursuant to the provisions of the ARV PIII Pledge Agreement and the SGRV Pledge Agreement, and (iv) subject to the provisions of the ARV PIII Pledge Agreement and the SGRV Pledge Agreement, all payments of principal or interest, distributions, dividends, 2 cash, income, profits instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of, in exchange for or upon conversion of, the partnership units of ARV PIII and SGRV owned by Guarantor, and (v) subject to the provisions of the ARV PIII Pledge Agreement and the SGRV Pledge Agreement, any and all voting and other rights, powers and privileges accruing or incidental to an owner of the partnership units of ARV PIII or SGRV and the other property referred to in clauses (i) through (iv); and (b) all cash and non-cash proceeds and products of the portion of the Collateral described in clause (a) above. "Enforcement Costs" means any and all funds, costs, expenses and charges of any nature whatsoever (including, without limitation, attorney's fees and expenses) advanced, paid or incurred by or on behalf of Lender under or in connection with the administration or enforcement of this Agreement, including, without limitation, (a) the compliance of Guarantor with any covenant, warranty, representation or agreement of Guarantor made in or pursuant to this Agreement or any of the other Loan Documents, and (b) the exercise, preservation, maintenance, protection, operation, management, enforcement, collection, sale or other disposition of, or realization upon, this Agreement, all or any part of the Collateral and the rights and remedies of Lender hereunder, under applicable law and otherwise. "Event of Default" has the meaning set forth in Article V. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity or person exercising applicable executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, administration, official, service or other instrumentality of the United States of America, of any state within the United States of America, of any territory or possession of the United States of America, of the District of Columbia, of any municipality within the United States of America, or of any other governmental entity. "Lien" means any interest in property securing any obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the lien, encumbrance, pledge, or security interest arising from a deed of trust, mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. "Loan Documents" shall have the meaning set forth in the Modification Agreement. "Obligations" means collectively and includes (i) all present and future liabilities and obligations of any kind and nature whatsoever of Borrower to Lender both now existing and hereafter arising under, as a result of, on account of, or in connection with, the Loan, (ii) the Note and any extensions, renewals or replacements thereof, amendments thereto and restatements or modifications thereof made at any time or from time to time hereafter, and/or (iii) the other Loan Documents, including, without 3 limitation, future advances, principal, interest, indemnities, fees, late charges, enforcement costs and other costs and expenses, whether direct, contingent joint, several, joint and several, matured or unmatured, and (iv) any other financing or other financial arrangement provided by Lender to Borrower. In addition, Obligations shall include all Enforcement Costs hereunder. "Person" or "person" means and includes an individual, a company, a corporation, a partnership, a joint venture, a trust, an unincorporated association, a Governmental Authority or any other entity. "SGRV" means San Gabriel Retirement Villa, L.P., a California limited partnership. "SGRV Pledge Agreement" means that certain San Gabriel Retirement Villa Partnership Interest Pledge Agreement dated as of the date hereof by Guarantor to and for the benefit of Lender. "UCC" means the Uniform Commercial Code as in effect in the State of California. SECTION 1.2. Rules of Construction. Unless otherwise defined herein and unless the context otherwise requires, all terms used herein which are defined by the UCC shall have the same meanings assigned to them by the UCC unless and to the extent varied by this Agreement. The words "hereof", "herein", and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule, and exhibit references are references to sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. ARTICLE II THE GUARANTY SECTION 2.1. The Guaranty. Guarantor absolutely, unconditionally and irrevocably guarantees to Lender the due and punctual payment in full (and not merely the collectibility) of the Obligations; provided, however, that absent fraud or willful misconduct on behalf of Guarantor, Lender's sole right of recourse against Guarantor shall be against the Collateral in an amount not to exceed $1,000,000. The guaranty of Guarantor under this Agreement is a guaranty of payment and performance and not merely of collection or enforceability and shall remain in full force and effect until all of the Obligations are indefeasibly paid in full. Guarantor agrees that: 4 (a) The obligations of Guarantor under this Agreement shall be performed without demand by Lender and shall be unconditional irrespective of the genuineness, validity, regularity or enforceability of the Note, or any other Loan Document, and without regard to any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. Guarantor hereby waives any and all benefits and defenses under California Civil Code Section 2810 and agrees that by doing so Guarantor shall be liable even if Borrower had no liability at the time of execution of the Note or any other Loan Document, or thereafter ceases to be liable. Guarantor hereby waives any and all benefits and defenses under California Civil Code Section 2809 and agrees that by doing so Guarantor's liability may be larger in amount and more burdensome than that of Borrower. Guarantor hereby waives the benefit of all principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Agreement and agrees that Guarantor's obligations shall not be affected by any circumstances, whether or not referred to in this Agreement, which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. Guarantor hereby waives the benefits of any right of discharge under any and all statutes or other laws relating to guarantors or sureties and any other rights of sureties and guarantors thereunder. Without limiting the generality of the foregoing, Guarantor hereby waives, to the fullest extent permitted by law, diligence in collecting the Obligations, presentment, demand for payment, protest, all notices with respect to the Note and this Agreement which may be required by statute, rule of law or otherwise to preserve Lender's rights against Guarantor under this Agreement, including notice of acceptance, notice of any amendment of the Loan Documents, notice of the occurrence of any default or Event of Default, notice of intent to accelerate, notice of acceleration, notice of dishonor, notice of foreclosure, notice of protest, and notice of the incurring by Borrower of any obligation or indebtedness. Guarantor also waives, to the fullest extent permitted by law, all rights to require Lender to (i) proceed against Borrower, (ii) if Borrower is a partnership, proceed against any general partner of Borrower, (iii) proceed against or exhaust any collateral held by Lender to secure the repayment of the Obligations, or (iv) pursue any other remedy it may now or hereafter have against Borrower, or, if Borrower is a partnership, any general partner of Borrower, including any and all benefits under California Civil Code Sections 2845, 2849 and 2850. (b) Guarantor understands that the exercise by