-----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, EK8jdAai8zWlGiuHSEdfVlIMHDSAQFdEsNtrJ0EZajKI9ZBY7OesbJjQxHXDJC9b gw5JJyf3nuzzdBxwfA+gHQ== 0001095811-01-002023.txt : 20010409 0001095811-01-002023.hdr.sgml : 20010409 ACCESSION NUMBER: 0001095811-01-002023 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K405 SEC ACT: SEC FILE NUMBER: 033-30084 FILM NUMBER: 1589408 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 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN RETIREMENT VILLAS PROPERTIES III L P DATE OF NAME CHANGE: 19920703 10-K405 1 a71219e10-k405.txt FORM 10-K405 PERIOD END DECEMBER 31, 2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER: 0-26470 ---------------- AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. A CALIFORNIA LIMITED PARTNERSHIP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0365417 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 245 FISCHER AVENUE, SUITE D-1 COSTA MESA, CALIFORNIA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ---------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF CLASS UNITS OF LIMITED PARTNERSHIP ---------------- 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ] The aggregate market value of the voting units held by non-affiliates of registrant, 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 March 30, 2001 was 18,666. ================================================================================ 2 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. A CALIFORNIA LIMITED PARTNERSHIP INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 PAGE ---- PART I Item 1: Business........................................................ 3 Item 2: Properties..................................................... 9 Item 3: Legal Proceedings.............................................. 9 Item 4: Submission of Matters to a Vote of Unit Holders................ 9 PART II Item 5: Market for Registrant's Common Equity and Related Unit Holders Matters................................... 10 Item 6: Selected Financial Data........................................ 10 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10 Item 7a: Quantitative and Qualitative Disclosures About Market Risk..... 14 Item 8: Financial Statements and Supplementary Data.................... 14 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 14 PART III Item 10: Directors and Executive Officers of the Registrant............. 15 Item 11: Executive Compensation........................................ 16 Item 12: Security Ownership of Certain Beneficial Owners and Management................................................. 17 Item 13: Certain Relationships and Related Transactions................. 17 PART IV Item 14: Exhibits and Financial Statement Schedules, and Reports on Form 8-K........................................ 19 2 3 PART I ITEM 1. BUSINESS OVERVIEW American Retirement Villas Properties III, L.P. ("ARVP III"), is the owner and operator of two assisted living communities, which house and provide personal care and support services to senior residents. The two assisted living communities currently in operation are located in Camarillo, California and Chandler, Arizona and contain an aggregate of 287 units. On February 19, 1999, we sold three senior apartment complexes we previously owned for approximately $17.9 million. During the third quarter of 2000, we accepted an offer to sell a community that we own in partnership with Bradford Square L.P. On December 21, 2000, we sold that community for $8.0 million. ARVP III is a California limited partnership that was formed in June of 1989 to develop, finance, acquire and operate senior citizen housing. As at December 31, 2000 the general partners of ARVP III were ARV Assisted Living, Inc. ("ARVAL" or "General Partner"), which serves as the Managing General Partner, Gary L. Davidson, John A. Booty, John S. Jason, Tony Rota, and David P. Collins (collectively known as " Special Limited Partners"). During fiscal year 2000, Messrs. Davidson, Booty, Jason and Rota elected to become special limited partners of ARVP III and, therefore, as of March 7, 2001 an amendment to our Certificate of Limited Partnership was filed with the State of California indicating that ARVAL is our only general partner. Our General Partner makes all decisions concerning property acquisitions and dispositions of the communities, subject to ARVP III limited partners' rights to approve or disapprove of the sale of substantially all of our assets. On September 15, 1989, we began offering a total of 35,000 units at $1,000 per unit. The offering terminated on October 31, 1992 and we realized gross offering proceeds of $18,665,000. In January and March of 1993, we repurchased 10 units for $8,500 and 3 units for $2,550, from certain of our limited partners. In the same period we resold 13 units for $14,000. During 1993, we applied for and earned block grants totaling a gross amount of approximately $1,081,000 allocated to two of our properties. Total grant funds received amounted to approximately $1,059,000. All of the proceeds from the offering and a portion of the proceeds from the block grants were allocated to, and spent on properties, which we own either directly or through our interest as managing general partner that holds title to the respective property. Although the offering memorandum contained no definite plan to sell any Assisted Living Communities ("ALCs") in accordance with a timetable, our general partner projected that ARVP III might sell or finance an ALC after operating that ALC for a five to seven years period. We have no definite plans to sell our remaining ALCs at this time. Any future decision regarding sale of our ALCs will be dependent upon the current and projected operating performance, our needs, the availability of buyers and buyers' financing and, in general, the relative merits of continued operation as opposed to sale. On any sale, we may accept purchase money obligations, unsecured or secured by mortgages as payment, depending upon then prevailing economic conditions that are customary in the area in which the property is located, credit of the buyer and available financing alternatives. In such event, distribution of the sale proceeds to our partners may be delayed until the notes are paid at maturity, sold, refinanced or otherwise liquidated. THE ASSISTED LIVING MARKET Assisted Living. Assisted living is a stage in the elder care continuum, midway between home-based care for lower acuity residents and the more acute level of care provided by skilled nursing facilities and acute care hospitals. Assisted living represents a combination of housing, personalized support services, and health care designed to respond to the individual needs of the senior population who need help in activities of daily living, but do not need the medical care provided in a skilled nursing facility. We believe our assisted living business benefits from significant trends affecting the long-term care industry. The first is an increase in the demand for elder care resulting from the continued aging of the U.S. population, with the average age of our residents falling within the fastest growing segment of the U.S. population. While increasing numbers of Americans are living longer and healthier lives, many gradually require increasing assistance with activities of daily living, and are not able to continue to age in place at home. The second trend is the effort to contain health care costs by the government, private insurers and managed care organizations by limiting lengths of stay, services, and reimbursement to patients in acute care hospitals and skilled nursing facilities. Assisted living offers a cost-effective, long-term care alternative while preserving a more independent lifestyle for seniors who do not need the broader array of medical services that acute care hospitals and skilled nursing facilities are required to provide. Other beneficial trends include increases in the financial net worth of the elderly population, the number of individuals living alone, and the number of women who work outside the home who are less able to care for their elderly relatives. We believe these trends will result in a growing demand for assisted living services and communities to fill the gap between aging at home and aging in more expensive skilled nursing facilities. 3 4 Aging Population. The primary consumers of long-term health care services are persons over the age of 65. This group represents one of the fastest growing segments of the population. According to the U.S. Bureau of Census data, the segment of the population over 65 years of age is currently 13% of the total population, or 35 million people. That number is projected to grow to 20% of the total population, or 70 million people, by the year 2030. Additionally, the number of people aged 85 and older, which comprises the largest percentage of residents at long-term care facilities, is currently 4.4 million and is projected to increase to 8.9 million by the year 2030. We believe that growth in the assisted living industry is being driven by several factors. Advances in the medical and nutrition fields have increased life expectancy, resulting in larger numbers of elderly people. Greater numbers of women in the labor force have reduced the supply of caregivers. Historically, unpaid women (mostly daughters or daughters-in-law) represented a large portion of the caregivers for the non-institutionalized elderly. The population of individuals living alone has increased significantly since 1960, largely as a result of an aging population in which women outlive men by an average of 6.8 years, rising divorce rates, and an increase in the number of unmarried individuals. Limitation on the Supply of Long-Term Care Facilities. The majority of states in the U.S. have enacted Certificate of Need or similar legislation, which generally limits the construction of skilled nursing facilities and the addition of beds or services in existing skilled nursing facilities. High construction costs, limitations on government reimbursement for the full cost of construction, and start-up expenses also constrain growth in the supply of such facilities. Such legislation benefits the assisted living industry by limiting the supply of skilled nursing beds for the elderly. Cost factors are placing pressure on skilled nursing facilities to shift their focus toward higher acuity care, which enables them to charge more. This contributes to a shortage of lower acuity care and thereby increases the pool of potential assisted living residents. While Certificates of Need generally are not required for ALCs, except in a few states, most states do require assisted living providers to license their communities and comply with various regulations regarding building requirements and operating procedures and regulations. States typically impose additional requirements on ALCs over and above the standard congregate care requirements. Further, the limited pool of experienced assisted living staff and management, as well as the costs and start-up expenses to construct an ALC, provide an additional barrier to entry into the assisted living business. Cost Containment Pressures of Health Reform. In response to rapidly rising health care costs, both government and private pay sources have adopted cost containment measures that encourage reduced lengths of stay in hospitals and skilled nursing facilities. The federal government has acted to curtail increases in health care costs under Medicare by limiting acute care hospital and skilled nursing facility reimbursement to pre-established fixed amounts. Private insurers have also begun to limit reimbursement for medical services in general to predetermined "reasonable" charges. Managed care organizations, such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs") are reducing hospitalization costs by negotiating discounted rates for hospital services and by monitoring and decreasing hospitalization. We anticipate that both HMOs and PPOs increasingly may direct patients away from higher cost nursing care facilities into less expensive ALCs. These cost containment measures have produced a "push-down" effect. As the number of patients being "pushed down" from acute care hospitals to skilled nursing facilities increases, the demand for residential options such as ALCs to serve patients who historically have been served by skilled nursing facilities will also increase. In addition, skilled nursing facility operators are continuing to focus on improving occupancy and expanding services (and fees) to subacute patients requiring very high levels of nursing care. As the acuity level of skilled nursing facility patients rises, the supply of nursing facility beds will be filled by patients with higher acuity needs who pay higher fees. This will provide opportunities for ALCs to increase their occupancy and services to residents requiring lower levels of care than patients in skilled nursing facilities generally receive. 4 5 OUR ASSISTED LIVING SERVICES We provide services and care that are designed to meet the individual needs of our residents. The services provided are designed to enhance both the physical and mental wellbeing of seniors in each of our ALCs by promoting their independence and dignity in a home-like setting. Our assisted living program includes the following: o Personalized Care Plan. The focus of our strategy is to meet the specific needs of each resident. We customize our services beginning with the admissions process when the ALC's management staff, the resident, the resident's family, and the resident's physician discuss the resident's needs and develop a "personalized" care plan. If recommended by the resident's physician, additional health care or medical services may be provided at the community by a third party home health care agency or other medical provider. The care plan is reviewed and modified on a regular basis. o Basic Service and Care Package. The basic service and care package at our ALCs generally includes: - meals in a restaurant-style setting; - housekeeping; - linen and laundry service; - social and recreational programs; - utilities; and - transportation in a van or minibus. Other care services can be provided under the basic package based upon the individual's personalized health care plan. Our policy is to charge base rents that are competitive with similar ALCs in the local market. o Additional Services. Our assisted living services program offers additional levels of care beyond what is offered in the basic package. The level of care a resident receives is determined through an assessment of a resident's physical and mental health which is conducted by the community's assisted living director, with input from other staff members. The six-tiered rate structure is based on a point system. We assign points to the various care tasks required by the resident, based on the amount of staff time and expertise needed to accomplish the tasks. The point scale and pricing are part of the admissions agreement between the community, the resident and the resident's family. The community performs reassessments after the initial 30 days and periodically throughout the resident's stay to ensure that the level of care we provide corresponds to changes in a resident's condition. The types of services included in the assessment point calculation are: - Medication management; - Assistance with dressing and grooming; - Assistance with showering; - Assistance with continence; - Escort services; - Status checks related to a recent hospitalization, illness, history of falls, etc; - Help with psychosocial needs, such as memory deficit or depression; - Special nutritional needs and assistance with eating. In addition to the above services, we provide other levels of assistance to residents at selected ALCs in order to meet individual needs, such as catheter, colostomy and ileosotomy care, minor wound care needs and light to moderate transferring needs. Specially trained staff provide personalized care, specialized activity programs and oversee the medication regimens. In addition to the base rent, we typically charge between $375 and $1,700 per month plus additional charges for higher levels of assisted living services. Fee levels vary from community to community and we may charge additional fees for other specialized assisted living services. We expect that an increasing number of residents will use additional levels of services as they age in our ALCs. Our internal growth plan is focused on increasing revenue by continuing to improve our ability to provide residents with these services. There can be no assurance that any ALC will be substantially occupied at our set rates at any time. In addition, we may only be able to lease the units in our ALCs at rates below our set rates due to limitations imposed on rates by local market conditions or other factors. Even if we achieve substantial occupancy at our set rates, our set rates may not allow for our projected cost recovery and profit if operating expenses increase. In addition, in order to increase our set rates, we must provide advance notice of rate increases, generally at least 30 days. Because of this advance notice requirement, we are not able to reflect cost increases in our set rates until at least several months after such cost increases occur. 5 6 Wellness Program. We have implemented a Wellness Program for residents of our communities designed to identify and respond to changes in a resident's health or condition. Together with the resident and the resident's family and physician, as appropriate, we design a solution to fit that resident's particular needs. We monitor the physical and mental well being of our residents, usually at meals and other activities, and informally as the staff performs services around the facility. Through the Wellness Program we work with: o home health care agencies to provide services the community cannot provide; o physical and occupational therapists to provide services to residents in need of such therapy; and o long-term care pharmacies to facilitate cost-effective and reliable ordering and distribution of medications. We arrange for these services to be provided to residents as needed in consultation with their physicians and families. At the present time, both of our ALCs have a comprehensive Wellness Program. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS Our business, results of operations and financial condition are subject to many risks, including those set forth below. Certain statements contained in this report, including, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, our performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We have made forward-looking statements in this report concerning, among other things, the level of future capital expenditures. These statements are only predictions, however; actual events or results may differ materially as a result of risks facing us. These risks include, but are not limited to, those items discussed below. Certain of these factors are discussed in more detail elsewhere in this report, including without limitation under the captions "Business", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this report. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Certain risks are inherent with the operation of ALCs. These risks include, but are not limited to: o our ability to access capital necessary for operations of our ALCs; o governmental regulation; o competition; and o risks common to the assisted living industry. DEPENDENCE ON THE AVAILABILITY OF ADEQUATE CAPITAL We depend heavily on our ability to obtain adequate capital to fund our operations. Our estimated capital needs for operations over the next 12 months are $163,496. As of December 31, 2000, we had $8.4 million in cash and cash equivalents. This means we have cash and cash equivalents to meet our estimated capital needs for operations for the next 12 months. If, however our operations costs exceed our projections, we may have to obtain significant additional financing. There is no assurance that we will be able to obtain the financing on a timely basis, if at all. If we are unable to obtain the required financing on a timely basis we may not be able to execute our business plan. COMPETITION The health care industry is highly competitive and we expect that the assisted living business, in particular, will become more competitive in the future. Sources of competition include: o family members providing care at home; o numerous local, regional and national providers of assisted living and long-term care whose facilities and services range from home-based health care to skilled nursing facilities; and o acute care hospitals. 6 7 In addition, we believe that as assisted living receives increased attention among the public and insurance companies, new competitors focused on assisted living will enter the market, including hospitality companies expanding into the market. Some of our competitors operate on a not-for-profit basis or as charitable organizations, while others have, or are capable of obtaining, greater financial resources than those available to us. We also expect to face increased competition for the acquisition and development of ALCs. Some of our present and potential competitors are significantly larger or have, or may obtain, greater financial resources than we have. These forces could limit our ability to attract residents, attract qualified personnel, expand our business, or increase the cost of future acquisitions, each of which could have a material adverse effect on our financial condition, results of operations and prospects. GOVERNMENT REGULATION Assisted Living. Health care is subject to extensive regulation and frequent regulatory change. Currently, no federal rules explicitly define or regulate assisted living. However, we are and will continue to be subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in California and Arizona and localities where we operate or intend to operate. Changes in such laws and regulations, or new interpretations of existing laws and regulations could have a significant effect on methods and costs of doing business, and on reimbursement levels from governmental and other payers. In addition, the President and Congress have proposed in the past, and may propose in future, health care reforms that could impose additional regulations on the Company or limit the amounts that we may charge for our services. We cannot assess the ultimate timing and impact that any pending or future health care reform proposals may have on the assisted living, home health care, skilled nursing or health care industry in general. No assurance can be given that any such reform will not have a material adverse effect on the business, financial condition or our results of operations. SSI Payments. A portion of our revenue comes from residents who receive SSI payments. Approximately 1% of our residents are on SSI programs. Revenue from these residents is generally lower than the amounts we receive from our other residents and could be subject to payment delay. We cannot assure that our percentage of revenue received from SSI will not increase, or that the amounts paid by SSI programs will not be further limited. In addition, if we were to become a provider of services under the Medicaid program, we would be subject to Medicaid regulations designed to limit fraud and abuse. Violations of these regulations could result in civil and criminal penalties and exclusion from participation in the Medicaid program. RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS Staffing and Labor Costs. We compete with other providers of assisted living and senior housing to attract and retain qualified personnel. We also rely on the available labor pool of employees, and unemployment rates are low in many areas where we operate. We make a genuine effort to remain competitive with other companies in our industry. Therefore, if it is necessary for us to increase pay and/or enhance benefits to maintain our competitive status in our industry, our labor costs could rise. We cannot provide assurance that if our labor costs do increase, they can be matched by corresponding increases in rental, assisted living or management revenue. Obtaining Residents and Maintaining Rates. As of December 31, 2000, our ALCs had a combined occupancy rate of 98.7%. Occupancy may drop in our existing ALCs, primarily due to: o changes in the health of residents; o increased competition from other assisted living providers, particularly those offering newer ALCs; o the reassessment of residents' physical and cognitive state. There can be no assurance that any ALC will be substantially occupied at our set rates at any time. In addition, we may only be able to lease the units in our ALCs at rates below our set rates due to limitations imposed on rates by local market conditions or other factors. Even if we achieve substantial occupancy at our set rates, our set rates may not allow for our projected cost recovery and profit if operating expenses increase. In addition, in order to increase our set rates, we must provide advance notice of rate increases, generally at least 30 days. Because of this advance notice requirement, we are not able to reflect cost increases in our set rates until at least several months after such cost increases occur. In addition, if we fail to generate sufficient revenue, we may be unable to make interest and principal payments on our indebtedness. 7 8 General Real Estate Risks. The performance of our ALCs is influenced by factors generally affecting real estate investments, and real estate risks specific to ALCs including: o an oversupply of, or a reduction in demand for, ALCs in a particular market; o the attractiveness of properties to residents; o zoning, rent control, environmental quality regulations or other regulatory restrictions; o competition from other forms of housing; o our ability to provide adequate maintenance and insurance; o general economic climates; o our ability to control operating costs, including maintenance, insurance premiums and real estate taxes. Real estate investments are also affected by such factors as applicable laws, including tax laws, interest rates and the availability of financing. Real estate investments are relatively illiquid and, therefore, limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. If we fail to operate our ALCs effectively, it may have a material adverse effect on our business, financial condition and operating results. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of the removal or remediation of certain hazardous or toxic substances. These include, without limitation, asbestos-containing materials which could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knows of, or is responsible for, the presence of the hazardous or toxic substances. When we acquire land for development or existing facilities, we typically obtain environmental reports on the properties as part of our due diligence in order to lessen our risk of exposure. Nonetheless, the costs of any required remediation or removal of these substances could be substantial. The owner's liability is generally not limited under such laws and regulations and could exceed the value of the property and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Under these laws and regulations, an owner, operator, or any entity that arranges for the disposal of hazardous or toxic substances at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. Requirements Imposed by Laws Benefiting Disabled Persons. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist that also may require us to modify existing and planned properties to allow disabled persons to access the properties. We believe that our properties are either substantially in compliance with present requirements or are exempt from them. However, if required changes cost more than anticipated, or must be made sooner than anticipated, we would incur additional costs. Further legislation, or amendments to the current legislation, may impose requirements with respect to ensuring access of disabled persons to our properties, and the costs of compliance could be substantial. Geographic Concentration. One of our ALCs is located in Camarillo, California and one ALC is located in Chandler, Arizona. The market value of these ALCs and the income generated from properties could be negatively affected by changes in local and regional economic conditions, specific laws and the regulatory environment in these states, and by acts of nature. We cannot provide assurance that such geographic concentration will not have an adverse impact on our business, financial condition, operating results and prospects. Insurance. We believe that we maintain adequate insurance policies, based on the nature and risks of our business, historical experience and industry standards. Our business entails an inherent risk of liability. In recent years, we and other assisted living providers have become subject to an increasing number of lawsuits alleging negligence or related legal theories, which may involve large claims and significant legal costs. From time to time we are subject to such suits because of the nature of our business. We cannot assure that claims will not arise that exceed our insurance coverage or are not covered by it. A successful claim against us that is not covered by, or is in excess of our insurance, could have a material adverse effect on our financial condition, operating results or liquidity. Claims against us, regardless of their merit or eventual outcome, may also have a material adverse effect on our ability to attract residents or expand our business and would consume considerable management time. We must review our insurance policies annually and can provide no assurance that we will be able to continue to obtain liability insurance coverage in the future or that it will be available on acceptable terms. 8 9 ITEM 2. PROPERTIES The following table sets forth, as of December 31, 2000 the location of each of our ALCs, the date on which operations commenced at each such ALC, the number of units at each ALC, and our interest in each ALC. COMMENCED COMMUNITY LOCATION OPERATIONS UNITS INTEREST - --------- -------- ---------- ----- --------- Chandler Villas Chandler, AZ September 1992 164 Fee Owned Villa Las Posas Camarillo, CA December 1997 123 Fee Owned PROMISSORY NOTES RESULTING FROM THE SALE OF HERITAGE POINTE CLAREMONT In September 1993, we contracted to sell our then owned Heritage Pointe Claremont to Claremont Senior Partners ("CSP") for $12,281,900. Our General Partner is a special limited partner of CSP. The transaction closed on December 30, 1993. The consideration we received from CSP in the sale of Heritage Pointe Claremont ALC consisted of both $10,000 in cash and cash equivalents and $12,271,900 in the form of a promissory note. The promissory note bears interest at 8.0% and the outstanding balance and interest are payable from excess cash flows as defined in the CSP partnership agreement. The promissory note is secured by certain CSP partners' interests in CSP and matures on January 25, 2010. Upon the receipt of the principal and interest payment from CSP in April 1996 and January 1995, a sufficient investment as defined by Statements of Financial Accounting Standards Board No. 66 was made and the sale was recognized. As CSP's excess cash flows do not currently exceed the interest payment requirements, SFAS 66 requires profit on the sale to be recognized under the cost recovery method as payments are received on the notes. We received interest payments on these note totaling $12,000, $54,600, $134,000 for the years ended December 31, 2000, 1999 and 1998 respectively. ITEM 3. LEGAL PROCEEDINGS On June 15, 1999, we, along with five other California limited partnerships of which ARVAL is the managing general partner including American Retirement Villas Properties II, Casa Bonita Fullerton, Ltd., Collwood Knolls, L.P., and San Gabriel Retirement Villa, L.P. (collectively, the "ARV Partnerships") filed an action in the Superior Court for the State of California, County of Orange, seeking a declaratory judgment and damages for breach of contract, promissory estoppel, fraud and negligent misrepresentation against PRN Mortgage Capital, L.L.C. and Red Mountain Funding, L.L.C. ("Defendants"). Defendants filed a counter-claim for amounts allegedly due under loan commitments between Defendants and the ARV Partnerships. In July 2000, the ARV Partnerships settled the dispute with the Defendants. We have received and recorded all amounts due as a result of the settlement. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity . ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS No matters were submitted to Unit Holders in the fourth quarter of the fiscal year. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS There is no established public trading market for our securities. As of March 30, 2001, there were approximately 1,759 Unit Holders of record owning 18,666 units. For the years ended December 31, 2000, 1999 and 1998, we made distributions of $226.99 per limited partner unit, $511.24 per limited partner unit and $68.75 per limited partner unit, respectively. Distributions for 2000 represent a distribution of earnings of $218.08 and a return of capital of $8.92. Distributions for 1999 represent a distribution of earnings of $252.81 and a return of capital of $258.43. All of the distributions during 1998 represented a return of capital to the Unit Holders. ITEM 6. SELECTED FINANCIAL DATA The following table presents financial data for each of the last five years. Certain of this financial data has been derived from our audited financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying notes and with "Management's Discussion and Analysis of Financial Condition Results of Operations" at Item 7. This table is not covered by the Independent Auditors' Report.