Lender of certain rights and remedies afforded Lender in other Loan Documents may affect or eliminate Guarantor's right of subrogation against Borrower and that Guarantor may therefore incur a partially or totally nonreimbursable liability under this Agreement. Nevertheless, Guarantor hereby authorizes and empowers Lender to exercise, in its sole and absolute discretion, any 5 right or remedy, or any combination thereof, which may then be available, since it is the intent and purpose of Guarantor that the obligations under this Agreement shall be absolute, independent and unconditional under any and all circumstances. Guarantor expressly waives any defense (which defense, if Guarantor had not given this waiver, Guarantor might otherwise have) to a judgment against Guarantor by reason of a nonjudicial foreclosure. Without limiting the generality of the foregoing, Guarantor hereby expressly waives any and all benefits under (i) California Code of Civil Procedure Section 580a (which Section, if Guarantor had not given this waiver, would otherwise limit Guarantor's liability after a nonjudicial foreclosure sale to the difference between the obligations of Guarantor under this Agreement and the fair market value of the property or interests sold at such nonjudicial foreclosure sale), (ii) California Code of Civil Procedure Sections 580b and 580d (which Sections, if Guarantor had not given this waiver, would otherwise limit Lender's right to recover a deficiency judgment with respect to purchase money obligations and after a nonjudicial foreclosure sale, respectively), and (iii) California Code of Civil Procedure Section 726 (which Section, if Guarantor had not given this waiver, among other things, would otherwise require Lender to exhaust all of its security before a personal judgment could be obtained for a deficiency). Notwithstanding any foreclosure of the lien of the ARV PIII Pledge Agreement or the SGRV Pledge Agreement, whether by the exercise of the power of sale contained in the ARV PIII Pledge Agreement or the SGRV Pledge Agreement or by an action for judicial foreclosure, Guarantor shall remain bound under this Agreement. (c) In accordance with California Civil Code Section 2856, Guarantor also waives any right or defense based upon an election of remedies by Lender, even though such election (e.g., nonjudicial foreclosure with respect to any collateral held by Lender to secure repayment of the Obligations) destroys or otherwise impairs the subrogation rights of Guarantor or the right of Guarantor (after payment of the obligations guaranteed by Guarantor under this Agreement) to proceed against Borrower for reimbursement, or both, by operation of California Code of Civil Procedure Section 580d or otherwise. (d) In accordance with California Civil Code Section 2856, Guarantor waives any and all other rights and defenses available to Guarantor by reason of California Civil Code Sections 2787 through 2855, inclusive, including any and all rights or defenses Guarantor may have by reason of protection afforded to Borrower with respect to any of the obligations of Guarantor under this Agreement pursuant to the antideficiency or other laws of the State of California limiting or discharging Borrower's Obligations, including California Code of Civil Procedure Sections 580a, 580b, 580d, and 726. 6 (e) In accordance with California Civil Code Section 2856, Guarantor agrees to withhold the exercise of any and all subrogation and reimbursement rights against Borrower, against any other person, and against any collateral or security for the Obligations, including any such rights pursuant to California Civil Code Sections 2847 and 2848, until the Obligations have been indefeasibly paid and satisfied in full, all obligations owed to Lender under the Loan Documents have been fully performed, and Lender has released, transferred or disposed of all of its right, title and interest in such collateral or security. (f) At any time or from time to time and any number of times, without notice to Guarantor and without affecting the liability of Guarantor, (i) the time for payment of the principal of or interest on the Obligations may be extended or the Obligations may be renewed in whole or in part; (ii) the time for Borrower's performance of or compliance with any covenant or agreement contained in the Note or any other Loan Document, whether presently existing or hereinafter entered into, may be extended or such performance or compliance may be waived; (iii) the maturity of the Obligations may be accelerated as provided in the Note or any other Loan Document; (iv) the Note or any other Loan Document may be modified or amended by Lender and Borrower in any respect, including an increase in the principal amount; and (v) any security for the Obligations may be modified, exchanged, surrendered or otherwise dealt with or additional security may be pledged or mortgaged for the Obligations. (g) If more than one person executes this Agreement, the obligations of those persons under this Agreement shall be joint and several. Lender, in its discretion, may (i) bring suit against Guarantor, or any one or more of the persons constituting Guarantor, jointly and severally, or against any one or more of them; (ii) compromise or settle with any one or more of the persons constituting Guarantor, or any other obligor of the Obligations, including Borrower, for such consideration as Lender may deem proper; (iii) release one or more of the persons constituting Guarantor, or any other obligor of the Obligations, including Borrower, from liability; and (iv) otherwise deal with Guarantor and any other obligor of the obligations, including Borrower, or any one or more of them, in any manner, and no such action shall impair the rights of Lender to collect from Guarantor any amount guaranteed by Guarantor under this Agreement. Nothing contained in this paragraph shall in any way affect or impair the rights or obligations of Guarantor with respect to any other obligor of the Obligations. (h) Any indebtedness of Borrower held by Guarantor now or in the future is and shall be subordinated to the Obligations and any such indebtedness of Borrower shall be collected, enforced and received by 7 Guarantor, as trustee for Lender, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Agreement. (i) Guarantor shall have no right of, and hereby waives any claim for, subrogation or reimbursement against Borrower or any general partner of Borrower by reason of any payment by Guarantor under this Agreement, whether such right or claim arises at law or in equity or under any contract or statute, until the Obligations have been paid in full and there has expired the maximum possible period thereafter during which any payment made by Borrower to Lender with respect to the Obligations could be deemed a preference under the United States Bankruptcy Code. (j) If any payment by Borrower is held to constitute a preference under any applicable bankruptcy, insolvency, or similar laws, or if for any other reason Lender is required to refund any sums to Borrower, such refund shall not constitute a release of any liability of Guarantor under this Agreement. It is the intention of Lender and Guarantor that Guarantor's obligations under this Agreement shall not be discharged except by Guarantor's performance of such obligations and then only to the extent of such performance. 8 ARTICLE III REPRESENTATIONS AND WARRANTIES Guarantor represents and warrants to Lender that the following statements are true, correct and complete: SECTION 3.1. Authority. Guarantor has full power and authority to guaranty the Obligations of Borrower under the Note and to execute, deliver and perform the obligations of Guarantor in accordance with the terms of this Agreement without the consent or approval of any Person other than any consent or approval which has been obtained. SECTION 3.2. Review of Documents; Financial Statements; Taxes Etc. (a) Guarantor has or has had an opportunity to examine the Loan Documents existing on the date hereof, (b) Guarantor has a direct or indirect financial interest in Borrower and the Loan to Borrower by the Lender will result in financial benefits to the Guarantor, (c) the most recent financial statements of Guarantor heretofore furnished to the Lender correctly and accurately present the financial condition of Guarantor as of the date of such financial statement in all material respects, and no material adverse change in the financial condition of Guarantor has occurred since the date of such financial statement, (d) Guarantor has filed, or has obtained extensions for the filing of, all federal, state and local tax returns required to be filed by Guarantor, and has paid all taxes shown as due on such returns, and (e) this Agreement constitutes the valid and binding obligation of Guarantor enforceable in accordance with its terms. SECTION 3.3. Survival. All representations and warranties contained in or made under or in connection with this Agreement (a) shall survive the execution, delivery and performance of this Agreement, and (b) shall be true, correct and complete at all times during which any of the Obligations (or commitments therefor) are outstanding with the same effect as if such representations and warranties had been made at such times. ARTICLE IV COVENANTS SECTION 4.1. Further Assurances. Guarantor covenants and agrees with Lender that Guarantor shall, from time to time, at its expense, execute, deliver, acknowledge and cause to be duly filed, recorded or registered, if applicable, any other certificate, agreement, statement, instrument or other document and take any other action that from time to time may be necessary or desirable, or that Lender may reasonably request, in order to create, grant, convey, confirm, preserve, validate or better assure to Lender the rights intended to be granted, now or in the future, to Lender under this Agreement and the other Loan Documents. 9 ARTICLE V DEFAULT The occurrence of any one or more of the following events shall constitute a default under the provisions of this Agreement, and the term "Event of Default" means, whenever it is used in this Agreement, any one or more of the following events: SECTION 5.1. Payment of Obligations. If any of the Obligations are not paid as and when due and payable in accordance with the provisions of this Agreement, the Note, and/or any of the other Loan Documents after giving effect to any applicable grace or cure periods, if any; SECTION 5.2. Perform, etc. Other Provisions of This Agreement and other Loan Documents. The failure of Guarantor to perform, observe or comply with any of the provisions of this Agreement not otherwise covered by other subsections of this Section 5 or any of the other Loan Documents, and such failure is not cured to the satisfaction of Lender within a period of thirty (30) days after the date of written notice thereof by Lender to Guarantor (or, whenever such a failure is such that it cannot be cured within thirty (30) days after Guarantor is given notice thereof, then within sixty (60) days from the date after Guarantor is given notice thereof if, in the sole but reasonable discretion of Lender, Guarantor is taking appropriate corrective action to cure the failure and such failure will not impair the ability of Guarantor to perform its obligations under this Agreement and the other Loan Documents or otherwise adversely affects Lender's security in or right to the Collateral). SECTION 5.3. Performance of Provisions of the other Loan Documents. If an Event of Default (as defined in the Deed of Trust) occurs, or subject to applicable notice and cure periods provided therein, if Borrower or Guarantor, as applicable, fails to perform, observe, or comply with any of the provisions of the Note or any of the other Loan Documents. SECTION 5.4. Representations and Warranties. If any representation or warranty contained herein or any statement or representation made in any certificate or other information at any time given by or on behalf of Guarantor or Borrower or furnished in connection with this Agreement or any of the other Loan Documents shall prove to be false or incorrect in any material respect on the date as of which made; SECTION 5.5. Liquidation, Termination, Dissolution, etc. If Guarantor, SGRV, ARV PIII or Borrower shall liquidate, dissolve or terminate its existence, or if, without the prior written consent of Lender, any change occurs in the ownership or control of Guarantor, Borrower, SGRV or ARV PIII; SECTION 5.6. Inability to Pay Debts. If Guarantor, Borrower, SGRV or ARV PIII admits in writing or in sworn testimony the inability to pay its debts as they mature or shall make any assignment for the benefit of any of its creditors; 10 SECTION 5.7. Bankruptcy. If proceedings in bankruptcy, or for reorganization of Guarantor, Borrower, SGRV or ARV PIII, or for the readjustment of any debts of Guarantor, Borrower, SGRV or ARV PIII, under the Bankruptcy Code, as amended, or any part thereof, or under any other applicable laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced against or by Guarantor, Borrower, SGRV or ARV PIII (provided, however, that with respect to any such proceedings not instituted by Guarantor, Borrower, SGRV or ARV PIII, such proceedings will not be an Event of Default if discharged within ninety (90) days of their commencement); SECTION 5.8. Receiver. A receiver or trustee shall be appointed for Guarantor, Borrower, SGRV or ARV PIII or for any substantial part of the assets of Guarantor, Borrower, SGRV or ARV PIII, or any proceedings shall be instituted for the dissolution or the full or partial liquidation of the Guarantor, Borrower, SGRV or ARV PIII (provided, however, that with respect to any such appointments not requested or instituted by Guarantor, Borrower, SGRV or ARV PIII, such appointment or proceedings will not be an Event of Default if such receiver or trustee is discharged within ninety (90) days of his or her appointment and/or such proceedings are discharged within ninety (90) days of their commencement). ARTICLE VI RIGHTS AND REMEDIES SECTION 6.1. Rights and Remedies. Upon the occurrence of an Event of Default under the provisions of this Agreement, an amount equal to the lesser of (i) total of the Obligations then outstanding (whether matured or unmatured and regardless of whether any portion of such Obligations are then due and payable by Borrower), or (ii) $1,000,000 (absent fraud or willful misconduct, in which event the total amount of the Obligations then outstanding as set forth in clause (i) above), shall immediately and automatically be due and payable by Guarantor to Lender, without further action by, or notice of any kind from, Lender unless expressly provided for herein, and Lender may at any time and from time to time thereafter exercise any powers, rights and remedies available to Lender under the provisions of this Agreement, the other Loan Documents and applicable laws to liquidate the Collateral, all such powers, rights and remedies being cumulative and enforceable alternatively, successively or concurrently. Each and every Event of Default hereunder shall give rise to a separate cause of action hereunder, and separate actions may be brought hereunder as each cause of action arises. SECTION 6.2. Application. The proceeds of any payment for the payment of all or any part of the Obligations coming into Lender's possession may be held, segregated, or applied by Lender to any of the Obligations, whether matured or unmatured, in such order and manner as Lender may determine in its sole discretion. 