2000 1999 1998 1997 1996 ------- ------- -------- ------- ------- (In thousands, except unit data) Revenues ..................................... $ 8,994 $ 8,645 $ 9,490 $ 6,333 $ 6,140 Net income (loss) ............................ 4,111 4,767 (378) 229 483 Net income (loss) (per limited partner unit) . 218.08 252.81 (20.06) 12.27 25.63 Total assets ................................. 21,315 18,786 31,679 31,241 25,300 Partners' capital ............................ 1,832 2,000 6,873 8,547 8,318 Long-term obligations ........................ 13,177 15,665 23,072 20,889 16,023 Distributions of earnings (per limited partner unit) .................................... 218.08 252.81 -- -- 25.02 Distributions - return of capital (per limited partner units) ........................... 8.92 258.43 68.75 -- -- Total distributions (per limited partner unit) 226.99 511.24 68.75 -- 25.02
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY We expect that cash generated from the operations of our properties will be adequate to pay operating expenses 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 year ended December 31, 2000, net cash provided by operating activities was $1.8 million compared to $1.0 million for the year ended December 31, 1999 and $0.6 million for the year ended December 31, 1998. Net cash provided by investing activities was $7.5 million for the year ended December 31, 2000 as compared to net cash provided by investing activities of $3.8 million for the year ended December 31, 1999, and net cash used in investing activities of $0.9 million for the year ended December 31, 1998. The increase in 2000 was primarily a result of proceeds from the sale of ARVP III/Bradford Square Ltd., sold on December 31, 2000 for $8.0 million. Net cash used in financing activities was $3.1 million for the year ended December 31, 2000 as compared to net cash used in financing activities of $4.5 million for the year ended December 31, 1999, and net cash provided by financing activities of $1.2 million for the year ended December 31, 1998. Our financing activities in 2000 consisted of: o principal repayments on notes payable, o cost acquired in related to refinancing on our two ALCs, and o distributions made to partners. 10 11 Our General Partner's Board of Directors approved the refinancing of the assisted living communities in July 1998 to: o take advantage of lower fixed interest rates available at the time through the commercial mortgage backed security market; o provide a return of equity to ARVP III's limited partners; and o borrow against the increased value of these properties. On June 28, 1999 we obtained financing on our two ALCs through a loan agreement with a major financial institution in the aggregate principle amount of $13.4 million at an interest rate of 9.15% per annum with a maturity date of June 28, 2001. As required by the loan agreement, we created a wholly owned subsidiary, Retirement Inns III, LLC as a special purpose entity for the financial situation. Our General Partner is a guarantor on the loan for fraud, material misrepresentation and certain covenants. During the fourth quarter of 2000, we received a commitment to refinance the loan with respect to one of the two ALCs into a thirty-five year HUD backed loan bearing interest at a rate of 8.06% per annum. We closed the refinancing transaction in January 2001. With respect to the loan on the other ALC, the maturity date has been extended to January 2002. We are not aware of any trends, other than national economic conditions, which had or which may be reasonably expected to have a material favorable or unfavorable impact on revenues or income from the operations or sale of properties. We believe that if the inflation rate increases we will be able to pass the subsequent increases in operating expenses onto the residents at the properties by way of higher rental and assisted living rates. The implementation of price increases is intended to lead to an increase in revenue however, those increases may result in an initial decline in occupancy and/or a delay in increasing occupancy. If this occurs, revenues may remain constant or even decline. CAPITAL RESOURCES We estimate that we will incur approximately $163,000 for capital expenditures during 2001 for physical improvements at our two ALCs. The funds for these improvements should be available from operations. There are no known material trends, favorable or unfavorable, in our capital resources, and there is no expected change in the mix of such resources. RESULTS OF OPERATIONS The Year Ended December 31, 2000 as compared to the Year Ended December 31, 1999
(DOLLARS IN MILLIONS) Increase/ 2000 1999 (decrease) ------ ------ ---------- Revenues: Rent ............................................. $ 7.58 $ 7.14 6.2% Assisted living .................................. 1.12 1.02 9.2% Interest and other revenue ....................... 0.29 0.48 (38.3)% ------ ------ ------ Total revenue ............................ 8.99 8.64 4.00% ------ ------ ------ Costs and expenses: Rental property operations ....................... 4.42 4.28 3.3% Assisted living .................................. 0.68 0.66 3.9% General and administrative ....................... 0.51 0.41 21.5% Depreciation and amortization .................... 1.10 1.06 3.8% Property taxes ................................... 0.23 0.25 (8.9)% Interest ......................................... 1.41 1.50 (6.1)% ------ ------ ------ Total costs and expenses ................. 8.35 8.16 2.3% ------ ------ ------ Operating income ......................... 0.64 0.48 33.3% Gain on sale of properties ......................... 4.82 4.56 5.7% ------ ------ ------ Income (loss) before minority interest and change in accounting principle ............................. 5.46 5.04 8.3% Minority interest in operations .................... 1.34 0.18 648.4% ------ ------ ------ Income(loss) before change in accounting principle . 4.12 4.86 (15.2)% Cumulative effect of change in accounting principle -- (0.10) (100.0)% ------ ------ ------ Net income .............................. $ 4.12 $ 4.76 (13.4)% ====== ====== ======
11 12 The increase in assisted living community rental revenue of $0.44 million from $7.14 million for the year ended December 31, 1999 to $7.58 million for the year ended December 31, 2000, or 6.2%, is primarily attributable to: o average occupancy for our assisted living communities increased to 96.8% for the year ended December 31, 2000 as compared with 94.7% the year ended December 31, 1999; o an increase in average rental rate per occupied unit to $1,723 for the year ended December 31, 2000 as compared with $1,663 for the year ended December 31, 1999; o offset by one and one-half months of rent from the senior apartments in 1999 which were sold on February 19, 1999. The increase in assisted living revenue of $0.10 million from $1.02 million for the year ended December 31, 1999 to $1.12 million for the year ended December 31, 2000, or 9.2%, is primarily attributable to: o an increase in the assisted living rate from $673 per month for the year ended December 31, 1999 compared to $701 per month for the year ended December 31, 2000; o offset by the loss of one-third of one month's revenue from Bradford Square which was sold on December 21, 2000. The decrease in interest and other revenue of $0.19 million from $0.48 million for the year ended December 31, 1999 to $0.29 million for the year ended December 31, 2000, or (38.3)%, is primarily attributable to: o a decrease in processing and other resident fees for the twelve-month period ended December 31, 2000 due to competitor's waiving such fees to increase occupancy; o a lack of interest income from notes receivable in connection with the sale of three apartment projects in February 1999; and o a decrease in other income from the Claremont Senior Partner note; o offset by an increase in interest earned from bank accounts which utilize commercial paper investments. The increase in rental property operations and assisted living operating expenses of $0.14 million from $4.28 million for the year ended December 31, 1999 to $4.42 million for the year ended December 31, 2000, or 3.3%, is primarily attributable to: o an increased in variable expenses that related to increases in occupancy in assisted living communities; o staffing requirements related to increased assisted living services provided; and o increased salaries of staff and fringe benefits; o offset by a decrease in expenses from the senior apartments which were sold in 1999; and o a small decrease in the expenses of Bradford Square which was sold on December 21,2000. The increase in general and administrative expenses of $0.10 million from $0.41 million for the year ended December 31, 1999 to $0.51 million for the year ended December 31, 2000, or 21.5%, is primarily attributable to: o increased administration fees paid to our general partner; o increased marketing and advertising expenses; and o increased legal expenses related to the recovery of the interest rate lock and commitment fees incurred in connection with the failed refinancing of certain notes payable in 1998; o offset by a reduction of expenses, that were previously allocated to general and administrative due to cost-cutting efforts. The decrease in property tax expense of $0.02 million from $0.25 million for the year ended December 31, 1999 to $0.23 million for the year ended December 31, 2000, or (8.9)%, is primarily related to the sale of our three senior apartments consummated on February 19, 1999. The decrease in interest expense of $0.09 million from $1.50 million for the year ended December 31, 1999 to $1.41 million for the year ended December 31, 2000, or (6.1)%, is primarily related to the following: o a recovery of $112,000 of interest rate lock and commitment fees incurred in connection with the failed refinancing of certain notes payable in 1998; and o buyer's assumption of the notes payable for the three senior apartments sold on February 19, 1999; o offset by an increase in expense from refinancing of two ALCs in June 1999. The increase in minority interest in operations of $1.16 million from $0.18 million for the year ended December 31, 1999 to $1.34 million for the year ended December 31, 2000, or 646.7%, is primarily due to the sale of Bradford Square, L.P on December 21, 2000. The cumulative effect of change in accounting principle in 1999 is a result of the adoption of SOP 98-5 which requires that costs of start-up activities and organizational costs be expensed as incurred and the write-off of previously deferred and un-amortized amounts. 12 13 The Year Ended December 31, 1999 as compared to the Year Ended December 31, 1998
(DOLLARS IN MILLIONS) Increase/ 1999 1998 (decrease) ------- ------- --------- Revenues: Rent .............................................. $ 7.14 $ 8.20 (12.9)% Assisted living ................................... 1.02 0.97 5.2% Interest and other revenue ........................ 0.48 0.32 50.0% ------- ------- ------- Total revenue ............................. 8.64 9.49 (8.1)% ------- ------- ------- Costs and expenses: Rental property operations ........................ 4.28 5.02 (14.7)% Assisted living ................................... 0.66 0.46 43.5% General and administrative ........................ 0.41 0.55 (25.4)% Depreciation and amortization ..................... 1.06 1.44 (26.4)% Property taxes .................................... 0.25 0.39 (35.9)% Interest .......................................... 1.50 1.96 (23.5)% ------- ------- ------- Total costs and expenses .................. 8.16 9.82 (16.9)% ------- ------- ------- Operating income .......................... 0.48 (0.33) 245.5% Gain on sale of property ............................ 4.56 0.13 3,296.0% ------- ------- ------- Income (loss) before minority interest and cumulative effect of change in accounting principle .......... 5.04 (0.20) 2,620.0% Minority interest in operations ..................... 0.18 0.18 2.7% ------- ------- ------- Income (loss) before change in accounting principle . 4.86 (0.38) 1,378.9% Cumulative effect of change in accounting principle . (0.10) -- 100.0% ------- ------- ------- Net income (loss) ........................ $ 4.76 $ (0.38) 1,360.3% ======= ======= =======
The decrease in assisted living community rental revenue of $1.06 million from $8.20 million for the year ended December 31, 1998 to $7.14 million for the year ended December 31, 1999, or (12.9)%, is primarily attributable to: o only one and one-half months of rent in 1999 from our previously owned senior apartments (sold on February 19, 1999); o average occupancy for our ALCs decreased to 94.1% for the year ended December 31, 1999 as compared with 96.4% for the year ended December 31, 1998; o offset by an increase in average rental rate per occupied unit to $1,663 for the year ended December 31, 1999 as compared with $1,445 for the year ended December 31, 1998. The increase in assisted living revenue of $0.05 million from $0.97 million for the year ended December 31, 1998 to $1.02 million for the year ended December 31, 1999, or 5.2%, is primarily is due to: o an average increase of 3.0% in assisted living resident; and o an increase in assisted living rate from$662 per month for the year ended December 31, 1998 compared to $673 per month for the year ended December 31, 1999. The increase in interest income of $0.16 million from $0.32 million for the year ended December 31, 1998 to $0.48 million for the year ended December 31, 1999, or 50.0%, is primarily attributable to investments of excess cash during 1999. The decrease in rental property operations is primary due to the sale of our three senior apartments (sold on February 19, 1999). Assisted living operating expenses were approximately the same for the fiscal year ended December 31, 1999 and the fiscal year ended December 31, 1998. General and administrative costs of $0.14 million from $0.55 million for the year ended December 31, 1998 to $0.41 million for the year ended December 31, 1999, or (25.4)%, decreased primarily due to cost cutting-measures. The decrease in depreciation and amortization expense of $0.38 million from $1.44 million for the year ended December 31, 1998 to $1.06 million for the year ended December 31, 1999, or (26.4)%, is primarily related to: o the sale of our three senior apartments sold on February 19, 1999; and o the elimination of amortization of start-up costs due to the adoption of SOP 98-5 which required us to write-off all capitalized start-up costs in the first quarter 1999. 13 14 The decrease in property tax expense of $0.14 million from $0.39 million for the year ended December 31, 1998 to $0.25 million for the year ended December 31, 1999, or (35.9)%, is primarily related to the sale of our three senior apartments sold on February 19, 1999. Advertising expenses were approximately the same for the fiscal year ended December 31, 1999 and the fiscal year ended December 31, 1998. The decrease in interest expense of $0.46 million from $1.96 million for the year ended December 31, 1998 to $1.50 million for the year ended December 31, 1999, or (23.5)% is primarily related to: o the buyer's assumption of the notes payable for the three senior apartments sold on February 19, 1999; and o the $0.6 million rate lock fee incurred in 1998. Minority interest in income were approximately the same for the fiscal year ended December 31, 1999 and the fiscal year ended December 31, 1998. Cumulative effect of change in accounting principle is a result of the adoption of SOP 98-5 that required that cost of start-up activities and organizational costs be expensed as incurred and the write-off of previously deferred and un-amortized amounts. FUTURE CASH DISTRIBUTIONS On January 11, 2001, we distributed to our limited partners the sales proceeds from Bradford Square L.P. in the aggregate amount of $4.0 million. We do not have any plans to make cash distribution in the immediate future. Our ability to make cash distributions in the future depends on many factors, including: our ability to rent the available units and maintain high occupancies and rates, our ability to control both operating and administrative expenses, our ability to maintain adequate working capital, the absence of any losses from uninsured property damage or future litigation, and our ability to generate proceeds from the sales of our properties under favorable terms. ITEM 7A. QUANATITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuations in the interest rates on our fixed rate notes payable. With respect to our fixed rate notes payable, changes in the interest rates affect the fair market value of the notes payable, but not our earnings or cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until the earlier of maturity and any required refinancing of such debt. We do not currently have any variable interest rate debt and, therefore, are not subject to interest rate risk associated with variable interest rate debt. Currently, we do not utilize interest rate swap or exchange agreements and, therefore, are not subject to interest rate risk associated with interest rate swaps. Less than 1% of our total assets and total contract revenues as of and for the periods ended December 31, 2000 and 1999 were denominated in currencies other than the U.S. Dollar; accordingly, we believe that we have 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%. We have no foreign currency exchange contracts. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and the Report of Independent Auditors are listed at Item 14 and are included beginning on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As an entity, we have no directors and offices. As of December 31, 2000 our general partners were: ARV Assisted Living, Inc. ("ARVAL"), which serves as the Managing General Partner, Gary L. Davidson, John A. Booty, John S. Jason, Tony Rota, and David P. Collins (collectively known as " Special Limited Partners"). Our General Partner makes all decisions concerning property acquisitions and dispositions of the communities, subject to the limited partners' rights to approve or disapprove of the sale of substantially all of our assets. Our Special Limited Partners elected to be changed from general partners to special limited partners during the fiscal year of 2000. An amendment to our Certificate of Limited Partnership has been filed with the State of California as of March 7, 2001. EXECUTIVE OFFICERS AND DIRECTORS OF OUR GENERAL PARTNER The following table sets forth-certain information regarding the executive officers and directors of ARVAL as December 31, 2001.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Douglas M. Pasquale 46 Chief Executive Officer and Chairman of the Board Abdo H. Khoury 51 President, Chief Financial Officer and Secretary of ARVAL Robertson K. Chandler 44 Senior Vice President, Operations Laura J. Loda 42 Senior Vice President Operations (Resigned February 2001) Maurice J. Dewald 60 Director David P. Collins 63 Director John A. Moore 39 Director Jeffrey D. Koblentz 33 Director
DOUGLAS M. PASQUALE, has served as the Chief Executive Officer of ARVAL since March, 1999. Mr. Pasquale also serves as a Director of ARVAL, a position he has held since October 1998 and as the Chairman of the Board of Directors of ARVAL, a position he has held since December 1999. He joined ARVAL as President and Chief Operating Officer on June 1, 1998. Prior to joining ARVAL, Mr. Pasquale was employed from 1986 until 1998 in various capacities by Richfield Hospitality Services, Inc., and Regal Hotels International-North America, a leading hotel ownership and hotel management company based in Englewood, Colorado including as its President and Chief Executive Officer from 1996 to 1998 and as as its Chief Financial Officer from 1994 to 1996. ABDO H. KHOURY, Mr. Khoury has served President of ARVAL since January 2001and has served as Chief Financial Officer and Secretary of ARVAL since March 30, 1999. Previously he served as Vice President, Asset Strategy and Treasury of ARVAL, a position he held from January 1999 until March 1999, and as President of the Apartment Division, a position he held from May 1997 until January 1999. Prior to joining ARVAL, Mr Khoury was a principal with Financial Performance Group in Newport Beach, California, from 1991 to 1997. ROBERTSON K. CHANDLER. Mr. Chandler has served as Senior Vice President, Operations of ARVAL since February 1999. Prior to that time he served as Vice President of Operations, Home Care and Hospice, with Mariner Specialty Health Services in Longmont, Colorado, from 1997 to 1999. From 1993 to 1997, he was Chief Operating Officer and a Director of Colorado Home Care, a home care agency headquartered in Broomfield, CO. LAURA J. LODA. From June 1999 until June 2000, Ms. Loda served as the Senior Vice President, Human Resources of ARVAL. She served as Vice President, Operations of ARVAL from February 1999 until February 2001. Ms. Loda resigned her positions with ARVAL in February 2001. Prior her employment with ARVAL, from 1996 until 1998 Ms. Loda served as the Director of Corporate Human Resources for Taco Bell, a fast food operation of Tricon Global Restaurants based in Irvine, California. From 1993 to 1996, Ms. Loda was the Director of Compensation for Gap, Inc. an international clothing chain based in San Francisco, Calfornia. 15 16 MAURICE J. DEWALD, age 60, has served as a Director of ARVAL since 1995. Mr. Dewald is the Chairman and Chief Executive Officer of Verity Financial Group, Inc., a firm he founded in 1992. He currently serves as a Director of Tenet Healthcare Corporation, Dai-Ichi Kangyo Bank of California and Monarch Funds. DAVID P. COLLINS, age 63, has served as a Director of ARVAL since 1985. From 1985 to January 1998, Mr. Collins was a Senior Vice President of ARVAL, responsible for investor relations and for capital formation for ARVAL and affiliated entities. Mr. Collins currently is President and Chief Executive Officer of Euro Senior Living, Lisbon, Portugal. JOHN A. MOORE, age 39, has served as a Director of ARVAL since 1999. Mr. Moore is a principal of Lazard Freres Real Estate Investors L.L.C. and its Chief Financial Officer. He joined Lazard in 1998 from World Financial Properties, where he had served as an Executive Vice President and Chief Financial Officer since 1996. Prior to his employment with World Financial Properties, from 1988 until 1996 Mr. Moore worked with Olympia and York as Senior Vice President, Finance. JEFFREY D. KOBLENTZ, age 33, has served as a Director since 2000. Mr. Koblentz is a Vice President of Lazard Freres Real Estate Investors L.L.C. He joined Lazard in 1998 from Arthur Andersen LLP, where he was a Manager in the Real Estate Services Group from 1992 until 1998. None of the directors or officers is related to each any other director or officer by blood or marriage and none of the directors or officers is involved in any legal proceedings as described in Section 401(f) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION As an entity, we have no officers or directors. We are managed by our General Partner. We compensate our General Partner as set forth in the table below. Please note that during the fiscal year 2000 the Special Limited Partners were general partners of ARVP III and, as such, were entitled to the compensation set forth below (except for compensation which to which ARVAL only is entitled, as specifically indicated in parenthetical). Acquisition Fees (ARV Assisted Living, Inc.) A property acquisition fee of 2% of Gross Offering Proceeds as defined in the ARVP III Limited Partnership Agreement to be paid for services in connection with the selection and purchase of ALCs and related negotiations. In addition, a development, processing and renovation fee of 3.5% of Gross Offering Proceeds to be paid for services in connection with negotiations for or the renovation or improvement of existing communities and the development, processing or construction of ALCs developed by us. There were no property acquisition, development, and renovation fees for the years ending December 31, 2000, 1999 and 1998. Rent-Up and Staff Training Fees (ARV Assisted Living, Inc.) Rent-up and staff training fees of 4.5% of the Gross Offering Proceeds allocated to each specific acquired or developed ALCs. Such fees will be paid for services in connection with the opening and initial operations of the ALCs including, without limitation, design and implementation of the advertising, direct solicitation and other campaigns to attract residents and the initial hiring and training of managers, food service specialists, activities directors and other personnel employed in the individual communities. There were no rent-up and staff training fees for the years ending December 31, 2000, 1999 and 1998. Property Management Fees (ARV Assisted Living, Inc.) A property management fee of 5% of gross revenues paid for managerial services including general supervision, hiring of onsite management personnel employed by ARVP III, renting of units, installation and provision of food service, maintenance, and other operations. Property management fees for the years ending December 31, 2000, 1999 and 1998 were $442,000, $421,000, and $472,000, respectively.