11 SECTION 6.3. No Waiver, etc. No failure or delay by Lender to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of the other Loan Documents, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant or agreement or of any such breach, or preclude Lender from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any amount payable under this Agreement or under any of the other Loan Documents, Lender shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any of the other Loan Documents, or to declare a default for failure to effect such prompt payment of any such other amount. The payment by Guarantor, or any other Person and the acceptance by Lender or any other amount due and payable under the provisions of this Agreement or the other Loan Documents at any time during which a default or Event of Default exists shall not in any way or manner be construed as a waiver of such default or Event of Default by Lender or preclude Lender from exercising any right of power or remedy consequent upon such default or Event of Default. ARTICLE VII MISCELLANEOUS SECTION 7.1. Course of Dealing; Amendment. No course of dealing between Lender and Guarantor shall be effective to amend, modify or change any provision of this Agreement or the other Loan Documents. Lender shall have the right at all times to enforce the provisions of this Agreement and the other Loan Documents in strict accordance with the provisions hereof and thereof, notwithstanding any conduct or custom on the part of Lender in refraining from so doing at any time or times. The failure of Lender at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or the other Loan Documents or as having in any way or manner modified or waived the same. This Agreement may not be amended, modified, or changed in any respect except by an agreement in writing signed by Lender and Guarantor. SECTION 7.2. Waiver of Default. Lender may, at any time and from time to time, execute and deliver to Guarantor a written instrument waiving, on such terms and conditions as Lender may specify in such written instrument, any of the requirements of this Agreement or any Event of Default or default and its consequences, provided, that any such waiver shall be for such period and subject to such conditions as shall be specified in any such instrument. In the case of any such waiver, Guarantor and Lender shall be restored to their former positions prior to such Event of Default or default and shall have the same rights as they had hereunder. No such waiver shall extend to any subsequent or other Event of Default or default, or impair any right consequent thereto and shall be effective only in the specific instance and for the specific purpose for which given. 12 SECTION 7.3. Guaranty Absolute. All rights and remedies of Lender hereunder and under applicable laws, the guaranty and all agreements and obligations of Guarantor hereunder shall be absolute and unconditional irrespective of, and shall not be released, discharged, impaired or affected by (a) any lack of validity or enforceability of the Note, or any of the other Loan Documents, (b) any change in the amount of any or all of the Obligations or any change in the time, manner or place of payment of any or all of the Obligations or any change of any other provision or term of any or all of the Obligations, (c) any amendment to, or modification or waiver of, consent to, or departure from, any of the provisions of any of the Loan Documents, (d) any exchange, substitution, release, addition or non-perfection of any collateral and security for any of the Obligations, (e) the release of, in whole or in part, any Person, including, without limitation, Borrower or Guarantor, obligated or liable for the payment of all or any part of the Obligations or any attempt, pursuit, enforcement or exhaustion of any rights or remedies Lender may have against any such Person or against any collateral and security for any or all of the Obligations, (f) the failure, omission, lack of diligence or delay by Lender to exercise or enforce any rights and remedies it may have under any of the Loan Documents or applicable laws, and (g) any other event or circumstance which might otherwise constitute a legal or equitable discharge, release or defense of Guarantor or of the Collateral. SECTION 7.4. Notices. All notices, requests and demands to or upon the parties to this Agreement shall be deemed to have been given or made when delivered by hand, or when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or, in the case of telegraphic notice, when delivered to the telegraphic company and when properly transmitted, addressed as provided under the Deed of Trust (the address of the Guarantor shall for all notice purposes be the same as the Borrower's address set forth in the Deed of Trust). SECTION 7.5. Enforcement Costs. Guarantor shall pay to Lender upon demand all Enforcement Costs. Enforcement Costs shall be included in the Obligations secured hereby. SECTION 7.6. Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of Lender in order to carry out the intentions of the parties hereto as nearly as may be possible, (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, and (c) the parties hereto shall endeavor, in good faith, negotiations to replace the invalid or unenforceable provisions with valid and enforceable provisions, the economic effect of which comes as close as possible to that of the invalid or unenforceable provisions. SECTION 7.7. Assignment. Lender may, without prior notice to, or consent of, Guarantor, sell, assign or transfer to any Person or Persons all or any part of 13 the Obligations, and in the event of any such assignment and rights and remedies of Lender hereunder shall extend to, and vest in, any such assignee or assignees who shall have the right to enforce the provisions of this Agreement as fully as Lender, provided that Lender shall continue to have the unimpaired right to enforce the provisions of this Agreement as to so much of the Obligations that it has not sold, assigned or transferred. Guarantor will fully cooperate with Lender in connection with any such assignment and will execute and deliver such consents and acceptances to any such assignment and amendments to this Agreement in order to effect any such assignment (including, without limitation, the appointment of Lender as agent for itself and all assignees). SECTION 7.8. Survival. All representations, warranties and covenants contained among the provisions of this Agreement shall survive the execution and delivery of this Agreement and all other Loan Documents. SECTION 7.9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Guarantor and Lender and their respective personal representatives, successors and assigns, except that Guarantor shall not have the right to assign their rights hereunder or any interest herein without the prior written consent of Lender. SECTION 7.10. Continuing Agreement. This Agreement shall be continuing and binding on Guarantor regardless of how long before or after the date hereof any of the Obligations were or are incurred. This Agreement shall terminate when all of the Obligations have been indefeasibly paid in full and no commitments therefor are outstanding. SECTION 7.11. Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the State of California, both in interpretation and performance. SECTION 7.12. Exhibits and Schedules. Any exhibits and schedules attached to this Agreement are an integral part hereof and are hereby incorporated herein and included in the term "this Agreement." SECTION 7.13. Headings. Article, Section, paragraph, and clause headings in this Agreement are included herein for convenience of reference only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. SECTION 7.14. Jurisdiction and Venue. Guarantor agrees that any controversy arising under or in relation to this Agreement shall be litigated exclusively in Ventura County, California (the "the Jurisdiction"). The state and federal courts and authorities with jurisdiction in the Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Agreement, the Note or any other Loan Document. Guarantor irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence, or otherwise. 14 SECTION 7.15. WAIVER OF JURY TRIAL. GUARANTOR AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS AGREEMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. 15 IN WITNESS WHEREOF, Guarantor has executed and delivered this Agreement under its seal as of the day and year first written above. ATTEST: ARV ASSISTED LIVING, INC., a Delaware corporation _____________________ By:_______________________________ (SEAL) Name: Abdo H. Khoury Title: President 16 EX-10.21 7 dex1021.txt CASH COLLATERAL PLEDGE AGREEMENT Exhibit 10.21 CASH COLLATERAL PLEDGE AGREEMENT THIS CASH COLLATERAL PLEDGE AGREEMENT (this "Agreement") is made this day of February, 2002, by RETIREMENT INNS III, LLC, a Delaware limited liability company (the "Pledgor"), to and for the benefit of RED MORTGAGE CAPITAL, INC., an Ohio corporation (the "Lender"). RECITALS WHEREAS, the Lender has previously made a loan to the Pledgor in the original principal amount of Eight Million Two Hundred Nine Thousand Nine Hundred Dollars ($8,209,900) (the "Loan") pursuant to the terms of that certain Multifamily Note dated as of June 27, 1999, by Pledgor to the order of the Lender (the "Original Note"), as amended pursuant to the terms of that certain First Amendment to Multifamily Note dated as of December 28, 2000 between Pledgor and Lender (the "First Amendment to Note" and together with the Original Note, the "Existing Note"), as further amended pursuant to the terms of that certain Second Amendment to Multifamily Note dated as of even date herewith between Pledgor and Lender (the "Second Amendment to Note") (the Original Note, as amended by the First Amendment and the Second Amendment, as the same may be from time to time, renewed, extended, further amended, restated, supplemented or otherwise modified is herein called the "Note") and is secured, in part, by a first mortgage lien on the real property (the "Mortgaged Property") described on Exhibit A to that certain Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 27, 1999 by Pledgor for the benefit of the Lender (the "Original Deed of Trust"), recorded among the Official Records of Ventura County, California (the "Land Records") on June 28, 1999 as Instrument No. 99-122405, as amended by that certain Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of August 31, 1999 between Pledgor and the Lender (the "First Amendment to Deed of Trust"), recorded among the Land Records on September 10, 1999 as Instrument No. 99-173435, as affected by that certain Confirmatory Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of December 12, 2000, effective as of October 2, 2000, by Banc One Capital Funding Corporation, an Ohio corporation to Provident Mortgage Capital, Inc., now known as Red Mortgage Capital, Inc. (the "Confirmatory Assignment", and together with the Original Deed of Trust and the First Amendment to Deed of Trust, the "Existing Deed of Trust"), recorded among the Land Records on January 31, 2001 as Instrument No. 2001-0018605-00, as further amended by that certain Second Amendment to Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of even date herewith between Pledgor and Lender (the "Second Amendment to Deed of Trust") (the Original Deed of Trust, as amended by the First Amendment to Deed of Trust and the Second Amendment to Deed of Trust, as the same may be from time to time renewed, extended, further amended, restated, supplemented or otherwise modified is herein called the "Deed of Trust"); and WHEREAS, the Pledgor has requested and the Lender has agreed pursuant to the terms and conditions of that certain Master Modification Agreement dated as of even date herewith by and among the Pledgor, ARV Assisted Living, Inc., a Delaware corporation (the "Guarantor"), and the Lender (the "Modification Agreement") to (i) increase the principal sum of the Loan to $11,980,000 (the "Increase"), (ii) extend the Maturity Date (as such term is defined in the Existing Note) of the Loan to July 1, 2003 (the "Extension"), and (iii) change the interest rate of the Loan to 8.50% (the "Rate Change"); and WHEREAS, as a condition to the Extension, the Increase and the Rate Change, Lender has required Pledgor to deposit with and pledge to Lender cash in the amount of Two Million Dollars ($2,000,000) (the "Deposit"), and to grant to Lender a continuing security interest in and to such Deposit. 1 NOW, THEREFORE, in consideration of the Extension, the Rate Change, the Increase, these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Pledgor and Lender hereby agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Definitions. All capitalized terms which are not specifically defined in this Agreement shall have the meanings assigned to such terms in the Deed of Trust. In addition, the terms defined in the Preamble and Recitals hereto and elsewhere herein shall have the respective meanings specified therein or elsewhere herein, and the following terms shall have the following meanings: "Cash Collateral Account" means that certain account entitled the "ARV/RMC Cash Pledge Account," to be established and maintained by Lender, and any successor or replacement account designated and pledged to Lender as the "Cash Collateral Account" under this Agreement; and which account shall be an interest bearing account, bearing interest (calculated monthly) at the then money market rate of interest obtainable by Lender. "Collateral" has the meaning set forth in Section 2.2. "Deposit" has the meaning set forth in the Recitals. "Enforcement Costs" means any and all funds, costs, expenses and charges of any nature whatsoever (including, without limitation, attorney's fees and expenses) advanced, paid or incurred by or on behalf of Lender under or in connection with the administration or enforcement of this Agreement, including, without limitation, (a) the compliance of Pledgor with any covenant, warranty, representation or agreement of Pledgor made in or pursuant to this Agreement or any of the other Loan Documents, and (b) the exercise, preservation, maintenance, protection, operation, management, enforcement, collection, sale or other disposition of, or realization upon, this Agreement, all or any part of the Collateral, the Security Interest and the rights and remedies of Lender hereunder, under applicable law and otherwise. "Event of Default" has the meaning set forth in Article V. "Loan Documents" has the meaning set forth in the Modification Agreement. "Lien" means any mortgage, deed of trust, pledge, security interest, assignment, encumbrance, judgment, lien, claim or charge of any kind in, on, of or in respect of, any asset or property or any rights to any asset or property, including, without limitation, (a) any interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to any such asset or property, and (b) the filing of, or any agreement to give, any financing statement relating to any such asset or property under the Uniform Commercial Code of any