16 17 Partnership Management Fees (ARV Assisted Living, Inc.) A partnership management fee of 10% of cash flow before distributions is paid for implementing our business plan, supervising and management of our affairs including general administration, coordination of legal, audit, tax, and insurance matters. Partnership management fees for the years ending December 31, 2000, 1999 and 1998 were $178,000 $151,000, and $140,000 respectively. Sale of Partnership Projects (ARV Assisted Living, Inc.) The ARVP III,Limited Partnership Agreement neither specifically authorizes nor prohibits payment or compensation in the form of real estate commissions to the General Partners or its affiliates. Any such payments or compensation are subordinated to a return to ARVP III's limited partners of their capital contributions plus an 8% per annum, cumulative, but not compounded, return thereon from all sources, including prior distribution of cash flow. Any such compensation shall not exceed 3% of the gross sales price or 50% of the standard real estate brokerage commission, whichever is less. Upon the sale of Bradford Square on December 21, 2000, $240,060 real estate selling commission was paid to ARVAL. In fiscal 1999, and 1998 no real estate selling commissions were paid to our ARVAL. Subordinated Incentive Compensation (ARV Assisted Living, Inc.) ARVAL is entitled to receive 15% of the proceeds of sale or refinancing subordinated to a return of initial Capital Contributions (as defined in ARVP III Limited Partnership Agreement) plus cumulative, but not compounded return on capital contributions varying from 8% to 10% per annum. In 2000, 1999 and 1998, no incentive compensation was paid. Partnership Interest (General Partners) 1% of all items of capital, profit or loss, and liquidating distributions, subject to a capital account adjustment. Reimbursed Expenses & Credit Enhancement (General Partners) Our General Partner may receive fees for personal guarantees of loans made to us. All of our expenses shall be billed directly to and paid by us. Our General Partners may be reimbursed for the actual cost of goods and materials obtained from unaffiliated entities and used for or by us. Our General Partner will be reimbursed for administrative services necessary to our prudent operation, provided that such reimbursement is at the lower of its actual cost or the amount which we would be required to pay to independent parties for comparable administrative services in the same geographic location. The total reimbursements to ARVAL amounted to $3.1 million, $3.7 million, and $2.5 million for the years ending December 31, 2000, 1999 and 1998, respectively. Finder Fees (ARV Assisted Living, Inc.) Our General Partner received finder fees in conjunction with obtaining grants for the rehabilitation of Cedar Villas and Villa Azusa. The finders fees amount to 10% of the total grant money received by us. No finder fees for the years ending December 31, 2000, 1999 and 1998 were paid. Indemnity Fees (General Partners) Our General Partner received $96,000 for indemnifying and holding UHSI, Costa and Husky harmless from any liabilities as a result of our buy out of them. No indemnity fees for the years ending December 31, 2000, 1999 and 1998 were paid.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Not applicable. 17 18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Other than the compensation earned by our General Partners, as set out under item 11 above, no General Partner or Affiliate receives any direct or indirect compensation from us. Our General Partner receives a management fee of 5% of Gross Revenues (as defined in the ARVP III Limited partnership Agreement). Because these fees are payable without regard to whether particular communities are generating cash flow or otherwise benefiting us, a conflict of interest could arise in that it might be to the advantage of our General Partner that a community be retained or re-financed rather than sold. On the other hand, an affiliate of the General Partner may earn a real estate commission on sale of a property, creating incentive to sell what might be a profitable property. The General Partner has authority to invest our funds in properties or entities in which it or any of its affiliate has an interest, provided we acquire a controlling interest. In any such investment, duplicate property management or other fees will not be permitted. Our General Partner or any of its affiliates may, however, purchase property in their own names and temporarily hold title to facilitate acquisition for us, provided that such property is purchased by us at cost (including acquisition, closing and carrying costs). Our General Partner will not commingle our funds with those of any other person or entity. Conflicts of interest exist to the extent that communities owned or operated compete, or are in a position to compete for residents, general managers or key employees with assisted living facilities owned or operated by our General Partner and any of its affiliates in the same geographic area. Our General Partners will seek to reduce any such conflicts by offering such persons their choice of residence or employment on comparable terms in any community. Further conflicts may exist if and to the extent that other affiliated owners of ALCs seek to refinance or sell at the same time as us. The General Partner will seek to reduce any such conflicts by making prospective purchasers aware of all properties available for sale. 18 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (1) Financial Statements o Independent Auditors' Report; o Consolidated Balance Sheets - December 31, 2000 and 1999; o Consolidated Statements of Operations - Years ended December 31, 2000, 1999 and 1998; o Consolidated Statements of Partners' Capital - Years ended December 31, 2000, 1999 and 1998; o Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998; o Notes to Consolidated Financial Statements; o Financial Statement Schedule - Schedule III - Real Estate and Related Accumulated Depreciation and Amortization - December 31, 2000. (2) Financial Statement Schedules: All financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto. (3) Exhibits Exhibit Number Description ------- ----------- 10.1 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC (Incorporated by reference to Exhibit 10.1 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.2 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC (Incorporated by reference to Exhibit 10.2 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.3 Letter Agreement as to the Loans in the aggregate amount of $13,382,200 from Banc One Capital Funding Corporation to Retirement Inns III (Incorporated by reference to Exhibit 10.14 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.4 Note and Agreement as to Retirement Inns III, LLC. (Incorporated by reference to Exhibit 10.16 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.5 Limited Liability Company Agreement of Retirement Inns III, LLC. (Incorporated by reference to Exhibit 10.18 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.6 Deed of Trust Note of ARV Chandler Villas, L.P. to Red Mortgage Capital, Inc.* 10.7 Allonge #1 to Deed of Trust Note of ARV Chandler Villas, L.P. to Red Mortgage Capital, Inc.* 10.8 Deed of Trust between ARV Chandler Villas, L.P. and Fidelity National Title Insurance* 10.9 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Chandler Villas, L.P. and Secretary of Housing and Urban Development* 10.10 Purchase agreement and Escrow instructions between ARVP III/Brandford Square, L.P., and Vintage Senior Housing, LLC* 10.11 First Amendment to Purchase Agreement and Escrow Instructions between ARV III/Bradford Square, L.P., and Avalon at Bradford Square, LLC, assignee of Vintage Senior Housing, LLC* 10.12 Second Amendment to Purchase Agreement and Escrow Instructions between ARV III/ Bradford Square, L.P., and Avalon at Bradford Square, LLC* - -------------- * Filed herewith. (b) Reports on Form 8-K. ARVP III did not file any report on form 8-K for the fiscal year ended December 31, 2000. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, A CALIFORNIA LIMITED PARTNERSHIP, BY THE FOLLOWING PERSONS ON OUR BEHALF. ARV ASSISTED LIVING, INC. By: /s/ DOUGLAS M. PASQUALE ------------------------------- Douglas M. Pasquale Chief Executive Officer Date: April 2, 2001 Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DOUGLAS M. PASQUALE Chief Executive Officer April 2, 2001 - ------------------------------- (Principal Executive Officer) Douglas M. Pasquale /s/ ABDO H. KHOURY President and Chief Financial Officer April 2, 2001 - ------------------------------- (Principal Financial & Accounting Officer) Abdo H. Khoury /s/ JOHN A. MOORE Director April 2, 2001 - ------------------------------- John A. Moore /s/ DAVID P. COLLINS Director April 2, 2001 - ------------------------------- David P. Collins /s/ MAURICE J. DEWALD Director April 2, 2001 - ------------------------------- Maurice J. DeWald /s/ JEFFREY D. KOBLENTZ Director April 2, 2001 - ------------------------------- Jeffery D. Koblentz
20 21 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Annual Report - Form 10-K Consolidated Financial Statements and Schedule Items 8 and 14(a) December 31, 2000, 1999 and 1998 (With Independent Auditors' Report Thereon) 21 22 Annual Report - Form 10-K Items 8 and 14(a) Index to Consolidated Financial Statements and Schedule Page ---- Independent Auditors' Report F-1 Consolidated Balance Sheets - December 31, 2000 and 1999 F-2 Consolidated Statements of Operations - Years ended December 31, 2000, 1999 and 1998 F-3 Consolidated Statements of Partners' Capital - Years ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 F-5 Notes to Consolidated Financial Statements F-6 Schedule Real Estate and Related Accumulated Depreciation and Amortization - December 31, 2000 Schedule III All other schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial statements or related notes. 23 INDEPENDENT AUDITORS' REPORT To ARV Assisted Living, Inc. as the Managing General Partner of American Retirement Villas Properties III, L.P.: We have audited the consolidated financial statements of American Retirement Villas Properties III, L.P., a California limited partnership and subsidiaries, as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedule listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Retirement Villas Properties III, L.P. and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Orange County, California March 5, 2001 F-1 24 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Balance Sheets December 31, 2000 and 1999 (IN THOUSANDS, EXCEPT UNITS)
2000 1999 -------- -------- ASSETS Properties, at cost: Land $ 1,549 $ 2,224 Building and improvements, less accumulated depreciation of $2,371 and $2,976 in 2000 and 1999, respectively 10,111 12,768 Furniture, fixtures and equipment, less accumulated depreciation of $609 and $527 in 2000 and 1999, respectively 510 746 -------- -------- Net properties 12,170 15,738 Cash 8,458 2,190 Restricted cash 168 168 Loan fees, less accumulated amortization of $403 and $240 in 2000 and 1999, respectively 176 401 Other assets 343 289 -------- -------- $ 21,315 $ 18,786 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable to banks $ 13,177 $ 13,323 Notes payable to others -- 2,342 Accounts payable 65 116 Accrued expenses 550 486 Amounts payable to affiliates 244 118 Distributions payable to Partners 5,447 286 -------- -------- Total liabilities 19,483 16,671 -------- -------- Minority interest -- 115 -------- -------- Partners' capital (deficit): General partners (2) (2) Special limited partners (138) (137) Limited partners, 18,666 units outstanding at December 31, 2000 and 1999 1,972 2,139 -------- -------- Total partners' capital 1,832 2,000 -------- -------- $ 21,315 $ 18,786 ======== ========
See accompanying notes to the consolidated financial statements. F-2 25 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Statements of Operations Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ------ ------- ------- (IN THOUSANDS EXCEPT PER UNIT DATA) Revenues: Rent $ 7,582 $ 7,143 $ 8,195 Assisted living 1,115 1,022 977 Interest 158 206 58 Other 139 274 260 ------- ------- ------- Total operating revenues 8,994 8,645 9,490 ------- ------- ------- Costs and expenses: Rental property operations (including $2,834, $2,450, and $1,518 related to affiliates in 2000, 1999 and 1998, respectively) 4,419 4,277 4,307 Assisted living (including $676, $651, and $361 related to affiliates in 2000, 1999 and 1998, respectively) 685 659 463 General and administrative (including $297, $258, and $349 related to affiliates in 2000, 1999 and 1998, respectively) 403 332 552 Depreciation and amortization 1,104 1,060 1,439 Property taxes 228 250 393 Advertising 103 84 115 Interest 1,410 1,502 2,557 ------- ------- ------- Total operating costs and expenses 8,352 8,164 9,826 ------- ------- ------- Operating income (loss) 642 481 (336) Gain on sale of properties 4,823 4,562 134 ------- ------- ------- Income (loss) before income tax, minority interest in income of majority owned entities, and change in accounting principle 5,465 5,043 (202) Income tax expense 10 -- -- ------- ------- ------- Income (loss) before minority interest in income of majority owned entities, and change in accounting principle 5,455 5,043 (202) Minority interest in income of majority owned entities 1,344 180 176 ------- ------- ------- Income (loss) before change in accounting principle 4,111 4,863 (378) Cumulative effect of change in accounting principle -- (96) -- ------- ------- ------- Net income (loss) $ 4,111 $ 4,767 $ (378) ======= ======= ======= Net income (loss) per limited partner unit $218.08 $252.81 $(20.06) ======= ======= =======
See accompanying notes to the consolidated financial statements F-3 26 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Statements of Partners' Capital Years ended December 31, 2000, 1999 and 1998
SPECIAL TOTAL GENERAL LIMITED LIMITED PARTNERS' PARTNER PARTNERS PARTNERS CAPITAL ------- ------------ -------- --------- (IN THOUSANDS EXCEPT PER UNIT DATA) Balance (deficit) at December 31, 1997 $ (74) $ 8,621 $ 8,547 Distribution to partners ($68.75 per limited partner unit) (13) (1,283) (1,296) Net loss (3) (375) (378) ----- ------- ------- Balance (deficit) at December 31, 1998 (90) 6,963 6,873 Distribution to partners ($511.24 per limited partner unit) (97) (9,543) (9,640) Net income 48 4,719 4,767 ----- ------- ------- Balance (deficit) at December 31, 1999 (139) 2,139 2,000 ----- ------- ------- Change in status of general partners to special limited partners 137 $(137) Distribution to partners ($226.95 per limited partner unit) (42) (4,237) (4,279) Net income 41 4,070 4,111 ----- ----- ------- ------- Balance (deficit) at December 31, 2000 $ (2) $(138) $ 1,972 $ 1,832 ===== ===== ======= =======
See accompanying notes to consolidated financial statements. F-4 27 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ------- -------- ------- (IN THOUSANDS EXCEPT PER UNIT DATA) Cash flows from operating activities: Net income (loss) $ 4,111 $ 4,767 $ (378) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,104 1,060 1,439 Gain on sale of properties (4,823) (4,562) (134) Cumulative effect of change in accounting principle -- 96 -- Minority interest in income of majority owned entities 1,344 20 21 Change in assets and liabilities: (Increase) in restricted cash -- (6) (9) Decrease in other assets 47 -- 265 (Increase) Decrease in other assets (101) 151 (268) Increase (decrease) in accounts payable and accrued expenses 13 (515) (111) Increase (decrease) in amounts payable to affiliates 126 (4) (261) ------- -------- ------- Net cash provided by operating activities 1,821 1,007 564 ------- -------- ------- Cash flows from investing activities: Improvements and building construction -- -- (885) Additions to properties, net (168) (187) (164) Proceeds from sales of properties, net 7,738 3,962 -- Cash received for property sold under contract -- -- 134 ------- -------- ------- Net cash provided by (used in) investing activities 7,570 3,775 (915) ------- -------- ------- Cash flows from financing activities: Proceeds from notes payable -- 13,361 2,429 Principal repayments on notes payable to banks and others (2,488) (10,162) (321) Proceeds from note receivable -- 2,765 -- Loan Fees (58) (704) -- Distributions paid (577) (9,752) (943) ------- -------- ------- Net cash provided by (used in) financing activities (3,123) (4,492) 1,165 ------- -------- ------- Net increase in cash 6,268 290 814 Cash at beginning of year 2,190 1,900 1,086 ------- -------- ------- Cash at end of year $ 8,458 $ 2,190 $ 1,900 ======= ======== ======= Supplemental cash flow information - cash paid during the year for interest (net of capitalized interest of $0, $0, and $35 in 2000, 1999 and 1998, respectively) $ 1,508 $ 1,473 $ 2,553 ======= ======== =======
See accompanying notes to the consolidated financial statements. F-5 28 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of American Retirement Villas Properties III, L.P. (the Partnership) include the accounts of the Partnership, ARVP III/Bradford Square, L.P. (ARVP III/BS) and Retirement Inns III, LLC. that was created as part of the loan requirements for the refinancing in June 1999, Heritage Pointe Ontario Partners, L.P. (HPOP), and Heritage Pointe Pomona Partners, L.P. (HPPP) for the years ended December 31, 2000, 1999 and 1998. All inter-company balances and transactions have been eliminated in consolidation. We consolidate these limited partnerships since we have a controlling financial interest. Minority interest represents the minority partners' cost to acquire the minority interest adjusted by their proportionate share of subsequent earnings, losses and distributions. BASIS OF ACCOUNTING We maintain our 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 We review our 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, we estimate 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 our financial statements in conformity with generally accepted accounting principles, we have made estimates and assumptions that affect the following: o reported amounts of assets and liabilities at the date of the financial statements; o disclosure of contingent assets and liabilities at the date of the financial statements; and o reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRE-OPENING COSTS Costs such as fees paid for employee training, rent-up and other related costs incurred prior to the opening of a retirement community are deferred and amortized using the straight-line method over a period of one year after the community's opening. F-6 29 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements (Continued) In April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities," which is effective for fiscal years beginning after December 15, 1998. The SOP provides guidance on the financial reporting of start-up activities and organizational costs. It requires costs of start-up activities and organizational costs to be expensed when incurred and, upon adoption, the write-off as a cumulative effect of a change in accounting principle of any previously capitalized and un-amortized start-up or organizational costs. We adopted the provisions of SOP 98-5 in the first quarter of 1999 writing off capitalized start-up costs of approximately $96,000. LOAN FEES We amortize loan fees using the effective interest method over the term of the respective note payable. RENTAL INCOME Rent agreements with tenants are on a month-to-month basis. We apply advance deposits to the first month's rent. Revenue is recognized in the month earned for rent and assisted living services. ADVERTISING COSTS Except for yellow pages advertising, which is expensed over the period benefited on a straight-line basis, we expense all advertising costs as they are incurred. INCOME TAXES Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership. We have not requested a ruling from the Internal Revenue Service to the effect that we will be treated as a partnership and not an association taxable as a corporation for Federal income tax purposes. The Partnership received an opinion of counsel as to its tax status prior to the offering of limited partnership units, but such opinion is not binding upon the Internal Revenue Service. Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles (GAAP) and for Federal income tax reporting purposes at December 31 (in thousands): 2000 1999 ------------------- ------------------- GAAP TAX BASIS GAAP TAX BASIS BASIS (1) BASIS (1) ------------------- ------------------- Total assets $21,315 $23,362 $18,786 $19,153 ======= ======= ======= ======= Total liabilities $19,483 $13,802 $16,671 $16,770 ======= ======= ======= ======= F-7 30 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements (Continued) Following are the differences between the financial statement and tax return income (in thousands):
2000 1999 1998 ------- ------- ----- Net income (loss) per financial statements $ 4,111 $ 4,767 $(378) Guaranteed payments(1) 502 459 502 Depreciation differences on properties(1) (40) (105) 92 Amortization differences on intangible assets(1) 75 102 128 Deferred income(1) (3) (89) 20 Gain on sale of assets(1) 74 72 -- Other(1) (2) 15 (3) ------- ------- ----- Total income per Federal tax return (1) $ 4,717 $ 5,221 $ 361 ======= ======= =====
----------- (1) Unaudited. 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 in 2000, 1999 and 1998. RECLASSIFICATIONS We have reclassified certain prior period amounts to conform to the December 31, 2000 presentation. (2) ORGANIZATION AND PARTNERSHIP AGREEMENT We were formed on June 28, 1989 for the purpose of acquiring, developing and operating assisted living and senior apartment communities. The term of the Partnership is 60 years and may be dissolved earlier under certain circumstances. We commenced operations on December 28, 1989 when the minimum number of units (1,250) had been sold. Limited partner units (minimum of 2 units per investor for Individual Retirement Accounts, KEOGH'S and pension plans and 5 units for all other investors) were offered for sale to the general public. Each limited partner unit represents a $1,000 capital contribution. There were 18,666 Limited Partner units sold through the end of the offering in October 1992 which represented a cumulative capital investment of $18,666,000, net of units repurchased and resold. Under the Partnership Agreement, the maximum liability of the Limited Partners is the amount of their capital contributions. Our Managing General Partner is ARV Assisted Living, Inc. ("ARVAL"), a Delaware corporation, and the individual Special Limited Partners are John A. Booty, John S. Jason, Gary L. Davidson, Tony Rota and David P. Collins. Our Special Limited Partners are not required to make capital contributions to the Partnership. Profits and losses for financial and income tax reporting purposes shall generally be allocated, other than cost recovery deductions (as defined in the Partnership Agreement), 0.01% to the General Partners, 0.99% to Special Limited Partners and 99% to the Limited Partners. Cost recovery deductions for each year are allocated 0.01% to the General Partner, 0.99% to Special Limited Partners and 99% to the Limited Partners who are taxable investors. F-8 31 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements (Continued) Cash available for distribution from operations, which is determined at the sole discretion of the General Partner, is to be distributed 0.01% to the General Partner, 0.99% to Special Limited Partners and 99% to the Limited Partners. Upon any sale, refinancing or other disposition of our real properties, distributions are to be made 0.01% to the General Partner, 0.99% to the Special Limited Partners and 99% to the Limited Partners until the Limited Partners have received an amount equal to 100% of their capital contributions plus an amount ranging from 8% to 10% (depending upon the timing of the Limited Partner's investment) of their capital contributions per annum, cumulative but not compounded, from the date of each Partner's investment. The cumulative return is to be reduced, but not below zero, by the aggregate amount of prior distributions from all sources. Thereafter, distributions are 15% to the General Partner and Special Limited Partners, and 85% to the Limited Partners, except that after the sale of the properties, the proceeds of sale of any last remaining assets owned by us are to be distributed in accordance with positive capital account balances. (3) TRANSACTIONS WITH AFFILIATES Our properties are managed by ARVAL. For this service we pay a property management fee of 5% of gross revenues totaling $442,000, $421,000, and $472,000, for the years ended December 31, 2000, 1999 and 1998, respectively. Additionally, we pay a partnership management fee of 10% of cash flow before distributions, as defined in the Partnership Agreement, amounting to $178,000, $151,000, and $140,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Payment of the partnership management fee out of cash flow is subordinated to a quarterly noncumulative distribution from each property to the Limited Partners of an amount equal to an annualized return, per quarter, of 7.5% of Capital Contributions allocated to each property. We reimburse ARVAL for certain expenses, such as payroll and retirement benefit expenses, repairs and maintenance, and supplies expenses paid on our behalf. The total reimbursements to ARVAL, are included in rental property operations and general and administrative expenses in the accompanying statements of operations and amounted to $3,160,000, $3,673,000, and $2,497,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In consideration for services rendered with respect to property acquisitions, the Managing General Partner is paid a property acquisition fee of a maximum of 2% of the gross offering proceeds. In addition, the Managing General Partner is entitled to a development, processing and renovation fee of a maximum of 3.5% of gross offering proceeds allocated to a particular project. The Managing General Partner is also entitled to a maximum fee of 4.5% of gross offering proceeds for rent-up and staff training services. There were no property acquisition and development or processing and renovation fees paid during the three years ended December 31, 2000. We paid ARVAL $240,060 in real estate selling commission fees upon the sale of Bradford Square on December 21, 2000. Amounts payable to affiliates at December 31, 2000 and 1999 include expense reimbursements and accrued property management and partnership management fees. F-9 32 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements (Continued) (4) PROPERTIES The following table sets forth, as of December 31, 2000 the location of each our ALCs, the date on which operations commenced at each such ALC, the number of units at each ALC, and our interest in each ALC. COMMENCED COMMUNITY LOCATION OPERATIONS UNITS --------- -------- ---------- ----- Chandler Villas Chandler, AZ September 1992 164 Villa Las Posas Camarillo, CA December 1997 123 ARVP III/BRADFORD SQUARE LTD. On December 18, 1990, we entered into a limited partnership, ARVP III/BS, with an unrelated third party, Bradford Square Ltd. Both partners made an initial $1,000 cash contribution. We are the Managing General Partner and Bradford Square Ltd. is the Limited Partner, each with a 50% interest. Pursuant to the agreement, Bradford Square Ltd. contributed an existing community (Bradford Square), to ARVP III/BS, and, we contributed cash. Income and loss is generally allocated to the Managing General Partner and Bradford Square, Ltd. based on their partnership interests. Under the limited partnership agreement between Bradford Square Ltd., and us, we receive a 9% preferred return on 125% of amounts contributed to the partnership. The remaining cash flow from operations is divided equally between Bradford Square Ltd and us. During 2000, 1999 and 1998, we received a preferred return of $ 218,000, $218,000 and $218,000, respectively. SALE OF PROPERTY - ARVPIII/BRADFORD SQUARE LTD. On December 21, 2000 we sold ARVPIII/BS for $8,002,000. Under the limited partnership agreement between Bradford Square Ltd., and ARVP III, the distribution of assets on liquidation of the partnership shall be made in the following orders: First, to ARVPIII one hundred twenty five percent (125%) of the cash contributions made by the Partnership; Second, in proportion to and to the extent of the positive balance of respective capital accounts as of the date of distribution; and Third, the balance shall be made 50% to Bradford Square, L.P. and 50% to ARVPIII. The Partnership received a distribution