jurisdiction. "Obligations" means all past, present and future indebtedness, liabilities, and obligations of Borrower and/or any other Person to Lender of any kind, nature or description whatsoever under, arising as a result of, pursuant to, and/or in connection with, the provisions of this Agreement, the Note and/or any of the other Loan Documents, including, without limitation, (a) such indebtedness, liabilities, and obligations of Pledgor to Lender which consist of principal, interest, fees, late charges, attorneys' fees, Enforcement Costs, collection costs, due or to become due, future advances, direct, indirect, primary, secondary, joint, several, joint and several, fixed or contingent, liquidated or unliquidated, regardless of how they arise or by what agreement or instrument they may be evidenced or whether they are evidenced by any agreement or instrument, and whether incurred as maker, endorser, surety, guarantor or otherwise, (b) any and all renewals, extensions, and rearrangements of any such indebtedness, liabilities, and obligations, (c) the "Obligations" as such term is described and defined in any other Loan Documents, and (d) any other obligations, either direct or indirect, of Pledgor to Lender. 2 "Person" means and includes an individual, a corporation, a partnership, a joint venture, a trust, a limited liability company, an unincorporated association, a government or political subdivision or agency thereof, or any other entity. "Security Interest" means the security interest and other Liens in the Collateral granted hereunder. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of California. Rules of Construction. Unless otherwise defined herein and unless the context otherwise requires, all terms used herein which are defined by the UCC shall have the same meanings assigned to them by the UCC unless and to the extent varied by this Agreement. The words "hereof", "herein", and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule, and exhibit references are references to sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. ARTICLE II THE COLLATERAL Deposits with Lender. (a) Pledgor hereby covenants and agrees to make the Deposit with Lender concurrently with the execution by the Pledgor and the Lender of the Modification Agreement. (b) Lender hereby covenants and agrees upon execution of the Modification Agreement to (i) establish and maintain the Cash Collateral Account and (ii) deposit the Deposit into the Cash Collateral Account upon receipt thereof. The Pledge. In order to secure the full and punctual payment of the Obligations, and to secure Pledgor's performance under this Agreement and the performance of the other Loan Documents, Pledgor hereby transfers, pledges, assigns, sets over, delivers and grants to Lender a first priority continuing lien and security interest in and to all of the following property of Pledgor, both now owned and existing and hereafter created, acquired and arising (all being collectively referred to as the "Collateral") and all right, title and interest of Pledgor in and to the Collateral: (a) Deposits into the Cash Collateral Account. (i) All deposits by Pledgor, including, but not limited to the Deposit, into the Cash Collateral Account; and (b) Proceeds. All cash and non-cash proceeds and products of the portion of the Collateral described in clause (a) above, including, without limitation, all property or deposit accounts which may from time to time be acquired directly or indirectly with any proceeds of such Collateral. SECTION 2.3. Interest on Cash Collateral Account. Until the occurrence of an Event of Default, all interest, dividends, cash, income or other property now or hereafter accrued, payable or distributable under, on, to or by reason of the Cash Collateral Account shall be credited against interest due on the Note for the immediately succeeding month after such accrued interest, dividend, cash, 3 income or other property is calculated. Upon the occurrence of an Event of Default, all interest, dividends, cash, income or other property shall accrue to and become part of the amounts on deposit in the Cash Collateral Account and part of the Collateral for the benefit of Lender, and shall not be distributable to Borrower at any time except upon payment in full of all Obligations and the termination of this Agreement. SECTION 2.4. Security Interest Security Only. The Security Interest is granted as security only and shall not subject Lender to, or transfer or in any way affect or modify, any obligation or liability of Pledgor with respect to any of the Collateral or any transaction in connection therewith. ARTICLE III REPRESENTATIONS AND WARRANTIES Pledgor represents and warrants to Lender that the following statements are true, correct and complete: Title and Authority. As of the date hereof, Pledgor is the owner of the Collateral, subject only to the Lien hereof. Pledgor has full power and authority to grant the Security Interest to Lender in the Collateral pursuant hereto and to execute, deliver and perform the obligations of Pledgor in accordance with the terms of this Agreement without the consent or approval of any Person other than any consent or approval which has been obtained. Survival. All representations and warranties contained in or made under or in connection with this Agreement (a) shall survive the execution, delivery and performance of this Agreement, and (b) shall be true, correct, and complete at all times during which any of the Obligations (or commitments therefor) are outstanding with the same effect as if such representations and warranties had been made at such times. ARTICLE IV COVENANTS Pledgor covenants and agrees with Lender as follows: Title, Liens and Taxes. Pledgor shall, at its cost and expense, take any and all actions necessary to defend its title to the Collateral against all Persons other than Lender and to defend the Security Interest of Lender in the Collateral and the priority (or intended priority) thereof, against any adverse Lien of any nature whatsoever. Except to the extent contested in good faith, Pledgor will pay all taxes and assessments levied or placed on the Collateral prior to the date when any interest or penalty would accrue for the nonpayment thereof. Further Assurances. Pledgor shall, from time to time, at its expense, execute, deliver, acknowledge and cause to be duly filed, recorded or registered any statement, transfer, assignment, endorsement, instrument, paper, agreement or other document and take any other action that from time to time may be necessary or desirable, or that Lender may reasonably request, in order to create, preserve, continue, perfect, 4 confirm or validate the Security Interest or to enable Lender to obtain the full benefits of this Agreement or to exercise and enforce any of its rights, powers and remedies hereunder. Pledgor shall pay all costs of, and incidental to, the filing, recording or registration of any such document as well as any recordation, transfer or other tax required to be paid in connection with any such filing, recordation or registration. Pledgor hereby covenants to save harmless and indemnify Lender from and against any liability resulting from the failure to pay any required documentary stamps, recordation and transfer taxes and recording costs incurred by Lender in connection with this Agreement which covenant shall survive the termination of this Agreement and the payment of all other Obligations. Pledgor agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement signed by Pledgor in connection with this Agreement shall be sufficient as a financing statement. Care and Protection of Collateral. Pledgor shall perform, observe, and comply with all of the terms and provisions to be performed, observed or complied with by it under each contract, agreement or obligation relating to the Collateral. Lender shall have no duty to, and Pledgor hereby releases Lender from all claims for loss or damage caused by the failure of Lender to, collect, protect, preserve or enforce any of the Collateral or preserve rights against account debtors and prior parties to the Collateral other than claims arising from Lender's gross negligence or willful misconduct. Other Liens, Withdrawals, etc. Without the prior written consent of Lender, Pledgor will not (a) assign, transfer, dispose of, pledge or grant or permit a Lien to exist on, the Collateral or (b) withdraw any moneys or funds on deposit pursuant to the Cash Collateral Account, including, but not limited to, the Deposit. ARTICLE V DEFAULT The occurrence of any one or more of the following events shall constitute a default under the provisions of this Agreement, and the term "Event of Default" means, whenever it is used in this Agreement, any one or more of the following events: Payment of Obligations. If any of the Obligations are not paid as and when due and payable in accordance with the provisions of this Agreement, the Note and/or any of the other Loan Documents after giving effect to any applicable grace or cure periods, if any; Perform, etc. Other Provisions of This Agreement and other Loan Documents. The failure of Pledgor to perform, observe or comply with any of the provisions of this Agreement not otherwise covered by other subsections of this Section 5 or any of the other Loan Documents, and such failure is not cured to the satisfaction of Lender within a period of thirty (30) days after the date of written notice thereof by Lender to Pledgor (or, whenever such a failure is such that it cannot be cured within thirty (30) days after Pledgor is given notice thereof, then within sixty (60) days from the date after Pledgor is given notice thereof if, in the sole but reasonable discretion of Lender, Pledgor is taking appropriate corrective action to cure the failure and such failure will not impair the ability of Borrower to perform its obligations under this Agreement and the other Loan Documents or otherwise adversely affects Lender's security in or right to the Collateral). 5 Performance of Provisions of the other Loan Documents. If an Event of Default (as defined in the Deed of Trust) occurs, or subject to applicable notice and cure periods provided therein, if Pledgor fails to perform, observe or comply with any of the provisions of the Note or any of the other Loan Documents. Representations and Warranties. If any representation or warranty contained herein or any statement or representation made in any certificate or other information at any time given by or on behalf of Pledgor or furnished in connection with this Agreement or any of the other Loan Documents shall prove to be false or incorrect in any material respect on the date as of which made; Liquidation, Termination, Dissolution, etc. If Pledgor shall liquidate, dissolve or terminate its existence, or if, without the prior written consent of Lender, any change occurs in the ownership or control of Pledgor; Inability to Pay Debts. If Pledgor admits in writing or in sworn testimony the inability to pay its debts as they mature or shall make any assignment for the benefit of any of its creditors; Bankruptcy. If proceedings in bankruptcy, or for reorganization of Pledgor, or for the readjustment of any debts of Pledgor, under the Bankruptcy Code, as amended, or any part thereof, or under any other applicable laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced against or by Pledgor (provided, however, that with respect to any such proceedings not instituted by Pledgor, such proceedings will not be an Event of Default if discharged within ninety (90) days of their commencement); Receiver. A receiver or trustee shall be appointed for Pledgor or for any substantial part of the assets of Pledgor, or any proceedings shall be instituted for the dissolution or the full or partial liquidation of the Pledgor (provided, however, that with respect to any such appointments not requested or instituted by Pledgor, such appointment or proceedings will not be an Event of Default if such receiver or trustee is discharged within ninety (90) days of his or her appointment and/or such proceedings are discharged within ninety (90) days of their commencement). ARTICLE VI RIGHTS AND REMEDIES Rights and Remedies of Lender. Upon and after the occurrence of an Event of Default, Lender may, without notice or demand other than expressly provided for under the provisions of this Agreement, apply the Collateral to the repayment of any and all Obligations then outstanding in accordance with Section 6.2 below, and exercise in any jurisdiction in which enforcement hereof is sought, any and all rights and remedies Lender may have under this Agreement or any other Loan Document, or under applicable law, including the rights and remedies of a secured party under the UCC, all such rights 6 and remedies being cumulative and enforceable alternatively, successively or concurrently. Application. The Collateral may be held, segregated, or applied by Lender to any of the Obligations, whether matured or unmatured, in such order and manner as Lender may determine in its sole discretion. No Waiver, etc. No failure or delay by Lender to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of any of the other Loan Documents, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant or agreement or of any such breach, or preclude Lender from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any amount payable under this Agreement or under any of the other Loan Documents, Lender shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any of the other Loan Documents, or to declare a default for failure to effect such prompt payment of any such other amount. The payment by Pledgor, or any other Person and the acceptance by Lender or any other amount due and payable under the provisions of this Agreement or the other Loan Documents at any time during which a default or Event of Default exists shall not in any way or manner be construed as a waiver of such default or Event of Default by Lender or preclude Lender from exercising any right of power or remedy consequent upon such default or Event of Default. ARTICLE VII MISCELLANEOUS Course of Dealing; Amendment. No course of dealing between Lender and Pledgor shall be effective to amend, modify or change any provision of this Agreement or the other Loan Documents. Lender shall have the right at all times to enforce the provisions of this Agreement and the other Loan Documents in strict accordance with the provisions hereof and thereof, notwithstanding any conduct or custom on the part of Lender in refraining from so doing at any time or times. The failure of Lender at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or the other Loan Documents or as having in any way or manner modified or waived the same. This Agreement may not be amended, modified, or changed in any respect except by an agreement in writing signed by Lender and Pledgor. Waiver of Default. Lender may, at any time and from time to time, execute and deliver to Pledgor a written instrument waiving, on such terms and conditions as Lender may specify in such written instrument, any of the requirements of this Agreement or any Event of Default or Default and its consequences, provided, that any such waiver shall be for such period and subject to such conditions as shall be specified in any such instrument. In the case of any such