of $3,622,000 from the sale of Bradford Square. (5) SALE OF PROPERTY - HERITAGE POINTE CLAREMONT In September 1993, we contracted to sell our then owned Heritage Pointe Claremont to Claremont Senior Partners ("CSP") for $12,281,900. Our General Partner is a special limited partner of CSP. The transaction closed on December 30, 1993. The consideration we received from CSP in the sale of Heritage Pointe Claremont ALC consisted of both $10,000 in cash and cash equivalents and $12,271,900 in the form of a promissory note. The promissory note bears interest at 8.0% and the outstanding balance and interest are payable from excess cash flows as defined in the CSP partnership agreement. The promissory note is secured by certain CSP partners' interests in CSP and matures January 25, 2010. Upon the receipt of the principal and interest payment from CSP in April 1996 and January 1995, a sufficient investment as defined by Statements of Financial Accounting Standards Board No. 66 was made and the sale was recognized. As CSP's excess cash flows do not currently exceed the interest payment requirements, SFAS 66 requires profit on the sale to be recognized under the cost recovery method as payments are received on the notes. We received interest payments on these note totaling $12,000, $54,600, $134,000 for the years ended December 31, 2000, 1999 and 1998 respectively. F-10 33 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements (Continued) (6) NOTES PAYABLE TO BANKS AND OTHERS On January 1, 1993, we obtained notes payable secured by a deed of trust on Bradford Square and Chandler Villas. The notes were for 84 months and is guaranteed by our General Partners. The interest for the initial 7-year term was at 5.25% in excess of the seven-year treasury yield as of the inception date (6.38% at inception) with annual increases of 2% per year, and interest for the second seven-year period at 7 % in excess of the seven-year treasury yield as of the reset date with annual increases of 2 %. On June 1999 we refinanced a note secured on Chandler Villas to a 24 month loan and on December 21, 2000 we paid the note secured on Bradford Square as part of the sale of the property. On June 28, 1999, we obtained financing on two communities. As part of the loan requirements, we created a wholly owned subsidiary Retirement Inns III, LLC. The loan is for 24 months and is secured by the two ALCs; in addition, ARV Assisted Living, our General Partner is a guarantor on the loan for fraud, material misrepresentation and certain covenants. The interest rate is 9.15% per annum and the payments are based upon a 25 year principal and interest amortization schedule. During the fourth quarter of 2000, we received a commitment to refinance the loan with respect to one of the two ALCs into thirty-five year HUD backed loan bearing interest at 8.06% per annum. We closed the refinancing transaction in January 2001. With respect to the loan on the other ALC, the maturity date has been extended to January 2002. At December 31, 2000 and 1999, notes payable to banks and others included the following (in thousands): 2000 1999 ------- ------- Note payable to the bank, bearing interest at 9.15%. Monthly principle and interest payment of $13. Collateralized by two ALCs. $13,177 $13,323 ------- ------- Notes Payable to Others: Notepayable secured by deed of trust on Bradford Square, bearing interest rate at 13.2% in the year of 1999 and 13.40% in the year of 2000. Monthly principle and interest payments $28; paid in 2000. -- 2,339 Various notes payable bearing interests ranging from 13% to 16%; collateralized by equipment; paid in 2000. -- 3 ------- ------- Notes payable to others -- 2,342 ------- ------- $13,177 $15,665 ======= ======= The annual principal payments of notes payable as of December 31, 2000 are as follows (in thousands): Year ending December 31: 2001 $ 5,198 2002 7,979 ------- $13,177 ======= F-11 34 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P. (A California Limited Partnership) Notes to Consolidated Financial Statements (Continued) Our General Partner's Board of Directors approved the refinancing of the assisted living communities in July 1998 to: o take advantage of lower fixed interest rates available at the time through the commercial mortgage backed security market; o provide a return of equity to ARVP III limited partners; and o borrow against the increased value of these properties. Due to a failed financing, in 1998 we paid the lender approximately $0.7 million of fees for an interest rate lock and $0.10 million for loan commitment and other fees. The lender terminated the loan commitment and underlying interest rate lock in October 1998 due to adverse market conditions. The lender returned $0.2 million of the interest rate lock fees in January 1999. After seeking legal action against the lender, we received an additional refund in the amount of $112,000 of the interest rate lock fees in July 2000 as full and final settlement. We have included the amounts paid and received in interest expense in the accompanying statements of operations for the years ended December 31, 2000, 1999 and 1998. On June 28, 1999 we completed the refinancing. The loan is for 24 months and is secured by the two ALCs; in addition, ARV Assisted Living, our General Partner is a guarantor on the loan for fraud, material misrepresentation and certain covenants. As part of the loan requirements, we created a wholly owned subsidiary American Retirement Villas III, LLC as a special purpose entities for the financial situation. The loan term is for 24 months with a lender option to extend for 10 years. The interest rate is 9.15% per annum and the payments are based upon a 25 year principal and interest amortization schedule. During the fourth quarter of 2000, we received a commitment to refinance the loan with respect to one of the two ALCs into thirty-five year HUD backed loan bearing interest at 8.06% per annum. We closed the refinancing transaction in January 2001. With respect to the loan on the other ALC, the maturity date has been extended to January 2002. (7) EMPLOYEE BENEFIT PLANS Effective January 1, 1997, ARVAL established a savings plan (the "Savings Plan") that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees who are at least 21 years of age may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. ARVAL matches 25% of each employee's contributions up to a maximum of 6% of the employee's earnings. Employees are eligible to enroll at the first enrollment date following the start of their employment (July 1 or January 1). ARVAL matches employees' contributions beginning on the first enrollment date following one year of service or 1,000 hours of service. Our Savings Plan expense was $8,000, $10,000 and $8,000 (as a reimbursement to ARVAL) for the years ended December 31, 2000, 1999 and 1998. (8) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Partnership's financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. The carrying amounts reported in the consolidated balance sheets for cash, other assets and, accounts payable, accrued liabilities and amounts payable to affiliates, approximate fair value due to the short-term nature of these instruments. The notes payable bear interest at rates that approximate current market rates. Therefore, we believe that the carrying value approximates fair value. (9) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE QUARTER ENDED ------------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ----------- ------------ ------- -------- 2000 Total revenue..................... $2,280 $2,246 $2,202 $2,266 Income from operations............ 107 119 269 147 Net income........................ 3,769 51 277 64 1999 Total revenue..................... $1,280 $2,027 $2,110 $2,328 Income (loss) from operations..... 145 (37) 208 165 Net income (loss)................. 96 (80) (6) 4,757
F-12 35 Schedule III AMERICAN RETIREMENT VILLAS PROPERTIES III (A California Limited Partnership) Real Estate and Related Accumulated Depreciation and Amortization December 31, 2000 (In thousands)'
INITIAL COSTS GROSS AMOUNT ----------------------- ------------------------- COSTS CAPITALIZED ENCUM- BUILDINGS AND SUBSEQUENT BUIDINGS AND DESCRIPTION BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS - ----------- ------- ------ ------------- -------------- ------ ------------ Villa Las Posas $ 8,081 $1,210 $ 572 $8,666 $1,249 $ 9,238 Chandler Villas 5,096 300 2,902 342 300 3,244 ------- ------ ------ ------ ------ ------- $13,177 $1,510 $3,474 $9,008 $1,549 $12,482 ======= ====== ====== ====== ====== =======
ACCUMULATED DATE OF DEPRECIABLE TOTAL(1) DEPRECIATION ACQUISITION LIVES (YEARS) -------- ------------ ------------- ------------- Villa Las Posas $10,487 $1,204 December 1987 27-1/2 years Chandler Villas 3,544 1,167 September 1990 27-1/2 years ------- ------ $14,031 $2,371 ======= ======
Following is a summary of investment in properties for the year ended December 31, 2000, 1999 and 1998:
2000 1999 1998 -------- -------- ------- Balance at beginning of year $ 17,968 $ 33,423 $32,922 Transfer of cost from other fixed assets -- 189 -- Improvements/construction 62 51 501 Disposals (3,999) (15,695) -- -------- -------- ------- Balance at end of year $ 14,031 $ 17,968 $33,423 ======== ======== =======
Following is a summary of accumulated depreciation and amortization of investment in properties for the years ended December 31, 2000, 1999, and 1998:
2000 1999 1998 ------- ------- ------ Balance at beginning of year $ 2,976 $ 5,177 $4,122 Transfer of accumulated depreciation from other fixed assets -- 92 -- Additions charged to expense 566 746 1,055 Disposals (1,171) (3,039) -- ------- ------- ------ Balance at end of year $ 2,371 $ 2,976 $5,177 ======= ======= ======
- ------------ (1) Aggregate cost for Federal income tax purposes is $13,554 December 31, 2000. 36 EXHIBIT INDEX Exhibit Number Description ------- ----------- 10.1 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC (Incorporated by reference to Exhibit 10.1 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.2 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC (Incorporated by reference to Exhibit 10.2 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.3 Letter Agreement as to the Loans in the aggregate amount of $13,382,200 from Banc One Capital Funding Corporation to Retirement Inns III (Incorporated by reference to Exhibit 10.14 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.4 Note and Agreement as to Retirement Inns III, LLC. (Incorporated by reference to Exhibit 10.16 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.5 Limited Liability Company Agreement of Retirement Inns III, LLC. (Incorporated by reference to Exhibit 10.18 on Form 10-Q for the fiscal quarter ended 06-30-99) 10.6 Deed of Trust Note of ARV Chandler Villas, L.P. to Red Mortgage Capital, Inc.* 10.7 Allonge #1 to Deed of Trust Note of ARV Chandler Villas, L.P. to Red Mortgage Capital, Inc.* 10.8 Deed of Trust between ARV Chandler Villas, L.P. and Fidelity National Title Insurance* 10.9 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Chandler Villas, L.P. and Secretary of Housing and Urban Development* 10.10 Purchase agreement and Escrow instructions between ARVP III/Brandford Square, L.P., and Vintage Senior Housing, LLC* 10.11 First Amendment to Purchase Agreement and Escrow Instructions between ARV III/Bradford Square, L.P., and Avalon at Bradford Square, LLC, assignee of Vintage Senior Housing, LLC* 10.12 Second Amendment to Purchase Agreement and Escrow Instructions between ARV III/ Bradford Square, L.P., and Avalon at Bradford Square, LLC* - -------------- * Filed herewith. EX-10.6 2 a71219ex10-6.txt EXHIBIT 10.6 1 EXHIBIT 10.6 DEED OF TRUST NOTE $5,782,900.00 Phoenix, Arizona January 29, 2001 FOR VALUE RECEIVED, the undersigned, ARV CHANDLER VILLAS, L.P., a California limited partnership, promises to pay to RED MORTGAGE CAPITAL, INC., an Ohio corporation, or order, at its principal office at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215, or at such other place as may be designated in writing by the holder of this Note, the principal sum of FIVE MILLION SEVEN HUNDRED EIGHTY-TWO THOUSAND NINE HUNDRED AND NO/100THS DOLLARS ($5,782,900.00), with interest thereon from the date hereof at the rate of Eight and six hundredths per centum (8.06 %) per annum on the unpaid balance until paid. The principal and interest shall be payable in monthly installments as follows: Interest alone shall be due and payable on the first day of February, 2001. Commencing on March 1, 2001, monthly installments of interest and principal shall be due and payable in the sum of Forty-One Thousand Three Hundred Twenty-Five and 94/100ths Dollars ($41,325.94) each, such payments to continue monthly thereafter on the first day of each succeeding month until the entire indebtedness has been paid in full. In any event, the balance of principal (if any) remaining unpaid, plus accrued interest, shall be due and payable February 1, 2036. The installments of principal and interest shall be applied first to interest at the applicable rate aforesaid upon the principal sum or so much thereof as shall from time to time remain unpaid, and the balance thereof shall be applied on account of principal. Both principal and interest under this Note shall be payable at the office of RED MORTGAGE CAPITAL, INC., at its principal office at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215, or such other place as the holder may designate in writing. 2 -- 2 -- ARV CHANDLER VILLAS, L.P. a California limited partnership By: American Retirement Villas Properties III, L.P. a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: ---------------------------------------- Douglas Armstrong Vice President EX-10.7 3 a71219ex10-7.txt EXHIBIT 10.7 1 EXHIBIT 10.7 ALLONGE TO DEED OF TRUST NOTE OF ARV CHANDLER VILLAS, L.P. TO RED MORTGAGE CAPITAL, INC. IN THE ORIGINAL PRINCIPAL SUM OF $5,782,900.00 DATED JANUARY 29, 2001 ------------------------------------------------------------------------------ 1. Except as provided in Paragraphs 2, and 3 below, Maker may not prepay any sums due under the Mortgage Note (the "Note") prior to March 1, 2006. Commencing on March 1, 2006, upon thirty (30) days advance written notice to the Holder, Maker may prepay the indebtedness evidenced by this Note, in whole or in an amount equal to one or more monthly payments of principal next due, on the last day of any month, provided such prepayment is accompanied by the prepayment penalty (expressed as a percentage of the principal amount so prepaid) set forth below: PREPAYMENT PERIODS PREPAYMENT PENALTY ------------------ ------------------ March 1, 2006 through February 28, 2007 5% March 1, 2007 through February 29, 2008 4% March 1, 2008 through February 28, 2009 3% March 1, 2009 through February 28, 2010 2% March 1, 2010 through February 28, 2011 1% March 1, 2011 and thereafter None All such prepayments, including the principal sum and interest thereon to and including the date of such prepayment, shall be in immediately available Federal Funds. 2. Notwithstanding any prepayment prohibition imposed and/or penalty required by this Allonge #1 with respect to voluntary prepayments made prior to March 1, 2010, the indebtedness may be prepaid in whole or in part on the last or first day of any calendar month without the consent of the holder and without prepayment premium if the Commissioner determines that prepayment will avoid a mortgage insurance claim and is therefore in the best interest of the Federal Government. 3. The provisions of Paragraph 1 of this Allonge #1 shall not apply and no prepayment premium shall be collected by the holder with respect to any prepayment which is made by or on behalf of Maker from insurance proceeds as a result of damage to the property or condemnation awards which may, at the option of the holder, be applied to reduce the indebtedness evidenced by the Note pursuant to the terms of the Mortgage given of even date to secure the indebtedness evidenced by the Note. 4. A reduction in the principal amount of the Note required by the Commissioner at the time of Initial/Final Endorsement by the Commissioner as a result of the Commissioner's cost certification requirements shall not be construed as a prepayment hereunder. If a reduction is required by the Commissioner as aforesaid, or if any prepayment from any source (to the extent permitted herein) is made, the remaining payments due on the Note may, with the approval of the holder and the Commissioner, be recast such that the required monthly payments of principal and interest shall be in equal amounts sufficient to amortize the Note over the then remaining term thereof. 5. In the event that any installment or part of any installment due hereunder becomes delinquent for more than fifteen (15) days, there shall be due, at the option of the holder, in addition to other sums dues hereunder, a sum equal to two percent (2%) of the amount of such installment or principal and interest so delinquent. Whenever under the law of the jurisdiction where the property is located, the amount of any such late charge is considered to be additional interest, this provision shall not be effective if the rate of interest specified in this Note, together with the amount of the late charge, would aggregate an amount in excess of the maximum rate of interest permitted and would constitute usury. 6. Notwithstanding any other provision contained in this Note, it is agreed that the execution of this Note shall impose no personal liability on the maker hereof for payment of the indebtedness evidenced hereby and in the event of a default, the holder of this Note shall look solely to the property described in the Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced hereby and will not seek or obtain any deficiency or personal judgment against the maker hereof except such judgment or decree as may be necessary 2 -- 2 -- to foreclose and bar its interest in the property and all other property mortgaged, pledged, conveyed or assigned to secure payment of this Note except as set out in the Deed of Trust of even date given to secure this indebtedness. ARV CHANDLER VILLAS, L.P. a California limited partnership By: American Retirement Villas Properties III, L.P. a California limited partnership, General Partner By: ARV Assisted Living, Inc. a Delaware corporation, General Partner By: ------------------------------- Douglas Armstrong Vice President END OF ALLONGE EX-10.8 4 a71219ex10-8.txt EXHIBIT 10.8 1 EXHIBIT 10.8 DEED OF TRUST With Assignment of Rents THIS DEED OF TRUST, Made as of the 29th day of January, 2001, by and between ARV CHANDLER VILLAS, L.P., a California limited partnership, with offices at 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, herein called Trustor, and FIDELITY NATIONAL TITLE INSURANCE COMPANY, an Arizona corporation, whose address is One South Church Street, Suite 120, Tucson, Arizona 85701, herein called Trustee(s), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, having an office and place of business at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215 herein called Beneficiary. WITNESSETH: That Trustor grants, transfers, and assigns to Trustee in trust, upon the trusts, covenants, conditions and agreements and for the uses and purposes hereinafter contained, with power of sale, all that real property situate, lying and being in Maricopa County, State of Arizona, described as follows: SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF. Together with the rents, issues, and profits thereof, SUBJECT, HOWEVER, to the right, power, and authority hereinafter given to and conferred upon Beneficiary to collect and apply such rents, issues, and profits; and together with all buildings and improvements of every kind and description now or hereafter erected or placed thereon, and all fixtures, including but not limited to all gas and electric fixtures, engines and machinery, radiators, heaters, furnaces, heating equipment, laundry equipment, steam and hot-water boilers, stoves, ranges, elevators and motors, bath tubs, sinks, water closets, basins, pipes, faucets and other plumbing and heating fixtures, mantels, cabinets, refrigerating plant and refrigerators, whether mechanical or otherwise, cooking apparatus and appurtenances, and all shades, awnings, screens, blinds and other furnishings, it being hereby agreed that all such fixtures and furnishings shall to the extent permitted by law be deemed to be permanently affixed to and a part of the realty; and Together with all building materials and equipment now or hereafter delivered to said premises and intended to be installed therein; and Together with all articles of personal property now or hereafter attached to or used in and about the building or buildings now erected or hereafter to be erected on the lands described which are necessary to the complete and comfortable use and occupancy of such building or buildings for the purposes for which they were or are to be erected, including all other goods and chattels and personal property as are ever used or furnished in operating a building, or the activities conducted therein, similar to the one herein described and referred to, and all renewals or replacements thereof or articles in substitution therefor, whether or not the same are, or shall be attached to said building or buildings in any manner, and said Trustor agrees to execute a chattel mortgage covering the aforesaid fixtures and articles of personal property, at the time of 2 -- 2 -- placing such personal property or any part thereof in the building or buildings to be erected on the lands herein described in the manner and form required by law, at its expense and satisfactory to the Beneficiary. To have and to hold the property hereinbefore described together with appurtenances to the Trustee, its or his successors and assigns forever. FOR THE PURPOSE of securing performance of each agreement of Trustor herein and payment of a just indebtedness of the Trustor to the Beneficiary in the principal sum of FIVE MILLION SEVEN HUNDRED EIGHTY-TWO THOUSAND NINE HUNDRED AND NO/100THS DOLLARS ($5,782,900.00), evidenced by its Note of even date herewith, bearing interest from date on outstanding balances at the rate of Eight and six hundredths per centum (8.06 %) per annum, said principal and interest being payable in monthly installments as provided in said Note with a final maturity of February 1, 2036, which Note is identified as being secured hereby by a certificate thereon. Said Note and all of its terms are incorporated herein by reference and this conveyance shall secure any and all extensions thereof, however evidenced. AND TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR COVENANTS AND AGREES: 1. That it will pay the Note at the times and in the manner provided therein; 2. That it will not permit or suffer the use of any of the property for any purpose other than the use for which the same was intended at the time this Deed of Trust was executed; 3. That the Regulatory Agreement, if any, executed by the Trustor and the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, which is being recorded simultaneously herewith, is incorporated in and made a part of this Deed of Trust. Upon default under the Regulatory Agreement and upon the request of the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, the Beneficiary, at its option, may declare the whole of the indebtedness secured hereby to be due and payable; 4. That all rents, profits and income from the property covered by this Deed of Trust are hereby assigned to the Beneficiary for the purpose of discharging the debt hereby secured. Permission is hereby given to Trustor so long as no default exists hereunder, to collect such rents profits and income for use in accordance with the provisions of the Regulatory Agreement; 5. That upon default hereunder Beneficiary shall be entitled to the Appointment of a receiver by any court having jurisdiction, without notice, to take possession and protect the property described herein and operate same and collect the rents, profits and income therefrom; 6. That at the option of the Trustor the principal balance secured hereby may be reamortized on terms acceptable to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner if a partial prepayment results from an award in condemnation in accordance with provisions of Paragraph 8 herein, or from an insurance payment made in accordance with provisions of Paragraph 7 herein, where there is a resulting loss of project income; 7. That the Trustor will keep the improvements now existing or hereafter erected on the deeded property insured against loss by fire and such other hazards, casualties, and 3 -- 3 -- contingencies, as may be stipulated by the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner upon the insurance of the Deed of Trust and other hazards as may be required from time to time by the Beneficiary, and all such insurance shall be evidenced by standard fire and extended coverage insurance policy or policies, in amounts not less than necessary to comply with the applicable Coinsurance Clause percentage, but in no event shall the amounts of coverage be less than 80 percent of the Insurable Values or not less than the unpaid balance of the insured Deed of Trust, whichever is the lesser, and in default thereof the Beneficiary shall have the right to effect insurance. Such policies shall be endorsed with standard Mortgagee clause with loss payable to the Beneficiary and the Secretary of Housing and Urban Development as their interests may appear, and shall be deposited with the Beneficiary; The insurance company providing such coverage shall be selected by Mortgagor, subject to approval by Mortgagee. That if the premises covered hereby, or any part thereof, shall be damaged by fire or other hazard against which insurance is held as hereinabove provided, the amounts paid by any insurance company in pursuance of the contract of insurance to the extent of the indebtedness then remaining unpaid, shall be paid to the Beneficiary, and, at its option, may be applied to the debt or released for the repairing or rebuilding of the premises or, with the consent of the Secretary of Housing and Urban Development, applied to the debt or used for other purposes. Any unexpired insurance shall inure to the benefit of, and pass to, the purchaser of the property covered thereby at any Trustee's sale held hereunder; 8. That all awards of damages in connection with any condemnation for public use of, or injury to, any of said property are hereby assigned and shall be paid to Beneficiary, who may apply the same to payment of the installments last due under said Note, and Beneficiary is hereby authorized, in the name of Trustor, to execute and deliver valid acquittances thereof and to appeal from any such award. No amount applied to the reduction of the principal amount due shall be considered an optional prepayment as the term is used in the Deed of Trust and the Note secured hereby, nor relieve the Trustor from making regular monthly payments commencing on the first month following the date of receipt of the award. 9. Together with and in addition to the monthly payments of interest or of principal and interest payable under the terms of said Note, to pay to Beneficiary monthly until said Note is fully paid, beginning on the first day of the first month after the date hereof, the following sums: (a) An amount sufficient to provide the Beneficiary with funds to pay the next mortgage insurance premium if this instrument and the Note secured hereby are insured, or a monthly service charge, if they are held by the Secretary of Housing and Urban Development, as follows: (I) If and so long as said Note of even date and this instrument are insured or are reinsured under the provisions of the National Housing Act, an amount sufficient to accumulate in the hands of the Beneficiary one month prior to its due date the annual mortgage insurance premium, in order to provide such Beneficiary with funds to pay such premium to the Secretary of Housing and Urban Development, pursuant to the National Housing Act, as amended, and applicable Regulations thereunder, or (II) Beginning with the first day of the month following an assignment of this instrument and the Note secured hereby to the Secretary of 4 -- 4 -- Housing and Urban Development, a monthly service charge which shall be an amount equal to one-twelfth of one-half percent (1/12 of 1/2%) of the average outstanding principal balance due on the Note computed for each successive year beginning with the first of the month following such assignment, without taking into account delinquencies or prepayments. (b) A sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other property insurance covering the premises covered hereby, plus water rates, taxes and assessments next due on the premises covered hereby (all as estimated by the Beneficiary) less all sums already paid therefor divided by the number of months to elapse before one month prior to the date when such ground rents, premiums, water rates, taxes and assessments will become delinquent, such sums to be held by Beneficiary in trust to pay said ground rents, premiums, water rates, taxes, and special assessments. (c) All payments mentioned in the two preceding subsections of this paragraph and all payments to be made under the Note secured hereby shall be added together and the aggregate amount thereof shall be paid each month in a single payment to be applied by Beneficiary to the following items in the order set forth: (I) premium charges under the Contract of Insurance with the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner or service charge; (II) ground rents, taxes, special assessments, water rates, fire and other property insurance premiums; (III) interest on the Note secured hereby; (IV) amortization of the principal of said Note. 10. Any excess funds accumulated under paragraph (b) above remaining after payment of the items therein mentioned, shall be credited to subsequent monthly payments of the same nature required thereunder; but if any such item shall exceed the estimate therefor, the Trustor shall without demand forthwith make good the deficiency. Failure to do so before the due date of such item shall be a default hereunder. In case of termination of the Contract of Mortgage Insurance by prepayment of the mortgage in full, or otherwise (except as hereinafter provided) accumulations under paragraph (a) above not required to meet payments due under the Contract of Mortgage Insurance, shall be credited to the Trustor. If the property is sold under foreclosure or is otherwise acquired by the Beneficiary after default any remaining balance of the accumulations under paragraph (b) above shall be credited to the principal of the debt as of the date of commencement of foreclosure proceedings or as of the date the property is otherwise acquired; and accumulations under paragraph (a) above shall be similarly applied unless required to pay sums due to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner under the Contract of Mortgage Insurance; 11. To keep said property in good condition and repair, not to remove or demolish any buildings thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged, or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting 5 -- 5 -- said property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer or permit any act upon said property in violation of law and/or covenants, conditions and/or restrictions affecting said property; not to permit or suffer any alterations of or addition to the buildings or improvements hereafter constructed in or upon said property without the consent of the Beneficiary. 12. To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear; 13. Should Trustor fail to make any payment or do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; may commence, appear in and/or defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; may pay, purchase, contest, or compromise any encumbrance, charge, or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such powers, may pay necessary expenses, employ counsel and pay his reasonable fees; 14. The Beneficiary shall have the right to pay mortgage insurance premiums or fire and other property insurance premiums when due to the extent that monthly payments made hereunder for the purpose of meeting same are insufficient. All such payments made by the Beneficiary shall be added to the principal sum secured hereby; 15. To pay immediately and without demand all sums so expended by Beneficiary or Trustee, under permission given under this Deed of Trust, with interest from date of expenditure at the rate specified in said Note; 16. That the funds to be advanced hereunder are to be used in the construction of certain improvements on the lands herein described in accordance with a certain building loan agreement made by and between the Trustor and the Beneficiary dated as of _________, which said building loan agreement (except such part or parts thereof as may be inconsistent herewith) is incorporated herein by reference to the same extent and effect as if fully set forth herein, and made a part of this Deed of Trust; and on the failure of the Trustor to keep and perform all the covenants, conditions, and agreements of said building loan agreement, thereupon, the principal sum and all arrears of interest, and other charges provided for herein shall at the option of the Beneficiary of this Deed of Trust become due and payable, anything contained herein to the contrary notwithstanding. This covenant shall be terminated upon the completion of the building or buildings to the satisfaction of the Beneficiary and the making of the final advance as provided in said building loan agreement; 17. The Trustor further covenants that it will not voluntarily create, suffer, or permit to be created against the property subject to this Deed of Trust any lien or liens inferior or superior to the lien of this Deed of Trust and further that it will keep and maintain the same free from the claim of all persons supplying labor or materials which will enter into the construction of any and all buildings now being erected or to be erected on said premises; 6 -- 6 -- 18. That the improvements about to be made upon the premises, covered by the Deed of Trust, and all plans and specifications comply with all municipal ordinances and regulations and all of other regulations made or promulgated, now or hereafter, by lawful authority, and that the same will upon completion comply with all such municipal ordinances and regulations and with the rules of the applicable fire rating or inspection organization, bureau, association or office; 19. That so long as this Deed of Trust and the said Note secured hereby are insured under the provisions of the National Housing Act, or held by the Secretary of Housing and Urban Development, it will not execute or file for record any instrument which imposes a restriction upon the sale or occupancy of the mortgaged property on the basis of race, color, or creed. IT IS MUTUALLY AGREED THAT: 20. That if the construction of the improvements herein referred to shall not be carried on with reasonable diligence, or shall be discontinued at any time for any reason other than strikes or lockouts, the Beneficiary, after due notice to the Trustor or any subsequent owner, is hereby invested with full and complete authority to enter upon the said premises, employ watchmen to protect such improvements from depredation or injury and to preserve and protect the personal property therein, and to continue any and all outstanding contracts for the erection and completion of said building or buildings, to make and enter into any contracts and obligations wherever necessary, either in its own name or in the name of the Trustor, and to pay and discharge all debts, obligations and liabilities incurred thereby. All such sums so advanced by the Beneficiary (exclusive of advances of the principal of the indebtedness secured hereby) shall be added to the principal of the indebtedness secured hereby and shall be secured by this Deed of Trust and shall be due and payable on demand with interest at the rate specified in said Note, but no such advances shall be insured unless same are specifically approved by the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner prior to the making thereof; 21. Upon default by Trustor in making any monthly payment provided for herein or in the Note secured hereby, and if such default is not made good prior to the due date of the next such installment, or if Trustor shall fail to perform any covenant or agreement in this Deed of Trust, the Beneficiary may declare all sums secured hereby immediately due and payable by delivery to Trustee of written declaration of default and demand for sale, and of written notice of default and of election to cause the property to be sold, which notice Trustee shall cause to be duly filed for record and the Beneficiary may foreclose this Deed of Trust. Beneficiary shall also deposit with Trustee this Deed, the Note and all documents evidencing expenditures secured hereby; 22. After Trustee shall have published, posted, recorded and mailed Notice of Sale as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of said property by public announcement at the time and place of sale, and from time to time thereafter may postpone the sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to the purchaser its Deed conveying the property so sold, but without any covenant or warranty, express or implied. Any person, including Trustor, Trustee, or Beneficiary, may purchase at the sale. The Trustee shall apply the proceeds of sale to payment of (1) the expenses of such sale, together with the reasonable expenses of this trust including therein reasonable Trustee's fees or attorney's fees for conducting the sale, and the actual cost of publishing, recording, mailing and posting notice of the sale; (2) the cost of any search and/or 7 -- 7 -- other evidence of title procured in connection with such sale and revenue stamps on Trustees' Deed; (3) all sums expended under the terms hereof, not then repaid, with accrued interest at the rate specified in said Note; (4) all other sums then secured hereby; and (5) the remainder, if any, to the person or persons legally entitled thereto; 23. Beneficiary may from time to time substitute a successor or successors to any Trustee named herein or acting hereunder to execute this Trust. Upon such appointment, and without conveyance to the successor trustee, the latter shall be vested with all title, powers, and duties conferred upon any Trustee herein named or acting hereunder. Each said appointment and substitution shall be made by written notice thereof executed by Beneficiary, containing reference to this Deed, the original parties thereto, the pertinent recording information, and its place of record. Such substitution shall become effective upon the mailing of copies of said notice by registered or certified mail, postage prepaid, to the Trustor, the Trustee and successor Trustee, and upon the recordation of said notice in the office of the county recorder of the county in which the trust property is situated. 24. The pleading of any statute of limitations as a defense to any and all obligations secured by this Deed is hereby waived to the full extent permissible by law; 25. Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed of Trust and said Note to Trustee for cancellation and retention and upon payment of its fees, Trustee shall reconvey, without warranty, the property then held hereunder. The recitals in such reconveyance of any matters or fact shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto;" 26. The trust created hereby is irrevocable by Trustor; 27. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term "Beneficiary" shall include not only the original Beneficiary hereunder but also any future owner and holder including pledgees, of the Note secured hereby in this Deed, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. All obligations of each Trustor hereunder are joint and several; 28. Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made public record as provided by law. Except as otherwise provided by law the Trustee is not obligated to notify any party hereto of pending sale under this Deed of Trust or of any action of proceeding in which Trustor, Beneficiary, or Trustee shall be a party unless brought by Trustee; 29. Notwithstanding any other provision contained herein or in the Note, it is agreed that the execution of the Note shall impose no personal liability upon the Trustor (or any of its present or future limited or general partners) for payment of the indebtedness evidenced thereby and in the event of a default, the holder of the Note shall look solely to the property subject to this Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced by the Note and will not seek or obtain any deficiency or personal judgment against the Trustor (or any of its present or future limited or general partners) except such judgment or decree as may be necessary to foreclose or bar its interest in the property subject to this Deed of Trust and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Note; provided, that nothing in this condition and no action so taken shall operate to impair any obligation of the maker under the Regulatory Agreement herein referred to and made a part hereof. 8 -- 8 -- 30. The Undersigned TRUSTOR REQUESTS that a copy of any notice of sale hereunder be mailed to him at the mailing address opposite his name hereto. Mailing Address for Notices --------------------------- 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 IN WITNESS WHEREOF the Trustor has caused its name to be hereunto subscribed by its duly authorized Partner as of the day and year herein first above written. ARV CHANDLER VILLAS, L.P. a California limited partnership By: American Retirement Villas Properties III, L.P. a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: ------------------------------------- Douglas Armstrong Vice President
9 -- 9 -- ACKNOWLEDGMENT State of Arizona ] ]: ss County of Maricopa ] Before me, ______________________________, of the State and County aforementioned, personally appeared Douglas Armstrong, known to me (or satisfactorily proven to me) to be the person who executed the foregoing instrument and who, upon oath, acknowledged himself to be the Vice President of ARV ASSISTED LIVING, INC., a Delaware corporation, General Partner of AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P., a California limited partnership, General Partner of ARV CHANDLER VILLAS, L.P., a California limited partnership, and that he as such Vice President, executed the foregoing instrument for the purpose therein contained, by signing his name on behalf of the said limited partnership. WITNESS my hand and seal, this ____ day of January, 2001. _____________________________________ Notary Public My Commission Expires: ______________________ 10 -- 10 -- DEED OF TRUST Between ARV CHANDLER VILLAS, L.P. a California limited partnership Trustor, and FIDELITY NATIONAL TITLE INSURANCE COMPANY an Arizona corporation Trustee, and RED MORTGAGE CAPITAL, INC. an Ohio corporation Beneficiary. ================================================================================ Dated January 29, 2001 Recorded January __, 2001 at minutes past in Liber at page records of Maricopa County, Arizona. RECORDER'S INSTRUCTIONS Index this document as a Deed of Trust and as an Assignment of Rents. Escrow No. Order No. EX-10.9 5 a71219ex10-9.txt EXHIBIT 10.9 1 EXHIBIT 10.9 FHA FORM 92466 REGULATORY AGREEMENT FOR MULTIFAMILY HOUSING PROJECTS Project No. 123-22013 Mortgagee: RED MORTGAGE CAPITAL, INC. Amount of Mortgage Note: $5,782,900.00 Date: January 29, 2001 Mortgage: Recorded: State: Arizona County: Maricopa Date: January 29, 2001 Concurrently Herewith Book ____________ Page ____________ Instrument No. ____________ Originally endorsed for insurance under Section 232 pursuant to Section 223(f) of the National Housing Act. This Agreement entered into as of this 29th day of January, 2001, between ARV CHANDLER VILLAS, LP, a California limited partnership whose address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, their successors, heirs, and assigns (jointly and severally, hereinafter referred to as Owners) and the undersigned Secretary of Housing and Urban Development and his successors (hereinafter referred to as Secretary). In consideration of the endorsement for insurance by the Secretary of the above described note or in consideration of the consent of the Secretary to the transfer of the mortgaged property or the sale and conveyance of the mortgaged property by the Secretary, and in order to comply with the requirements of the National Housing Act, as amended, and the Regulations adopted by the Secretary pursuant thereto, Owners agree for themselves, their successors, heirs and assigns, that in connection with the mortgaged property and the project operated thereon and so long as the contract of mortgage insurance continues in effect, and during such further period of time as the Secretary shall be the owner, holder or reinsurer of the mortgage, or during any time the Secretary is obligated to insure a mortgage on the mortgage property: 1. Owners, except as limited by paragraph 17 hereof, assume and agree to make promptly all payments due under the note and mortgage. 2. (a) Owners shall establish or continue to maintain a reserve fund for replacements by the allocation to such reserve fund in a separate account with the mortgagee or in a safe and responsible depository designated by the mortgagee, concurrently with the beginning of payments towards amortization of the principal of the mortgage insured or held by the Secretary of an amount equal to $4,494.50 per month ($3,320.17 for Realty and $1,174.33 for Major Movable Equipment) unless a different date or amount is approved in writing by the Secretary. An initial deposit to 2 -- 2 -- the Fund of $463,546.00 ($322,622.00 for Realty and $140,924.00 for Major Movable Equipment) has been made. Such fund, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America shall at all times be under the control of the mortgagee. Disbursements from such fund, whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project or for any other purpose, may be made only after receiving the consent in writing of the Secretary. In the event that the owner is unable to make a mortgage note payment on the due date and that payment cannot be made prior to the due day of the next such installment or when the mortgagee has agreed to forgo making an election to assign the mortgage to the Secretary based on a monetary default, or to withdraw an election already made, the Secretary is authorized to instruct the mortgagee to withdraw funds from the reserve fund for replacements to be applied to the mortgage payment in order to prevent or cure the default. In addition, in the event of a default in the terms of the mortgage, pursuant to which the loan has been accelerated, the Secretary may apply or authorize the application of the balance in such fund to the amount due on the mortgage debt as accelerated. (b) Where Owners are acquiring a project already subject to an insured mortgage, the reserve fund for replacements to be established will be equal to the amount due to be in such fund under existing agreements or charter provisions at the time Owners acquire such project, and payments hereunder shall begin with the first payment due on the mortgage after acquisition, unless some other method of establishing and maintaining the fund is approved in writing by the Secretary. 3. Real property covered by the mortgage and this agreement is described in Exhibit A attached hereto. (This paragraph 4 is not applicable to cases insured under Section 232). 3 -- 3 -- 5. (a) If the mortgage is originally a Secretary-held purchase money mortgage, or is originally endorsed for insurance under any Section other than Sections 231 or 232 and is not designed primarily for occupancy by elderly persons, Owners shall not in selecting tenants discriminate against any person or persons by reason of the fact that there are children in the family. (b) If the mortgage is originally endorsed for insurance under Section 221, Owners shall in selecting tenants give to displaced persons or families an absolute preference or priority of occupancy which shall be accomplished as follows: (1) For a period of sixty (60) days from the date of original offering, unless a shorter period of time is approved in writing by the Secretary, all units shall be held for such preferred applicants, after which time any remaining unrented units may be rented to non-preferred applicants; (2) Thereafter, and on a continuing basis, such preferred applicants shall be given preference over non-preferred applicants in their placement on a waiting list to be maintained by the Owners; and (3) Through such further provisions agreed to in writing by the parties. (c) Without the prior written approval of the Secretary not more than 25% of the number of units in a project insured under Section 231 shall be occupied by persons other than elderly persons. (d) All advertising or efforts to rent a project insured under Section 231 shall reflect a bona fide effort of the Owners to obtain occupancy by elderly persons. 6. Owners shall not without the prior written approval of the Secretary: (a) Convey, transfer, or encumber any of the mortgaged property, or permit the conveyance, transfer or encumbrance of such property. 4 -- 4 -- (b) Assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except from surplus cash, except for reasonable operating expenses and necessary repairs. (c) Convey, assign, or transfer any beneficial interest in any trust holding title to the property, or the interest of any general partner in a partnership owning the property, or any right to manage or receive the rents and profits from the mortgaged property. (d) Remodel, add to, reconstruct, or demolish any part of the mortgaged property or subtract from any real or personal property of the project. (e) Make, or receive and retain, any distribution of assets or any income of any kind of the project except surplus cash and except on the following conditions: (1) All distributions shall be made only as of and after the end of a semiannual or annual fiscal period, and only as permitted by the law of the applicable jurisdiction; (2) No distribution shall be made from borrowed funds, prior to the completion of the project or when there is any default under this Agreement or under the note or mortgage; (3) Any distribution of any funds of the project, which the party receiving such funds is not entitled to retain hereunder, shall be held in trust separate and apart from any other funds; and (4) There shall have been compliance with all outstanding notices of requirements for proper maintenance of the project. (f) Engage, except for natural persons, in any other business or activity, including the operation of any other rental project, or incur any liability or obligation not in connection with the project. (g) Require, as a condition of the occupancy or leasing of any unit in the project, any consideration or deposit other than the prepayment of the first month's rent plus a security deposit in an amount not in excess of one month's rent to guarantee the performance of the covenants of the lease. Any funds collected as security deposits shall be kept separate and apart from all other funds of the project in a trust account the amount of which shall at all times equal or exceed the aggregate of all outstanding obligations under said account. (h) Permit the use of the dwelling accommodations or nursing facilities of the project for any purpose except the use which was originally intended, or permit commercial use greater than that originally approved by the Secretary. 7. Owners shall maintain the mortgaged premises, accommodations and the grounds and equipment appurtenant thereto, in good repair and condition. In the event all or 5 -- 5 -- any of the buildings covered by the mortgage shall be destroyed or damaged by fire or other casualty, the money derived from any insurance on the property shall be applied in accordance with the terms of the mortgage. 8. Owners shall not file any petition in bankruptcy or for a receiver or in insolvency or for reorganization or composition, or make any assignment for the benefit of creditors or to a trustee for creditors, or permit an adjudication in bankruptcy or the taking possession of the mortgaged property or any part thereof by a receiver or the seizure and sale of the mortgaged property or any part hereof under judicial process or pursuant to any power of sale, and fail to have such adverse actions set aside within forty-five (45) days. 9. (a) Any management contract entered into by Owners or any of them involving the project shall contain a provision that, in the event of default hereunder, it shall be subject to termination without penalty upon written request by the Secretary. Upon such request Owners shall immediately arrange to terminate the contract within a period of not more than thirty (30) days and shall make arrangements satisfactory to the Secretary for continuing proper management of the project. (b) Payment for services, supplies, or materials shall not exceed the amount ordinarily paid for such services, supplies, or materials in the area where the services are rendered or the supplies or materials furnished. (c) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and subject to examination and inspection at any reasonable time by the Secretary or his duly authorized agents. Owners shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Secretary or his duly authorized agents. (d) The books and accounts of the operations of the mortgaged property and of the project shall be kept in accordance with the requirements of the Secretary. (e) Within sixty (60) days following the end of each fiscal year the Secretary shall be furnished with a complete annual financial report based upon an examination of the books and records of mortgagor prepared in accordance with the requirements of the Secretary, prepared and certified to by an officer or responsible Owner and, when required by the Secretary, prepared and certified by a Certified Public Accountant, or other person acceptable to the Secretary. (f) At the request of the Secretary, his agents, employees, or attorneys, the Owners shall furnish monthly occupancy reports and shall give specific answers to questions upon which information is desired from time to time relative to income, assets, liabilities, contracts, operation, and condition of the property and the status of the insured mortgage. 6 -- 6 -- (g) All rents and other receipts of the project shall be deposited in the name of the project in a financial institution, whose deposits are insured by an agency of the Federal Government. Such funds shall be withdrawn only in accordance with the provisions of this Agreement for expenses of the project or for distributions of surplus cash as permitted by paragraph 6(e) above. Any Owner receiving funds of the project other than by such distribution of surplus cash shall immediately deposit such funds in the project bank account and failing so to do in violation of this Agreement shall hold such funds in trust. Any Owner receiving property of the project in violation of this Agreement shall hold such funds in trust. At such time as the Owners shall have lost control and/or possession of the project, all funds held in trust shall be delivered to the mortgagee to the extent that the mortgage indebtedness has not been satisfied. (h) If the mortgage is insured under Section 232: 1. The Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as a nursing home and shall not lease all or part of the project except on terms approved by the Secretary. 2. The Owners shall suitably equip the project for nursing home operations. 3. The Owners shall execute a Security Agreement and Financing Statement (or other form of chattel lien) upon all items of equipment, except as the Secretary may exempt, which are not incorporated as security for the insured mortgage. The Security Agreement and Financing Statement shall constitute a first lien upon such equipment and shall run in favor of the mortgagee as additional security for the insured mortgage. 4. The Owners will not alter, or suffer or permit the alteration of, the nursing home license, bed authority or other operating authority of the Project without the advance written approval of the Secretary. In the event that any such alteration is proposed, upon learning of that event the Owners will advise the Secretary promptly. The Owners will insert the foregoing requirements into any operating lease for the Project. 5. The Owners will not enter into, amend, or agree to the assignment of, any operating lease for all or part of the Project without the advance written approval of, and on terms satisfactory to, the Secretary. (i) If the mortgage is insured under Section 231, Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as housing for the elderly. 10. Owners will comply with the provisions of any Federal, State, or local law prohibiting discrimination in housing on the grounds of race, color, religion or creed, sex, or national origin, including Title VIII of the Civil Rights Act of 1968 (Public 7 -- 7 -- Law 90-284; 82 Stat. 73), as amended, Executive Order 11063, and all requirements imposed by or pursuant to the regulations of the Department of Housing and Urban Development implementing these authorities (including 24 CFR Parts 100, 107 and 110, and Subparts I and M of Part 200). 