waiver, Pledgor and Lender 7 shall be restored to their former positions prior to such Event of Default or default and shall have the same rights as they had hereunder. No such waiver shall extend to any subsequent or other Event of Default or default, or impair any right consequent thereto and shall be effective only in the specific instance and for the specific purpose for which given. Security Interest Absolute. All rights and remedies of Lender hereunder and under applicable laws, the Security Interest and all agreements and obligations of Pledgor hereunder shall be absolute and unconditional irrespective of, and shall not be released, discharged, impaired or affected by (a) any lack of validity or enforceability of the Note or any of the other Loan Documents, (b) any change in the amount of any or all of the Obligations or any change in the time, manner or place of payment of any or all of the Obligations or any change of any other provision or term of any or all of the Obligations, (c) any amendment to, or modification or waiver of, consent to, or departure from, any of the provisions of any of the Loan Documents, (d) any exchange, substitution, release, addition or non-perfection of any collateral and security for any of the Obligations, (e) the release of, in whole or in part, any Person, including, without limitation, Pledgor, obligated or liable for the payment of all or any part of the Obligations or any attempt, pursuit, enforcement or exhaustion of any rights or remedies Lender may have against any such Person or against any collateral and security for any or all of the Obligations, (f) the failure, omission, lack of diligence or delay by Lender to exercise or enforce any rights and remedies it may have under any of the Loan Documents or applicable laws, and (g) any other event or circumstance which might otherwise constitute a legal or equitable discharge, release or defense of Pledgor or of the Collateral. Notices. All notices, requests and demands to or upon the parties to this Agreement shall be deemed to have been given or made when delivered by hand, or when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or, in the case of telegraphic notice, when delivered to the telegraphic company and when properly transmitted, addressed as provided under the Deed of Trust. Performance for Pledgor. Pledgor hereby appoints Lender the attorney-in-fact of Pledgor for the purpose of carrying out the ministerial provisions of this Agreement and taking any action and executing any instrument which Lender may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Lender shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in Lender's name or in the name of Pledgor, to the extent necessary or advisable to accomplish the purposes hereof (a) to ask for, demand, sue for, collect, receive, receipt and give acquittance for any and all moneys due or to become due and under and by virtue of any Collateral, (b) to give full discharge for all or any part of the Collateral, (c) to settle, compromise, prosecute or defend any action, claim or proceeding with respect to all or any part of the Collateral, (d) to sell, assign, endorse, pledge, transfer and make any agreement respecting all or any part of the Collateral, or (e) otherwise deal with all or any part of the Collateral as though Lender were the absolute owner thereof; provided, however, that nothing herein 8 contained shall, and no action taken by Lender or omitted to be taken with respect to the Collateral or any part thereof, give rise to any defense, counterclaim or offset in favor of Pledgor or to any claim or action against Lender. Enforcement Costs. Pledgor shall pay to Lender upon demand all Enforcement Costs. Enforcement Costs shall be included in the Obligations secured hereby. Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of Lender in order to carry out the intentions of the parties hereto as nearly as may be possible, (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, and (c) the parties hereto shall endeavor, in good faith, negotiations to replace the invalid or unenforceable provisions with valid and enforceable provisions, the economic effect of which comes as close as possible to that of the invalid or unenforceable provisions. Assignment. Lender may, without prior notice to, or consent of, Pledgor, sell, assign or transfer to any Person or Persons all or any part of the Obligations, and in the event of any such assignment, the Security Interest and rights and remedies of Lender hereunder shall extend to, and vest in, any such assignee or assignees who shall have the right to enforce the provisions of this Agreement as fully as Lender, provided that Lender shall continue to have the unimpaired right to enforce the provisions of this Agreement as to so much of the Obligations that it has not sold, assigned or transferred. Pledgor will fully cooperate with Lender in connection with any such assignment and will execute and deliver such consents and acceptances to any such assignment and amendments to this Agreement in order to effect any such assignment (including, without limitation, the appointment of Lender as agent for itself and all assignees). Survival. All representations, warranties and covenants contained among the provisions of this Agreement shall survive the execution and delivery of this Agreement and all other Loan Documents. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Pledgor and Lender and their respective personal representatives, successors and assigns, except that Pledgor shall not have the right to assign their rights hereunder or any interest herein without the prior written consent of Lender. Continuing Agreement. This Agreement and the Security Interest shall be continuing and binding on Pledgor regardless of how long before or after the date hereof any of the Obligations were or are incurred. This Agreement and the Security Interest shall terminate when all of the Obligations have been indefeasibly paid in full and no commitments therefor are outstanding, at which time Lender will reassign and deliver to Pledgor, against receipt, such of the Collateral as still held by Lender (if any) and not sold 9 or otherwise applied by Lender pursuant to the terms hereof. Any such reassignment shall be without recourse to or warranty by Lender at the expense of Pledgor. Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the State of Ohio, both in interpretation and performance. Duplicate Originals and Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. Exhibits and Schedules. Any exhibits and schedules attached to this Agreement are an integral part hereof and are hereby incorporated herein and included in the term "this Agreement." Headings. Article, Section, paragraph, and clause headings in this Agreement are included herein for convenience of reference only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Termination. The Security Interest granted hereby shall terminate upon the payment in full of the Obligations. Upon such termination, Lender shall take all such actions as may be reasonably requested by Pledgor to evidence the release of the Security Interest granted hereby. [REMAINDER OF PAGE INTENTIONALLY BLANK] 10 IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Agreement under their respective seals as of the day and year first written above. ATTEST: RETIREMENT INNS III, LLC, a Delaware limited liability company _____________________ By:_______________________________(SEAL) Name: Abdo H. Khoury Title: Manager ATTEST: RED MORTGAGE CAPITAL, INC., an Ohio corporation _____________________ By:_______________________________(SEAL) Name: Title: 11 -----END PRIVACY-ENHANCED MESSAGE-----