11. Upon a violation of any of the above provisions of this Agreement by Owners, the Secretary may give written notice thereof, to Owners, by registered or certified mail, addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate written notice thereof to the Secretary, be designated by the Owners as their legal business address. If such violation is not corrected to the satisfaction of the Secretary within thirty (30) days after the date such notice is mailed or within such further time as the Secretary determines is necessary to correct the violation, without further notice the Secretary may declare a default under this Agreement effective on the date of such declaration of default and upon such default the Secretary may: (a) (i) If the Secretary holds the note - declare the whole of said indebtedness immediately due and payable and then proceed with the foreclosure of the mortgage; (ii) If said note is not held by the Secretary - notify the holder of the note of such default and request holder to declare a default under the note and mortgage, and holder after receiving such notice and request, but not otherwise, at its option, may declare the whole indebtedness due, and thereupon proceed with foreclosure of the mortgage, or assign the note and mortgage to the Secretary as provided in the Regulations; (b) Collect all rents and charges in connection with the operation of the project and use such collections to pay the Owners' obligations under this Agreement and under the note and mortgage and the necessary expenses of preserving the property and operating the project. (c) Take possession of the project, bring any action necessary to enforce any rights of the Owners growing out of the project operation, and operate the project in accordance with the terms of this Agreement until such time as the Secretary in his discretion determines that the Owners are again in a position to operate the project in accordance with the terms of this Agreement and in compliance with the requirements of the note and mortgage. (d) Apply to any court, state or Federal, for specific performance of this Agreement, for an injunction against any violation of the Agreement, for the appointment of a receiver to take over and operate the project in accordance with the terms of the Agreement, or for such other relief as may be appropriate, since the injury to the Secretary arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain. 8 -- 8 -- 12. As security for the payment due under this Agreement to the reserve fund for replacements, and to secure the Secretary because of his liability under the endorsement of the note for insurance, and as security for the other obligations under this Agreement, the Owners respectively assign, pledge and mortgage to the Secretary their rights to the rents, profits, income and charges of whatsoever sort which they may receive or be entitled to receive from the operation of the mortgaged property, subject, however, to any assignment of rents in the insured mortgage referred to herein. Until a default is declared under this Agreement, however, permission is granted to Owners to collect and retain under the provisions of this Agreement such rents, profits, income, and charges, but upon default this permission is terminated as to all rents due or collected thereafter. 13. As used in this Agreement the term: (a) "Mortgage" includes "Deed of Trust", "Chattel Mortgage", "Security Instrument", and any other security for the note identified herein, and endorsed for insurance or held by the Secretary; (b) "Mortgagee" refers to the holder of the mortgage identified herein, its successors and assigns; (c) "Owners" refers to the persons named in the first paragraph hereof and designated as Owners, their successors, heirs and assigns; (d) "Mortgaged Property" includes all property, real, personal or mixed, covered by the mortgage or mortgages securing the note endorsed for insurance or held by the Secretary; (e) "Project" includes the mortgaged property and all its other assets of whatsoever nature or wheresoever situate, used in or owned by the business conducted on said mortgaged property, which business is providing housing and other activities as are incidental thereto; (f) "Surplus Cash" means any cash remaining after: (1) the payment of: (i) All sums due or currently required to be paid under the terms of any mortgage or note insured or held by the Secretary; (ii) All amounts required to be deposited in the reserve fund for replacements; (iii) All obligations of the project other than the insured mortgage unless funds for payment are set aside or deferment of payment has been approved by the Secretary; and 9 -- 9 -- (2) the segregation of: (i) An amount equal to the aggregate of all special funds required to be maintained by the project; and (ii) All tenant security deposits held. (g) "Distribution" means any withdrawal or taking of cash or any assets of the project, including the segregation of cash or assets for subsequent withdrawal within the limitations of Paragraph 6(e) hereof, and excluding payment for reasonable expenses incident to the operation and maintenance of the project. (h) "Default" means a default declared by the Secretary when a violation of this Agreement is not corrected to his satisfaction within the time allowed by this Agreement or such further time as may be allowed by the Secretary after written notice; (i) "Section" refers to a Section of the National Housing Act, as amended. (j) "Displaced persons or families" shall mean a family or families, or a person, displaced from an urban renewal area, or as the result of government action, or as a result of a major disaster as determined by the President pursuant to the Disaster Relief Act of 1970. (k) "Elderly person" means any person, married or single, who is sixty-two years of age or over. 14. This instrument shall bind, and the benefits shall inure to, the respective Owners, their heirs, legal representatives, executors, administrators, successors in office or interest, and assigns, and to the Secretary and his successors so long as the contract of mortgage insurance continues in effect, and during such further time as the Secretary shall be the owner, holder, or reinsurer of the mortgage, or obligated to reinsure the mortgage. 15. Owners warrant that they have not, and will not, execute any other agreement with provisions contradictory of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other requirements in conflict therewith. 16. The invalidity of any clause, part or provision of this Agreement shall not affect the validity or the remaining portions thereof. 17. The following Owners: ARV Chandler Villas, L.P., and all present and future general and limited partners thereof, do not assume personal liability for payments due under the note and mortgage, or for the payments to the reserve for replacements, or for matters not under their control, provided that said Owners shall remain liable under this Agreement only with respect to the matters hereinafter stated; namely: 10 -- 10 -- (a) for funds or property of the project coming into their hands which, by the provisions hereof, they are not entitled to retain; and (b) for their own acts and deeds or acts and deeds of others which they have authorized in violation of the provisions hereof. (To be executed with formalities for recording a deed to real estate) [SIGNATURES AND NOTARIES APPEAR ON FOLLOWING PAGES] 11 -- 11 -- All references herein to the terms "nursing home" or nursing homes" shall mean and include the terms "assisted living facility" and "assisted living facilities." See Rider I attached hereto and made a part hereof. IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the date first hereinabove written. ARV CHANDLER VILLAS, L.P. a California limited partnership By: American Retirement Villas Properties III, L.P. a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: ------------------------------------- Douglas Armstrong Vice President SECRETARY OF HOUSING AND URBAN DEVELOPMENT ACTING BY AND THROUGH THE FEDERAL HOUSING COMMISSIONER By: ----------------------------------- Authorized Agent 12 -- 12 -- ACKNOWLEDGMENTS State of Arizona ] ]: ss County of Maricopa ] Before me, ______________________________, of the State and County aforementioned, personally appeared Douglas Armstrong, known to me (or satisfactorily proven to me) to be the person who executed the foregoing instrument and who, upon oath, acknowledged himself to be the Vice President of ARV Assisted Living, Inc., a Delaware corporation, the General Partner of American Retirement Villas Properties III, L.P., a California limited partnership, the General Partner of ARV CHANDLER VILLAS, L.P., a California limited partnership, and that he as such General Partner, executed the foregoing instrument for the purposes therein contained, by signing his name on behalf of the said ARV CHANDLER VILLAS, L.P. WITNESS my hand and seal, as of this ____ day of January ___, 2001. ______________________________________ [SEAL] Notary Public My Commission Expires: ______________________________ State of Arizona ] ]: ss County of Maricopa ] On this ___ day of January, 2001, before me personally appeared ____________________________ to me personally known, who, being by me duly sworn, did say that he/she is the Authorized Agent of the SECRETARY OF HOUSING AND URBAN DEVELOPMENT, who executed the foregoing instrument, and that said instrument was signed and sealed on behalf of said SECRETARY OF HOUSING AND URBAN DEVELOPMENT the day and year first above written for the purposes therein contained. WITNESS my hand and seal, as of this ____ day of January ___, 2001. ______________________________________ [SEAL] Notary Public My Commission Expires: ______________________________ EX-10.10 6 a71219ex10-10.txt EXHIBIT 10.10 1 EXHIBIT 10.10 PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS This Purchase Agreement and Escrow Instructions (the "Agreement") is made as of September 5, 2000 (the "Effective Date"), between ARVP III/BRADFORD SQUARE, L.P., a California limited partnership ("Seller"), and VINTAGE SENIOR HOUSING, LLC, a California limited liability company, or its assignee (collectively, "Purchaser"), at Newport Beach, California. 1.0 RECITALS. 1.1 Seller is the fee owner of that certain parcel of real property (the "Real Property") that is improved with a 92-unit retirement facility known as "Bradford Square" and all fixtures and other improvements thereon or associated therewith (collectively, the "Improvements"), along with certain related personal and intangible property. The Real Property is located at 1180 N. Bradford, Placentia, CA 92670 and is more particularly described on EXHIBIT "A" attached hereto. The Real Property is located in Orange County, California (the "County"). 1.2 Purchaser desires to acquire the Real Property and Improvements and Seller is willing to sell the same to Purchaser on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller and Purchaser hereby agree as follows: 2.0 PURCHASE AND SALE. Subject to all of the terms and conditions of this Agreement and for the consideration set forth, at the Closing (as defined in Section 4.2), Seller shall convey to Purchaser or to Purchaser's assignee, and Purchaser or its assignee shall purchase from Seller, all of the following (collectively, the "Property"): 2.1 Real Property. The Real Property and the Improvements, together with all easements, hereditaments and appurtenances thereto, subject only to such easements and agreements and other matters of record as may have been approved by Purchaser in accordance with Section 5.3 and the rights of residents under residence agreements or occupancy agreements. 2.2 Personal Property. All of the personal property (the "Personal Property") owned by Seller and located at, attached or appurtenant to, or used in connection with, the operation or maintenance of the Real Property and/or the Improvements, including, but not limited to, all fixtures, fittings, furniture (including all equipment and furniture currently used in the office of the building at the Improvements), appliances, tools, vehicles, equipment, machinery, food and chattels, free and clear of any and all liens, claims and mortgages but excluding any of the Personal Property owned by residents of the Improvements. The Personal Property shall be listed in an inventory (the "Inventory") and shall be delivered by Seller to Purchaser by a bill of sale at the Closing. Personal property to be delivered shall exclude all "offsite" accounting records including journals, ledgers, invoices, payroll, etc. The portion of the furniture, furnishings, fixtures, linen, kitchen and other 1 2 equipment, vehicles, and other nonconsummable items with which the Real Property is furnished and equipped not owned by Seller is held under various equipment leases (the "Equipment Leases"). The Equipment Leases shall be listed on SCHEDULE 2.2 and Seller shall transfer and assign its right, title and interest under those Equipment Leases expressly assumed by Purchaser as provided hereinbelow, by means of the Assignment of Equipment Leases referred to in Section 12.2(d). Computer software which is licensed to Seller or ARV Assisted Living, Inc. shall be excluded from the definition of Personal Property, but a hard copy of all information thereon shall be delivered to Purchaser at or prior to the Closing. 2.3 Residence Agreements. Seller's right, title and interest in and under all leases, residence agreements or other agreements with residents or other tenants occupying space in the Improvements (the "Residence Agreements"), a summary of which, in the form of a rent roll, shall be listed on SCHEDULE 2.3. 2.4 Service Contracts. Seller's right, title and interest in and under those certain service, maintenance, management and other contracts pertaining to the Property under which Seller is obligated (the "Service Contracts"), subject to Seller's liability in connection therewith, listed on SCHEDULE 2.4. 2.5 Intangibles. All other right, title and interest of Seller (to the extent Seller has any rights therein) constituting part and parcel of the Property including, but not limited to, trade names, logos, easements, licenses, permits, air rights, certificates of occupancy, warranties, rights of way, signs, trademarks, telephone listings and numbers, sewer agreements, water line agreements, utility agreements, water rights and oil, gas and mineral rights (collectively, "Intangibles"). 3.0 PURCHASE PRICE AND METHOD OF PAYMENT. 3.1 Purchase Price. The purchase price to be paid by Purchaser to Seller for the Property (the "Purchase Price") is Eight Million Dollars ($8,000,000). 3.2 Method of Payment. The Purchase Price is payable as follows: (a) Initial Deposit. Upon opening of escrow, Purchaser shall deliver Fifty Thousand Dollars ($50,000) ("Initial Deposit") to Escrow Agent (defined in Section 4.1 below). Escrow Agent shall promptly place and thereafter hold the Initial Deposit in an interest bearing account. If the Closing occurs, the Initial Deposit (with interest) shall be paid to Seller and credited against the Purchase Price. (b) Additional Deposit. Upon delivery of the Suitability Notice (defined in Section 6.2, Purchaser shall deposit an additional Twenty-Five Thousand Dollars ($25,000) ("Additional Deposit") to Escrow Agent. Escrow Agent shall promptly place and thereafter hold the Additional Deposit in an interest bearing account. The Initial Deposit and the Additional Deposit shall thereupon become nonrefundable (other than if Escrow fails to close other than for Buyer's breach). If the Closing occurs, the Additional Deposit (with interest) shall be paid to Seller and credited against the Purchase Price. 2 3 (c) Balance. Purchaser shall pay to Seller through Escrow Agent at Closing in immediately available funds the sum of Eight Million Dollars ($8,000,000), minus the Initial Deposit, Additional Deposit and interest thereon, and plus (or minus) the net amount of all costs, expenses, adjustments and prorations to be debited (or credited) to Purchaser pursuant to this Agreement. 3.3 Additional Units. If, within five (5) years of the Closing, Purchaser elects to build additional units on the property and Purchaser commences construction on the additional units, Seller will be entitled to a payment from Purchaser equal to $5,000 multiplied by the number of units to be built in a new structure. The payment to Seller will be due and payable within ten (10) days of the issuance of building permits to Purchaser by the City of Placentia. Purchaser shall notify Seller in writing of any application it shall file for building permit(s) to construct such additional units, and of the issuance thereof. 4.0 ESCROW. 4.1 Opening of Escrow. Within one (1) business day after mutual execution of this Agreement, Seller and Purchaser shall open an escrow (the "Escrow") with Fidelity National Title Insurance Company in Newport Beach, California (the "Escrow Agent"), through which the purchase and sale of the Property shall be consummated. A fully executed copy of this Agreement shall be deposited with Escrow Agent, duly executed by Seller, Purchaser and Escrow Agent, and Escrow Agent is hereby authorized and instructed to deliver, pursuant to the terms of this Agreement, the documents and monies to be deposited into the Escrow. Escrow Agent's standard form escrow agreement shall, to the extent consistent with the terms hereof, inure to the benefit of Escrow Agent. On the date of receipt of such duly executed copy of this Agreement, Escrow Agent shall notify Seller and Purchaser of the opening of Escrow as of such date of receipt. 4.2 Closing of Escrow. Escrow shall close on or before the date forty-five (45) days after the day Buyer delivers the Suitability Notice (defined in Section 6.2 below) to Seller (the "Outside Date"). If the Closing fails to occur by the Outside Date by reason of Purchaser's failure to comply with its obligations hereunder, the costs relating to the issuance of the Title Commitment referred to in Section 5.1 hereof and Escrow Agent's cancellation fees, if any, shall be paid by Purchaser. Notwithstanding the foregoing, if the Closing fails to occur because of Seller's failure to comply with its obligations hereunder, such costs shall be borne by Seller. In any event, each party shall bear its own incidental costs and expenses, including, but not limited to, legal and accounting fees and travel expenses. The term "Closing" as used herein shall be deemed to be the date upon which the respective conditions precedent to Purchaser's and Seller's obligation to close escrow and have been satisfied, the Grant Deed (the "Deed") is recorded in the Official Records of the County (the "Official Records"), and the net proceeds of sale are held by Escrow Agent and delivered to Seller. 5.0 TITLE MATTERS. 5.1 Title Commitment. As soon as practicable after the Effective Date, but in no event later than ten (10) days after the Effective Date, Escrow Agent shall deliver or shall cause to be delivered to Purchaser a preliminary report covering the Real Property and the Improvements 3 4 together with true copies of all documents evidencing matters of record shown as exceptions to title thereon, and a map showing all easements plotted thereon, (the "Title Commitment"), issued by the title division of Escrow Agent (the "Title Division"). 5.2 Survey. Seller shall deliver to Buyer promptly after the Effective Date a copy of any existing as-built survey of the Real Property or, if none is available, certify the lack of same to Buyer. Within the Due Diligence Review Period (defined in Section 6.2 below), Purchaser shall obtain at Purchaser's expense an as-built ALTA survey of the Real Property (the "Survey") in form acceptable to the Title Company, showing the location of all buildings thereon and in such detail as is necessary for the Title Company to remove any survey exception from the Title Policy, and the location of any and all easements and rights of way to which the Real Property is subject. 5.3 Right to Disapprove. Purchaser shall have the right to object to any exceptions in the Title Commitment or the Survey (the "Disclosed Exceptions") by giving notice to Seller within ten (10) days after receipt thereof by Purchaser. Any Disclosed Exceptions Purchaser does not disapprove within that review period shall be deemed approved. If Purchaser disapproves of any Disclosed Exception, Seller shall have the lesser of thirty (30) days or until the Closing to cure or remove any one or more of the same. If Seller, after using its reasonable best efforts, does not remove all disapproved Disclosed Exceptions, then Purchaser shall have the right to terminate this Agreement and receive a refund of the Initial Deposit (plus interest), by giving written notice of termination to Seller within five (5) days following receipt of Seller's notice of inability to remove some or all of the disapproved Disclosed Exceptions. Failure of Purchaser to give written notice within the five (5) day period shall be deemed a waiver by Purchaser of Purchaser's right to terminate the Agreement pursuant to this Section and Purchaser agrees to accept title subject to such unremoved disapproved Disclosed Exceptions. 5.4 Existing Encumbrance Payoffs. If at the Closing date there are any liens, assessments or encumbrances that Seller is obligated to pay and discharge, Escrow Agent may use any portion of the Purchase Price to satisfy the same, provided Seller either (i) delivers to Escrow Agent at the Closing title instruments in recordable form sufficient to satisfy such liens, assessments or encumbrances of record, together with the cost of recording or filing such instruments, or, (ii) if Seller has made arrangements with Escrow Agent before the Closing, Seller shall deposit sufficient monies with Escrow Agent to ensure that such satisfactions are obtained and recorded and the Title Policy (hereinafter defined) is issued either free of any such liens, assessments and encumbrances, or with insurance against any loss or damage that Purchaser may suffer as a result thereof, including, but not limited to, the enforcement of same. 5.5 Title Policy. The Title Policy to be issued by (Fidelity National Title Insurance Company) shall be an ALTA owner's policy with such endorsements as Purchaser may reasonably require and liability in the amount of the Purchase Price less any amount allocated to the Personal Property, showing fee title to the Real Property and the Improvements as vested in Purchaser, or in Purchaser's assignee or nominee, subject only to the following permitted exceptions ("Permitted Exceptions"): (i) a lien for real estate taxes and assessments on the Real Property not yet delinquent; (ii) purchase money financing liens, if any, on the property securing the Equipment Leases identified on SCHEDULE 2.2; (iii) all liens, easements, encumbrances or other title exceptions identified in the Title Commitment, other than the disapproved Disclosed Exceptions; (iv) such other 4 5 exceptions as may be approved in writing by Purchaser prior to the Closing; and (v) acts of Purchaser or its representatives. 6.0 DELIVERY OF INFORMATION AND DUE DILIGENCE REVIEW. 6.1 Due Diligence Information. Except as otherwise specifically provided herein, within ten (10) business days after the Effective Date, Seller shall. at Seller's expense, deliver or cause to be delivered to Purchaser all of the documents and information identified in EXHIBIT "B" attached (to the extent available and in the Seller's possession) hereto (the "Due Diligence Information"). 6.2 Due Diligence Review. Purchaser, at Purchaser's sole cost and expense, shall conduct a due diligence review (the "Due Diligence Review") of the Property to determine its suitability for Purchaser's intended use. In this regard, Purchaser and its representatives shall have the right at reasonable times and upon reasonable notice to Seller, and subject to the rights of existing residents, to enter upon the Real Property at Purchaser's own cost and expense for the purpose of viewing the Real Property and performing other studies and inspections (including, without limitation, structural, mechanical, soils, seismic, hazardous/toxic and feasibility/economic studies). Purchaser shall hold Seller harmless from any liability resulting from Purchaser's entry onto the Real Property. Purchaser shall also determine during the Due Diligence Review, the probability of obtaining all necessary licenses to operate the Property. Purchaser shall complete the Due Diligence Review within thirty (30) days after the Effective Date (the "Due Diligence Review Period"). In the event this Agreement is terminated pursuant to this Section, Purchaser agrees to deliver to Seller, without warranty of any kind, copies of inspection reports, appraisals, and environmental audits and surveys, if any, received by Purchaser with respect to the Real Property prior to termination of this Agreement. If the Due Diligence Review indicates, in Purchaser's sole discretion and judgment, that the Property is suitable for Purchaser's intended use, Purchaser shall so notify Seller and Escrow Agent in writing (the "Suitability Notice") within the Due Diligence Review Period. If Purchaser fails to give a Suitability Notice or gives a non-suitability notice within the Due Diligence Review Period, this Agreement shall terminate and Escrow Agent shall immediately return the Initial Deposit (with interest) to Purchaser. Seller hereby certifies that it has delivered to Purchaser all of the items listed on EXHIBIT "B". 6.3 Review of Service Contracts and Equipment Leases. Within ten (10) days after the Effective Date, Seller shall furnish Purchaser with copies of all Service Contracts and Equipment Leases pertaining to the Property listed on SCHEDULE 2.2 and SCHEDULE 2.4. As of the Closing, Purchaser shall assume all of the Equipment Leases; in the event, however, that any Equipment Lease cannot be assumed, Purchaser shall purchase the personal property subject to the particular Equipment Lease pursuant to the terms of said Equipment Lease. On or before the expiration of the Due Diligence Review Period, Purchaser shall notify Seller in writing of Purchaser's approval and willingness to assume or its disapproval of each Service Contract. Seller shall terminate any Service Contract disapproved by Purchaser, effective as of the Closing Date, or as soon as possible thereafter as permitted under the provisions of the subject Service Contract. If by the terms of the disapproved Service Contract Seller has no right to terminate the same on or prior to Closing, or if any fee or other compensation is due thereunder as a result of such termination, Purchaser shall be required at Closing to assume all obligations thereunder until the effective date of 5 6 the termination and to assume the obligation to pay or to reimburse Seller for the payment of the termination charge. 7.0 PROPERTY OPERATION DURING ESCROW. 7.1 Operation, Management and Maintenance. Seller shall, through and including the Closing and at Seller's sole cost and expense, (1) keep all existing insurance policies affecting the Property or any portion thereof in full force and effect or replace with comparable coverage, (2) use due diligence and its best efforts to keep in full force and effect and/or renew all applicable licenses and permits, (3) provide all services and continue to operate, manage and maintain the Property (including mechanical equipment of every kind used in the operation thereof) in such condition so that the Property shall be in the same condition on the Closing as on the date hereof, reasonable wear and tear excepted, (4) comply with all governmental regulations, and (5) keep Purchaser timely advised of any single repair or improvement required to keep the Property in such condition as aforesaid and which costs in excess of Five Thousand Dollars ($5,000.00). 7.2 Residence Agreements. Without Purchaser's prior written consent, Seller shall not hereafter (1) modify, extend or otherwise change any of the terms, covenants or conditions of the Residence Agreements, or (2) except for Residence Agreements entered into in the ordinary course of business on Seller's standard agreement form and at Seller's standard rate and terms, enter into new agreements or any other obligations or agreements affecting the Property, or (3) terminate any of the Residence Agreements, unless the resident thereunder has materially defaulted. Seller shall not accept from any of the residents payment of rent more than two months in advance or apply any security deposit to rent due from any continuing resident. Nothing contained herein shall restrict Seller's right to enter into month-to-month Residence Agreements or grant month-to-month extensions of existing Residence Agreements in the ordinary course of business at rates generally consistent with those reflected in the rent roll. 7.3 Service Contracts. Seller may enter into Service Contracts or extend existing Service Contracts which are to be assumed by Purchaser in the ordinary course of business so long as such Service Contracts can be terminated, without penalty or payment by Purchaser or Purchaser's assignee upon thirty (30) days or less notice. Except as provided in the preceding sentence, Seller shall not extend, renew, modify or replace any of the Service Contracts without Purchaser's prior written consent, which shall not be unreasonably withheld. If Purchaser does not disapprove any Seller request regarding a Service Contract within five (5) business days of such request, Purchaser shall be deemed to have approved such request. 7.4 Alterations. Seller will not make any material alterations to the Property, or remove any of the Personal Property therefrom (unless the Personal Property so removed is simultaneously replaced with Personal Property of similar or better quality and utility). 7.5 Vacant Space. All debris shall be removed from any vacant units and the apartments shall be in a market ready (i.e. ready for occupancy within three (3) days) condition. 7.6 Bills and Leasing Commissions. Seller shall pay in full, before the Closing, all charges, bills and invoices for utilities, labor, goods, materials and services of any kind relating to 6 7 the Property for the period up to the Closing. Any alterations, installations, decorations and other work required to be performed under the Residence Agreements will be completed and paid for in full by the Closing. Any brokerage fee or similar commission which is or will become due and payable in connection with any Residence Agreement has been or will be paid by Seller before the Closing; provided, however, that Seller will not pay said costs, fees or commissions for prospective residents moving in subsequent to the Closing Date. 7.7 Notice of Changes. Seller shall promptly notify Purchaser of any material change in any condition concerning the Property or of any event or circumstance which makes any representation or warranty of Seller under this Agreement untrue or misleading, or any covenant of Purchaser under this Agreement incapable or less likely of being performed; however, Seller's obligation to provide such notice to Purchaser shall in no way relieve Seller of any liability for its breach of any of Seller's representations, warranties or covenants under this Agreement. 8.0 TERMINATION OF EMPLOYEES. An entity affiliated with Seller is managing the Property and employs all personnel necessary to effectively manage the Property. Before Closing, Seller shall take all measures necessary to effect the termination of each employee at the Closing. Purchaser, or an affiliate, shall become the property manager after the Closing, and may hire most of the employees pursuant to Section 14.8 of this Agreement. 9.0 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION TO CLOSE ESCROW. Purchaser's obligation to consummate the transactions contemplated hereby is subject to the following conditions, each of which is for Purchaser's sole benefit and may be waived by Purchaser only in writing at its sole option: 9.1 Representations and Warranties True at Closing. Seller's representations and warranties in this Agreement, including but not limited to those in Section 16 below, shall be true on the date of Closing. 9.2 Delivery of Instruments and Information. Seller shall have delivered the instruments and information required under Section 6.0 above to be delivered by Seller as, when and in the manner set forth therein. 9.3 Compliance with this Agreement. Seller shall have performed and complied with all agreements and conditions Seller is required to perform under this Agreement on or before the Closing. 9.4 Purchaser Approvals. Purchaser shall have affirmatively approved in writing those matters set forth in Sections 5.0 and 6.0, and shall have issued a Suitability Notice. 9.5 Title Policy. The Title Division shall be ready, willing and able to issue the Title Policy, subject only to the Permitted Exceptions, required by Section 5.5. 9.6 Change in Condition. Subject to the provisions of Sections 19.2 and 19.3 hereof, there shall exist no damage, destruction or condemnation of the Property before Closing. 7 8 9.7 Failure to Satisfy Obligations. If Seller fails to satisfy the obligations set forth in Subsections 9.1, 9.2, 9.3, 9.5 and 9.6 above, before Closing, Purchaser shall be entitled to terminate this Agreement and receive an immediate refund of the Initial Deposit (with interest). 10.0 CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE ESCROW. Seller's obligation to consummate the transactions contemplated hereby is subject to the following conditions, each of which is for Seller's sole benefit and may be waived solely by Seller only in writing, and at its sole option: 10.1 Representations and Warranties True at Closing. Purchaser's representations and warranties in this Agreement, or in any certificate or document signed by Purchaser pursuant to the provisions hereof, shall be true on and as of Closing. 10.2 Compliance with This Agreement. Purchaser shall have performed and complied with all agreements and conditions Purchaser is required to perform under this Agreement on or before Closing. 10.3 Approvals. Seller's obligation to close the transaction shall be further subject to: (i) obtaining approval of the transaction from the Board of Directors of ARV Assisted Living, Inc. and (ii) obtaining approval of the transaction from the limited partner of Seller, written documentation of each of which shall be delivered to Purchaser within thirty (30) days of the Effective Date. 11.0 ESCROW CANCELLATION OR TERMINATION. 11.1 Cancellation Before Removal of all Contingencies. All cost to be borne by the respective parties who incurred said cost except title company cancellation charges to be paid by Seller. 11.2 Cancellation After Removal of all Contingencies. (a) Purchaser's Failure. If escrow fails to close because of Purchaser's default after delivery of the Suitability Notice, Seller may at its option, terminate this Agreement and the escrow by giving written notice to Purchaser and escrow holder. Escrow shall thereupon be canceled, all documents shall be returned to the respective parties who deposited them and Purchaser shall pay all title and escrow cancellation charges. In addition, the parties agree that based on the circumstances now existing, known or unknown, it would be excessively costly and impractical to establish Seller's damages if escrow does not close as a result of Purchaser's default and it would therefore be reasonable to award Seller liquidated damages in the amount of the Initial Deposit and Additional Deposit (plus interest) specified in Section 3.2. By their respective initials set forth below, the parties agree that Seller may retain the Initial Deposit and Additional Deposit (plus interest) as its reasonable liquidated damages if escrow does not close as a result of Purchaser's default. Seller's retention of such amount shall be in lieu of any other relief, right or remedy, at law or in equity, to which Seller might otherwise be entitled by reason of Purchaser's default that results in escrow failing to close. ----------- --------------- Purchaser Seller 8 9 (b) Seller's Failure. If and only if Purchaser has complied with each and every provision of this Agreement including deposit of purchase price to escrow and Seller defaults under this Agreement, Purchaser's remedy shall be an action for damages, including but not limited to lost profits, arising by reason of Seller's Default, or an action for specific performance of this Agreement. 12.0 CLOSING PROCEDURE. 12.1 Purchaser's Deliveries. At least one (1) business day before the date of Closing, or as required by escrow agent, Purchaser shall deliver the following documents and funds to Escrow Agent: (a) The balance of the Purchase Price in the manner set forth in Section 3.2(c); (b) A counterpart of the Interim Lease (if applicable), signed by Purchaser as landlord, in the form described in Section 18.0 below; (c) A counterpart of the Interim Management Agreement (if applicable), signed by Purchaser as property manager; (d) Such other documents as may be required in connection with the closing of this transaction; (e) Such funds as may be necessary to comply with Purchaser's obligations hereunder regarding prorations, costs and expenses; (f) Resolutions of Purchaser or Purchaser's assignee, authorizing consummation of the transaction; and (g) Signed counterparts of the documents referenced in Section 12.2 (c), (d) and (e). 12.2 Seller's Deliveries. At least three (3) business days before the date of Closing, Seller shall deliver the following documents and funds to Escrow Agent: (a) The Deed in the form of EXHIBIT "C" attached hereto, duly executed and acknowledged by Seller, and a separate declaration of documentary transfer tax in form satisfactory to Escrow Agent; 9 10 (b) A duly executed Bill of Sale in favor of Purchaser in the form of EXHIBIT "D" attached hereto; (c) A duly executed Assignment of Service Contracts in the form of EXHIBIT "E" attached hereto; (d) A duly executed Assignment of Equipment Leases in the form EXHIBIT "F" attached hereto; (e) A duly executed Assignment of Residence Agreements in the form of EXHIBIT "G" attached hereto; (f) A duly executed certification of non-foreign status and California Franchise Tax Board Form 590 in the form of EXHIBIT "H" attached hereto; (g) Such other documents as may be required in connection with the closing of this transaction; (h) To the extent that the same are not credited against the Purchase Price, the security deposits (and accrued interest owed to residents, if any); (i) An original or copy of each of the Service Contracts; (j) An original of each of the Residence Agreements together with a certified rent roll; (k) Any information reasonably required to enable Purchaser to take possession of the Property upon Closing; (l) A closing certificate stating that all representations of Seller set forth in Section 16.0 hereof, except for facts that occurred or were discovered after the date of this Agreement, which shall be identified in such certificate, are true and correct as of the date of Closing; (m) Notices to each of the residents and occupants of the Property of the transfer of the Property to Purchaser; (n) Notices to each of Seller's employees of the transfer of the Property to the Purchaser; (o) Such funds as may be necessary to comply with Seller's obligations hereunder regarding prorations, costs, expenses and assignment of security deposits; (p) A counterpart of the Interim Lease (if applicable), signed by Seller as resident; and 10 11 (q) A counterpart of the Interim Management Agreement (if applicable), signed by Seller as resident. 12.3 Title Agent's Duties. Upon receipt of all of the foregoing, Escrow Agent shall instruct the Title Division to record the Deed in the Official Records and to issue the Title Policy. 13.0 COSTS AND PRORATIONS. 13.1 General. All revenues of the Property and all operating expenses that vary based upon the actual operations of the Property shall be prorated as of 6:00 a.m. on the date of Closing (the "Operations Cutoff Time") in accordance with the provisions set forth below. All operating expenses which are fixed and are typically billed on a periodic basis and are capable of proration on a per diem basis (e.g., insurance, property taxes, etc.) shall be prorated as of 12:00 midnight immediately before the Closing (the "Per Diem Cutoff Time") in accordance with the provisions set forth below. Any apportionments and prorations not expressly provided for above shall be made in accordance with customary practice in the County. Purchaser and Seller shall jointly prepare a tentative written proration statement before the Closing. Any adjustments to the Purchase Price and/or cash to be funded into Escrow or paid as of the Closing, subject to adjustment pursuant to the Operations Settlement (defined in Section 14.0 below), shall be effected by an increase in the amount to be funded by Purchaser into Escrow and a corresponding increase in the amount to be disbursed to Seller (if the prorations result in a net credit to the Seller) or by a decrease in the amount to be funded by Purchaser into Escrow and a corresponding decrease in the amount to be disbursed to Seller (if the prorations result in a net credit to the Purchaser). Any such adjustments not determined or not agreed upon as of the Closing shall be paid by Purchaser to Seller, or by Seller to Purchaser, as the case may be, in cash within seven (7) calendar days after demand. A copy of the schedule of adjustments to the proration statement as agreed upon by Purchaser and Seller shall be delivered to Escrow Holder before the Closing. 13.2 Inventory. The Purchase Price shall include all Personal Property on hand at the Real Property as of the Operations Cutoff Time (including open and unopened items) normally inventoried at the Property on a monthly or quarterly basis including, but not limited to, all glass, china, linen and silver, all food and beverages, all medical, pharmaceutical and operating supplies, as well as all other personal property, furniture, fixtures and equipment which is new and unused (in unopened packaging or otherwise) located at the Real Property as of the Operations Cutoff Time as determined by Purchaser and Seller pursuant to an inventory to be conducted by Purchaser and Seller between 8:00 p.m., California time, of the evening immediately before the Operations Cutoff Time, and 8:00 a.m., California time, immediately after the Operations Cutoff Time, a copy of which inventory shall be attached to the Bill of Sale. 13.3 Closing Statement. Escrow Holder shall prepare an estimated closing statement on or before the Closing Date (the "Closing Statement"), which will reflect all of the cash adjustments as a result of the prorations to be made as of the Closing. 14.0 OPERATIONS SETTLEMENT. Purchaser's and Seller's accountants shall prorate revenues of the Property as well as all variable operating expenses as of the Operations 11 12 Cutoff Time and/or the Per Diem Cutoff Time, as the case may be, and the results thereof together with a statement of cash in hand in the Property's operating accounts, and other cash accounts maintained by the Seller concerning the Property (the "House Funds") shall be set forth in a final accounting of the prorations to be specified in the Closing Statement, subject to the following: 14.1 Taxes. All general real estate and ad valorem personal property taxes and assessments shall be prorated as of the Per Diem Cutoff Time using the latest available tax rates and assessments. Seller shall be responsible for all general real estate and ad valorem personal property taxes and all special taxes or assessments accruing concerning the Property for all periods before the Per Diem Cutoff Time and Purchaser shall be responsible for all such taxes and assessments accruing after the Per Diem Cutoff Time. Any tax refunds or rebates occurring or accruing before the Per Diem Cutoff Time which apply to periods before the Per Diem Cutoff Time shall remain the property of Seller. If after the Closing it becomes apparent that the amount of real estate taxes for the Property was or becomes higher or lower than the amount that was used for apportionment as of the Closing (whether by reason of a change in either the asset value of the Property or the applicable tax rates or otherwise excepting reassessment based on this ownership change), real estate taxes shall be re-prorated and Seller or Purchaser, as the case may be, shall pay to the other within seven (7) calendar days after demand, any amount owed to the other as a result thereof. 14.2 Utilities. Seller shall terminate all light, power and other utilities for the Property, effective as the Close of Escrow. Utility meters will be read, to the extent that the utility company will do so, during the daylight hours on the calendar day immediately before the Closing, with charges accruing before the Operations Cutoff Time paid by Seller and charges accruing thereafter paid by Purchaser. Prepaid utility charges shall be prorated on the Closing Statement. Charges for utilities which are unmetered, or charges for the meters which have not been read by the Closing, will be prorated between Purchaser and Seller as of the Operations Cutoff Time, and an adjustment to any determinations made by the utility companies necessary to reflect actual operations as of the Operations Cutoff Time if reasonably estimatable or, if not after the Closing based upon utility billings received after the Closing in which case Seller or Purchaser, as appropriate, shall, upon receipt, submit a copy of the utility billings for any such charges to the other party and such party shall pay its pro rata share of such charges to the party requesting payment within seven (7) calendar days alter the date of any such request. Seller shall be credited and Purchaser debited for all deposits previously made by Seller which the utility company in question will apply to Purchaser's account. Purchaser shall be responsible for replacing and/or paying, on or before the Closing, all deposits which will not be applied by utility companies for Purchaser's account or which are otherwise required by utility companies in order to continue service at the Property for periods after the Operations Cutoff Time and shall take any other action and make any other payments required to assure uninterrupted availability of utilities at the Property for all periods after the Closing. Purchaser agrees that as of or after the Closing, all utility deposits previously made by Seller which are not applied to Purchaser's account may be refunded directly to Seller by the utility company holding same. 14.3 Residence Agreements, Service Contracts, and Equipment Leases. All accrued income and expenses concerning the Residence Agreements, Service Contracts and Equipment Leases which continue to affect the Property after the Closing will be prorated as of the Per Diem Cutoff Time. Purchaser shall receive a credit for the amount of any prepaid rents, security 12 13 deposits, or other deposits previously paid to Seller and not applied to delinquent rents or otherwise as provided under the Residence Agreements as of the Closing. Seller shall receive a credit for the amount of any prepaid expenses under any Service Contracts. Rent, whether paid or payable by residents or occupants under the Residence Agreements shall be prorated between Purchaser and Seller as of the Per Diem Cutoff Time on an accrued basis. Rent payments received after the Closing shall be applied first to rent then due and the balance, if any, shall be remitted to Seller pursuant to Section 14.6. 14.4 Reservations. Purchaser will honor all reservation agreements and deposits for dates after the Closing. Purchaser authorizes Seller to continue to accept reservations for units and beds at the Property for periods after the Closing provided the terms and conditions of the reservations are in the ordinary course of' Seller's business, and Purchaser agrees to honor all such reservations in accordance with their terms. Any pre-Closing deposits made to Seller concerning confirmed reservations for dates after the Closing will be credited to Purchaser. Any post-Closing deposits received by Seller concerning confirmed reservations for dates after the Closing shall be forwarded to Purchaser upon Seller's receipt. 14.5 House Funds. All house funds on hand at the Operations Cutoff Time shall be credited to Seller and debited to Purchaser. All accounts in which House Funds are maintained shall be transferred by Seller to Purchaser upon the Closing pursuant to an assignment of such accounts and execution by the parties of new account signature cards, or by transfer to new accounts opened by Purchaser for such purpose. 14.6 Accounts Receivable. All accounts receivable, whether due or accruing from private pay residents, or other third party payors, shall remain the property of Seller. To the extent that Purchaser receives payment for any accounts receivable following the Closing, Purchaser shall remit the same to Seller within thirty (30) days after receipt thereof. The determination of the accounts receivable shall be made as of the Closing to the extent known. Seller shall have the right, following the Closing, to maintain its efforts to collect its accounts receivable. 14.7 Accounts Payable and Expenses. Subject to Section 13.0, all accrued but unpaid accounts payable and expenses relating to operations of the Property (i.e., accounts payable and expenses arising from items not a part of inventory (e.g., energy, utilities, insurance, trade association dues, subscriptions, etc.) or services provided (e.g., by employees, independent contractors, professionals and other consultants, by vendors pursuant to service contracts, etc.) before the Closing shall be paid by Seller. Notwithstanding anything to the contrary, there shall be no proration of prepaid advertising. The determination of the accounts payable shall be made as of the Closing to the extent known. Prepaid expenses concerning all such items as of the Closing shall be credited to Seller. All accounts payable and expenses relating to operations of the Property after the Closing will be paid by Purchaser. 14.8 Employees. Periodic employee compensation, accrued vacation pay and other employee benefits to which employees of the Seller's management company, ARV Assisted Living, Inc., a Delaware corporation (hereinafter "ARV"), are entitled shall be paid by Seller or ARV, as applicable, to those employees upon closing. Most of ARV's employees may, at Purchaser's option, be hired by Purchaser in the same capacity of employment and at the same level 13 14 of compensation or other benefits enjoyed by such employees as of the closing. Seller shall be fully responsible for any severance obligations and liabilities of Seller's and/or Seller's employees, and Seller shall indemnify, defend and hold harmless Purchaser concerning all claims related thereto. 15.0 CLOSING EXPENSES. The Closing expenses shall be paid as follows: 15.1 Seller's Share. Seller shall pay: (i) the cost of an owner's CLTA standard coverage title policy without extended coverage or special endorsements; (ii) documentary transfer tax imposed on the conveyance of title to the Property to Purchaser; (and (iii) one-half (1/2) of Escrow Agent's fee. 15.2 Purchaser's Share. Purchaser shall pay: (i) the cost of the Title Policy in excess of the amount paid by Seller under Section 15.1(i), including any extended coverage or special endorsements; (ii) any sales taxes owing in connection with the transfer of the Personal Property as contemplated by this Agreement; (iii) the cost of recording the Deed; and (iv) one-half (1/2) of Escrow Agent's fee. 15.3 Other. All other Closing fees and expenses, including, but not limited to, the parties' legal expenses, accounting and consulting fees, and other incidental expenses in connection with this transaction shall be borne by the party incurring same. 16.0 SELLER'S REPRESENTATIONS AND COVENANTS. Seller hereby makes the following representations and covenants: 16.1 Due Organization. Seller is duly organized, validly existing and in good standing under California law and has the full power and authority to conduct its business as it is now being conducted in California. 16.2 Due Authority. Seller has the legal power, right and authority to enter into this Agreement and the instruments referenced herein, and to consummate the transaction contemplated hereby. 16.3 Requisite Actions. All requisite action (corporate, trust, partnership or otherwise) has been taken by Seller in connection with entering into this Agreement, the instruments referenced herein, and the consummation of the transaction contemplated hereby. No consent of any partner, shareholder, creditor, investor, judicial or administrative body, governmental authority (except as required under Section 18.0) or other party is required. 16.4 Individual Capacity. The individuals executing this Agreement and the instruments referenced herein on behalf of Seller and Seller's partners, have the legal power, right, and actual authority to bind Seller to the terms and conditions hereof and thereof. 16.5 Enforceability. This Agreement and all documents required hereby to be executed by Seller are and shall be valid, legally binding obligations of and enforceable against Seller in accordance with their terms. 14 15 16.6 No Defaults. Executing and delivering this Agreement and documents referenced herein, incurring the obligations set forth herein, consummating the transaction contemplated herein, and complying with the terms of this Agreement and the documents referenced herein do not conflict with or result in the material breach of any terms, conditions or provisions of, or constitute a default under the partnership agreement of Seller or Seller's general partner, American Retirement Villas Properties III, L.P. 16.7 Pending or Threatened Actions. There are no pending or, to the best of Seller's knowledge, contemplated actions, suits, arbitrations, claims, hearings or proceedings, at law or in equity, affecting all or any portion of the Property or in which Seller is or will be a party by reason of Sellers ownership of the Property. Seller does not know of the existence of any threatened or contemplated actions, claims, hearings or proceedings or of the existence of any facts which might give rise to such actions, claims or proceedings. 16.8 Hazardous Materials. To the best of Seller's knowledge, there has been no production, disposal or storage on, beneath the surface of, or nearby the Property of any hazardous materials or other toxic substance by Seller or any previous owner, or any other activity which could have toxic results, and there is no proceeding or inquiry by any governmental authority with respect thereto, other than cleaning materials used in the ordinary course of business for cleaning and maintaining the Property. Seller shall indemnify and hold Purchaser harmless from any and all losses, costs (including without limitation attorneys' fees), or liabilities arising out of or incurred in connection with the untruth or inaccuracy of Seller's representations in this subsection. The term "hazardous materials" means any hazardous or toxic substance which is regulated by any local governmental authority, the State of California and/or the United States government. 16.9 Documents Delivered. All instruments, documents, lists, schedules and items required to be delivered to Purchaser hereunder will fairly present the information set forth in a manner that is not misleading and will be true, complete and correct in all material respects on the date of delivery and upon the Closing, as they may be updated, modified or supplemented in accordance with this Agreement. 16.10 Residence Agreements. The Residence Agreements are in full force and effect strictly according to the terms set forth therein. There are no uncured defaults on the part of Seller, as landlord, and, to the best of Seller's knowledge, by residents under the Residence Agreements and no resident has asserted, or has any defense to, offsets or claims against rent payable or obligations under its Residence Agreement. All of the landlord's obligations under the Residence Agreements which accrue before the Closing have been performed. Seller has no reason to believe that any resident is or may become unable or unwilling to perform any or all of such resident's obligations under its Residence Agreement. To the best of Seller's knowledge, no claim, controversy, dispute, quarrel or disagreement exists between any resident and Seller. Seller has made no representations to residents regarding the condition of the premises covered by any Residence Agreement or the compliance of the premises with any applicable governmental regulations, except as expressly set forth in the Residence Agreements. 16.11 Employment Arrangements. There are no employment contracts, operating agreements, management contracts, listing agreements, consulting agreements, union contracts, labor 15 16 agreements, pension plans, profit sharing plans or employee benefit plans which relate to the Property, other than delivered to Purchaser pursuant to this Agreement. 16.12 Effect of Changes. Upon notification of any fact that could materially change any of the representations contained herein, Purchaser shall have the option of (1) waiving the breach that would be caused by such change, (2) agreeing with Seller to adjust the terms hereof to compensate Purchaser for such change (although Seller may refuse to make such agreement in its sole and absolute discretion), or (3) terminating this Agreement without prejudice to any further legal or equitable rights or remedies against Seller and/or the Property. 16.13 As-Is Condition. Except as otherwise expressly provided in this Section 16, Seller disclaims the making of any representations or warranties, express or implied, regarding the Property or matters affecting the Property, including, without limitation, the physical condition of the Property, title to or the boundaries of the Real Property, soil condition, hazardous waste or other environmental matters, compliance with building, health, safety, land use, and zoning laws, regulations and orders, structural and other engineering characteristics, or budgets and financial projections for the operation of the Property. Moreover, Purchaser acknowledges that (i) Seller did not develop or construct the Property; (ii) Purchaser has entered into this Agreement with the intention of making and relying on its own investigation of the physical, environmental, economic and legal conditions of the Property; and (iii) Purchaser is not relying on any statements, representations, or warranties, other than those specifically set forth in this Section 16, made by Seller or anyone acting or claiming to act on Seller's behalf concerning the Property, and that Purchaser shall purchase the Property in its "as is" condition on the Closing Date and assumes the risk that adverse physical, environmental, economic or legal conditions may exist. 17.0 PURCHASER'S REPRESENTATIONS. Purchaser hereby makes the following representations: 17.1 Due Organization. Purchaser is duly organized, validly existing and in good standing under California law and has the full power and authority to conduct its business as it is now being conducted. 17.2 Due Authority. Purchaser has full legal power and authority to enter into and perform this Agreement in accordance with its terms. 17.3 Enforceability. This Agreement constitutes the valid and binding obligation of Purchaser, enforceable in accordance with its terms, except as such enforcement may be affected by bankruptcy, insolvency and other laws affecting the rights of creditors generally. 17.4 No Defaults. The execution, delivery and performance of this Agreement and all documents in connection therewith are not in contravention of or in conflict with any agreement or undertaking to which Purchaser is a party or by which Purchaser may be bound or affected. 17.5 Requisite Actions. The execution and delivery of this Agreement and the payment and performance by Purchaser of its payments and obligations hereunder require no further 16 17 action or approval for this Agreement to be a binding and enforceable obligation of Purchaser and all such actions have been duly taken by Purchaser. 18.0 LICENSES. 18.1 License Transfer or Issuance. Purchaser shall be fully responsible for and shall pay all costs and fees required to be paid in connection with the transfer or issuance of any and all licenses and permits required for the operation of the Property, and shall pay all transfer and license application fees in connection therewith, as well as applying for and obtaining any and all new licenses, permits, certificates and/or approvals necessary or appropriate in connection with the operation of the Property and the consummation of the purchase and sale of the Property. Purchaser shall diligently prosecute its applications in accordance with the rules and procedures set forth under applicable law. Seller shall use its best efforts to assist Purchaser in obtaining the transfer or issuance of such licenses, permits, certificates and approvals. 18.2 Interim Lease. It may not be possible to complete the foregoing license and permit transfers or issuances before the Closing and some or all of the licenses and permits may not be capable of transfer. However, the transfer and/or issuance of such licenses, permits, certificates and/or approvals (and/or any other licenses, permits, certificates and/or approvals) shall not be a condition precedent to Purchaser's obligations under this Agreement, nor to the Closing and Purchaser shall remain fully obligated to perform all of its obligations hereunder and to Close the Escrow even if such licenses, permits, certificates and approvals have not been transferred or issued to Purchaser before Closing for any reason whatsoever, including Purchaser's inability to qualify for the transfer or issuance of any such licenses or permits. To the extent that the necessary licenses and permits are not obtained by transfer by Closing, for a period of one hundred eighty (180) days after the Closing Date, Seller and Purchaser shall operate the property pursuant to an Interim Lease (the "Interim Lease"), and an interim property management agreement (the "Interim Management Agreement") in the form and content approved by the parties during the Due Diligence Review Period. The parties shall execute the Interim Lease and Interim Management Agreement not later than the Closing. The Interim Lease and Interim Management Agreement shall terminate upon the earlier of one hundred eighty (180) days after the Closing or issuance by the appropriate governmental agency of the appropriate license(s) and permit(s). The Interim Lease will be entered into solely for the purpose of maintaining Seller's licenses for the Property for the term of the Interim Lease. During the term of the Interim Lease, Purchaser shall indemnify Seller as provided in Section 19.8 of this Agreement, and shall use its reasonable best and diligent efforts to apply for and obtain a new operating license. 19.0 GENERAL COVENANTS AND AGREEMENTS OF PURCHASER AND SELLER. 19.1 Delivery of Possession. Possession of the Property shall be delivered to Purchaser upon Closing, subject to the rights of residents in possession. 17 18 19.2 Damage to or Destruction of Property Before Closing. If the Property sustains damage caused by fire or other casualty before Closing that is insured and that would cost One Hundred Thousand Dollars ($100,000) or more to repair, or if any uninsured loss or casualty occurs, either Seller or Purchaser may elect to terminate this Agreement by written notice to the other within fifteen (15) days after notice of such event, or at Closing, whichever is earlier. If neither Seller nor Purchaser so elects to terminate its obligations under this Agreement, or if the loss or casualty would cost less than One Hundred Thousand Dollars ($100,000) to repair and Seller has insurance coverage reasonably satisfactory to Purchaser, the Closing shall take place as provided herein without abatement of the Purchase Price, and there shall be assigned to Purchaser at Closing all of Seller's interest in and to the insurance proceeds that may be payable to Seller on account of such occurrence and Seller shall have no obligation of repair or replacement. If an uninsured loss or casualty occurs and neither party elects to terminate its obligations under this Agreement as aforesaid, Purchaser shall receive a credit at Closing against the Purchase Price in an amount equal to the cost of repairing or restoring the loss or casualty in question. 19.3 Condemnation of Property Before Closing. Seller shall immediately advise Purchaser if the Property or any part thereof becomes the subject of a condemnation proceeding before Closing. If such condemnation occurs, Purchaser shall have the option to (i) take title in accordance with the terms and conditions of this Agreement and permit Seller to negotiate with the condemning authority and receive the condemnation award, reducing the Purchase Price by the amount thereof received or receivable by Seller, or (ii) take title in accordance with the terms and conditions of this Agreement and negotiate with the condemning authority for the condemnation award and receive the benefits thereof without affecting the Purchase Price, or (iii) terminate this Agreement and its obligations hereunder, in which event all sums theretofore paid to Seller or to Escrow Agent hereunder shall be returned to Purchaser. Notice of the exercise of such option hereunder shall be in writing, delivered to Seller at the address set forth in Section 20.7 of this Agreement (or such other address as Seller may have theretofore designated in writing) at least two (2) days before Closing. 19.4 Failure to Close. Except as otherwise provided in this Agreement, if Closing does not occur for any reason whatsoever, and after the parties shall have conformed to the requirements set forth in this Agreement, the parties shall, upon the request of either party, execute and deliver mutual general release agreements concerning any claims in connection with the transactions contemplated by this Agreement and evidencing the termination of this Agreement. 19.5 Time of Essence. Time is of the essence concerning the obligations of the parties hereunder. All modifications of time for performance must be specific, in writing and signed by the parties. 19.6 Assignability. Purchaser may assign its interest hereunder without Seller's prior written consent; however, such assignment shall not be effective as to Seller until close of escrow and shall not relieve Purchaser of any liability hereunder without Seller's prior written consent, which consent shall not be unreasonably withheld. 19.7 Waivers, Amendments and Modifications. Waivers, amendments or modifications of any term or condition of this Agreement must be in writing signed by the party 18 19 against whom such waiver is sought to be enforced. No waiver by any party of any breach hereunder shall be deemed a waiver of any other or subsequent breach. 19.8 Indemnification. Seller shall indemnify and hold Purchaser harmless from and against any and all loss, cost, damage, claim, liability or expense, including court costs and reasonable attorneys' fees, which may be asserted against or incurred or suffered by Purchaser from time to time by reason of or in connection with (i) the material inaccuracy or material breach of any of the representations, warranties, or covenants made by Seller herein, (ii) any injury or damage or claim of injury or damage of any kind whatsoever, including death, to persons or property, including employees of Seller (unless caused by Purchaser), occasioned in or about the Property before Closing, including, but not limited to, the existence of any hazardous materials located thereon, and (iii) any claim by any partner of American Retirement Villas Properties III, L.P., (the "Partnership"), the general partner of Seller, of breach of such Partnership's limited partnership agreement (or any other claim arising out of or relating to such document) arising out of the involvement, if any, of Gary L. Davidson as a part of Purchaser or Purchaser's assignee. Purchaser shall indemnify and hold Seller harmless from and against any and all loss, damage, claim of damage, liability or expense, including costs and reasonable attorneys' fees, which may be asserted against or incurred or suffered by Seller from time to time by reason of or in connection with (i) the material inaccuracy or material breach of any of the representations, warranties, or covenants made by Purchaser herein, or (ii) injury or damage or claim of injury or damage of any kind whatsoever, including death, to persons or property, including employees of Purchaser (unless caused by Seller), occasioned in or about the Property on or after the Closing. These covenants shall survive Closing. Upon demand each party shall cooperate in defending any such action which may be filed against the other, with defending party responsible for actual cost. 20.0 MISCELLANEOUS PROVISIONS. 20.1 Successors and Assigns. Subject to the provisions hereof, the terms and provisions hereof shall be binding upon and inure to the benefit of the successors and assigns of the parties. 20.2 Meaning of Terms. When necessary herein, all terms used in the singular shall apply to the plural, and vice versa; and all terms used in the masculine shall apply to the neuter and feminine genders. 20.3 Entire Agreement. This Agreement is the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements between the parties concerning the same. No claim of waiver, modification, consent or acquiescence concerning any of the provisions of this Agreement shall be made against either party, except on the basis of a written instrument executed by or on behalf of such party. 20.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 19 20 20.5 Section Headings. The Section headings in this Agreement are inserted solely for convenience of reference and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 20.6 Attorneys' Fees. If either Seller or Purchaser obtains legal counsel or brings an action against the other by reason of the breach of any covenant, provision or condition hereof, or otherwise arising out of this Agreement, the unsuccessful party shall pay to the prevailing party reasonable attorneys' fees, paralegal fees, and reasonable costs, which shall be payable whether or not any action is prosecuted to judgment. The term "prevailing party" shall include, without limitation, a party who obtains legal counsel or brings an action against the other by reason of the other's breach or default and obtains substantially the relief sought, whether by compromise. settlement or judgment. 20.7 Notices. All notices, requests, demands, and other communications required or permitted to be given under this Agreement shall be given in writing (at the addresses set forth below) by any of the following means (i) personal service (including delivery by overnight courier); (ii) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by registered or certified, first class mail, return receipt requested); or (iii) registered or certified, first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice, demand or request sent pursuant to either (i) or (ii) hereof shall be deemed received upon such personal service or upon dispatch by electronic means, and, if sent pursuant to (iii) shall be deemed received three (3) days after deposit in the mail: Seller: ARVP III/Bradford Square, L.P. c/o ARV Assisted Living, Inc. 245 Fischer Avenue, D-1 Costa Mesa, CA 92626-0236 Attn: Abdo Khoury Phone: (714) 435-4357 Facsimile: (714) 751-1743 With a copy to: Douglas Armstrong c/o ARV Assisted Living, Inc. 245 Fischer Avenue, D-1 Costa Mesa, CA 92626-0236 Phone: (714) 435-4327 Facsimile: (714) 435-7110 Purchaser: Vintage Senior Housing, LLC 350 San Miguel Drive, Suite 300 Newport Beach, CA 92660 Attn.: Eric K. Davidson Phone: (949) 719-4082 Facsimile: (949) 640-2794 20 21 With a copy to: The Busch Firm 2532 Dupont Drive Irvine, CA 92612 Attention: Sheila M. Muldoon Phone: (949) 474-7368, Ext. 108 Facsimile: (949) 474-7732 Efax: (425) 740-7978 Escrow Agent: Fidelity National Title Insurance Company 1300 Dove Street, #310 Newport Beach, CA 92660 Attention: Patty Beverly Phone: (949) 622-4911 Facsimile: (949) 477-6835 20.8 Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined to be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 20.9 Further Assurances. Each party agrees to do all acts and things and to make, execute and deliver such written instruments as are reasonably necessary to carry out the terms and provisions of this Agreement. This provision shall survive Closing. 20.10 Other Parties. Nothing in this Agreement shall be construed as giving any person, firm, corporation or other entity, other than the parties hereto, their successors and permitted assigns, any right, remedy or claim under or concerning this Agreement or any provision hereof. 20.11 Confidentiality. Because it is in Seller's and Purchaser's best interests to keep this Agreement and all information concerning the Property confidential until the Closing, neither of them shall take any action nor conduct itself in any fashion that would disclose any aspect of the contemplated transaction to site employees or other third parties unrelated to Purchaser's acquisition or intended ownership and operation of the Property. Purchaser and Seller representatives shall meet with key project employees and inform them that an analysis is being made to determine the feasibility of the investment in the property without explaining the percentage of investment contemplated. 20.12 Counterparts. This Agreement may be executed to any number of counterparts. each of which so executed shall be deemed an original; such counterparts shall together constitutes but one agreement. 20.13 No Brokers. Each party to this Agreement warrants and represents to the other that, in connection with the transactions herein contemplated, such party has dealt with no other person in the capacity of a broker, finder, or like function or capacity giving rise, by reason of such party's conduct, to a claim to a commission or fee payable to such person. Seller and Purchaser 21 22 agree that each will indemnify, defend, and hold the other harmless from the claims of any broker, finder or other person claiming to be entitled to compensation in connection with this Agreement or in connection with the sale of the Property. 20.14 Announcements. Seller and Purchaser shall consult with each other in advance with regard to all press releases and other announcements issued at or prior to the Close of Escrow and, except as may be required by applicable laws of the applicable rules and regulations of any governmental agency or stock exchange, neither Seller nor Purchaser shall issue any such press release or other publicity prior to the Close of Escrow without the prior consent of the other party. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. "SELLER" ARVP III/BRADFORD SQUARE, L.P., a California limited partnership By: American Retirement Villas Properties III, L.P., a California limited partnership By: ARV Assisted Living, Inc., a Delaware corporation By: ---------------------------------- Name: ---------------------------------- Its: ---------------------------------- By: ---------------------------------- Name: ---------------------------------- Its: ---------------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] 22 23 "PURCHASER" VINTAGE SENIOR HOUSING, LLC, a California limited liability company By: ----------------------------- Eric K. Davidson Its: Manager By: ----------------------------- Brian J. Flornes Its: Manager Agreed and Accepted: Escrow Agent: Fidelity National Title Insurance Company By: ----------------------------- Name: Patty Beverly Title: -------------------------- Date: --------------------------- Escrow No. ---------------------- EXHIBITS: EXHIBIT "A" DESCRIPTION OF PROPERTY - TO BE PROVIDED BY SELLER EXHIBIT "B" DUE DILIGENCE ACQUISITION CHECKLIST - ATTACHED EXHIBIT "C" DEED - FORM TO BE PROVIDED AT CLOSING EXHIBIT "D" BILL OF SALE EXHIBIT "E" ASSIGNMENT OF SERVICE CONTRACTS EXHIBIT "F" ASSIGNMENT OF EQUIPMENT LEASES EXHIBIT "G" ASSIGNMENT OF RESIDENCE AGREEMENTS - TO BE PROVIDED BY SELLER EXHIBIT "H" CERTIFICATION OF NON-FOREIGN STATUS AND CALIFORNIA FTB FORM 590 SCHEDULES: 2.2 EQUIPMENT LEASES - TO BE PROVIDED BY SELLER 2.3 RENT ROLL - TO BE PROVIDED BY SELLER 2.4 SERVICE CONTRACTS - TO BE PROVIDED BY SELLER 23 24 EXHIBIT B TO PURCHASE AGREEMENT DUE DILIGENCE ACQUISITION CHECKLIST (to be made available to Purchaser to the extent available and in the Seller's possession) GENERAL DATA Facility address Facility phone and fax Full name of facility Full name of Seller Land area (acres) Number of units Total building square feet Unit mix with square footage Partnership Agreement for Seller Partnership Agreement for American Retirement Villas Properties III, L.P. EMPLOYEE ITEMS Employee manual and benefit package description Employment Contracts History and experience of key personnel Job descriptions for all positions Latest health, dental and life insurance breakdowns List of employees with accrued vacation and sick pay or other accrued leave Organizational Chart Payroll records include SS#'s (last 2 months) Positions not filled or in process of being filled, hours worked and pay rate Worker's compensation rates/premium calculations and litigation records FACILITY ITEMS Brochures Building plans and specifications Bus/van registration, title and maintenance logs Certificates of Occupancy Description of any and all lawsuits or claims in progress Equipment Leasing Contracts Inventory - food 24 25 Inventory - personal property Operating Manuals and Warranties for physical plant equipment Service and Maintenance Contracts Summary of Capital Improvements since 1995 Title Report/Commitment Vendor list Zoning letters or materials Environmental Report(s) on the Property Survey(s) of the Property Appraisal(s) of the Property FINANCIAL ITEMS Dietary statistics (number of meals served and per plate food cost) Operating Statements (current and last 2 years) Proformas/Budgets Property tax notices and bills (2 years) Summary of all insurance policies and insurance company contracts Utility invoices (2 years) 1999 and year to date General Ledger INSURANCE ITEMS Area of each building Estimated annual payroll Estimated annual rental income Estimated building replacement cost Estimated contents replacement cost Number of buildings Number of employees Number of licensed beds Number of stories Number of units Roof material Smoke detectors Sprinklered Type of construction Year built 25 26 LICENSURE ITEMS Current licenses and permits Food license Inspection reports, fire, etc. (2 years) RESIDENT RELATED ITEMS Agreements with home health or therapy provider agencies Agreements with placement agencies Current rent roll (specifying resident name, unit, original occupancy date, residence agreement termination date, current monthly payment and list of services received) List of all delinquent resident accounts List of security deposits Move-in reservation, unit, anticipated date, security deposit and rental rate Move-out notices, anticipated date, unit moving, rental rate and reason for move Multi-week master menu/sample daily menu Number of residents at each level of Assisted Living Rental rates per room type Services and rates Standard Residency Agreement and Access to all Residency Agreements 26 EX-10.11 7 a71219ex10-11.txt EXHIBIT 10.11 1 EXHIBIT 10.11 FIRST AMENDMENT TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS This First Amendment to Purchase Agreement and Escrow Instructions ("First Amendment") is made as of October 4, 2000 (the "Effective Date"), between ARVP III/BRADFORD SQUARE, L.P., a California limited partnership ("Seller"), and AVALON AT BRADFORD SQUARE, LLC, a California limited liability company ("Purchaser"), assignee of Vintage Senior Housing, LLC, to amend that certain Purchase Agreement and Escrow Instructions between Seller and Vintage Senior Housing, LLC, date September 5, 2000 ("Purchase Agreement"). 1.0 RECITALS. Seller and Purchaser desire to extend the Due Diligence Review Period and provide for a fixed date for the Closing. 2.0 AMENDMENT TO PURCHASE AGREEMENT. 2.1 Extension of Due Diligence Review Period. Section 6.2 of the Purchase Agreement is hereby amended to extend the Due Diligence Review Period to October 12, 2000. 2.2 Additional Deposit. Section 3.2(b) is hereby deleted and the following is added in its stead: (b) Additional Deposit. Purchaser shall deposit an additional Twenty-Five Thousand Dollars ($25,000) ("Additional Deposit") to Escrow Agent on October 5, 2000. Escrow Agent shall promptly place and thereafter hold the Additional Deposit in an interest bearing account. Upon delivery of the Suitability Notice (defined in Section 6.2), the Initial Deposit and the Additional Deposit shall become nonrefundable (other than if Escrow fails to close other than for Buyer's breach). If the Closing occurs, the Additional Deposit (with interest) shall be paid to Seller and credited against the Purchase Price. 2.3 Closing of Escrow. The first sentence of Section 4.2 of the Purchase Agreement is hereby deleted, and the following shall be substituted in its place: "Escrow shall close on or before December 1, 2000 (the "Outside Date"). 3.0 EFFECT OF AMENDMENT. Except as amended in this First Amendment, the Purchase Agreement shall remain in full force and effect. 4.0 COUNTERPARTS. This First Amendment may be executed in counterparts, each of which shall be deemed a duplicate original. [Signatures on Following Page] 1 2 IN WITNESS WHEREOF, the First Amendment has been executed as of the date set forth above. "SELLER" ARVP III/BRADFORD SQUARE, L.P., a California limited partnership By: American Retirement Villa Properties III, L.P., a California limited partnership, General Partner By: ARV Assisted Living, Inc., a Delaware corporation, General Partner By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- "PURCHASER" AVALON BRADFORD SQUARE, LLC, a California limited liability company By: Vintage Senior Housing, LLC, a California limited liability company, Executive Manager By: ---------------------------------------- Eric K. Davidson, Member By: ---------------------------------------- Brian J. Flornes, Member 2 EX-10.12 8 a71219ex10-12.txt EXHIBIT 10.12 1 EXHIBIT 10.12 FHA FORM 92466 REGULATORY AGREEMENT FOR MULTIFAMILY HOUSING PROJECTS Project No. 123-22013 Mortgagee: RED MORTGAGE CAPITAL, INC. Amount of Mortgage Note: $5,782,900.00 Date: January 29, 2001 Mortgage: Recorded: State: Arizona County: Maricopa Date: January 29, 2001 Concurrently Herewith Book __________ Page _____________ Instrument No. ____________ Originally endorsed for insurance under Section 232 pursuant to Section 223(f) of the National Housing Act. This Agreement entered into as of this 29th day of January, 2001, between ARV CHANDLER VILLAS, LP, a California limited partnership whose address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, their successors, heirs, and assigns (jointly and severally, hereinafter referred to as Owners) and the undersigned Secretary of Housing and Urban Development and his successors (hereinafter referred to as Secretary). In consideration of the endorsement for insurance by the Secretary of the above described note or in consideration of the consent of the Secretary to the transfer of the mortgaged property or the sale and conveyance of the mortgaged property by the Secretary, and in order to comply with the requirements of the National Housing Act, as amended, and the Regulations adopted by the Secretary pursuant thereto, Owners agree for themselves, their successors, heirs and assigns, that in connection with the mortgaged property and the project operated thereon and so long as the contract of mortgage insurance continues in effect, and during such further period of time as the Secretary shall be the owner, holder or reinsurer of the mortgage, or during any time the Secretary is obligated to insure a mortgage on the mortgage property: 1. Owners, except as limited by paragraph 17 hereof, assume and agree to make promptly all payments due under the note and mortgage. 2. (a) Owners shall establish or continue to maintain a reserve fund for replacements by the allocation to such reserve fund in a separate account with the mortgagee or in a safe and responsible depository designated by the mortgagee, concurrently with the beginning of payments towards amortization of the principal of the mortgage insured or held by the Secretary of an amount equal to $4,494.50 per month ($3,320.17 for Realty and $1,174.33 for Major Movable Equipment) unless a different date or amount is approved in writing by the Secretary. An initial deposit to 2 -- 2 -- the Fund of $463,546.00 ($322,622.00 for Realty and $140,924.00 for Major Movable Equipment) has been made. Such fund, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America shall at all times be under the control of the mortgagee. Disbursements from such fund, whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project or for any other purpose, may be made only after receiving the consent in writing of the Secretary. In the event that the owner is unable to make a mortgage note payment on the due date and that payment cannot be made prior to the due day of the next such installment or when the mortgagee has agreed to forgo making an election to assign the mortgage to the Secretary based on a monetary default, or to withdraw an election already made, the Secretary is authorized to instruct the mortgagee to withdraw funds from the reserve fund for replacements to be applied to the mortgage payment in order to prevent or cure the default. In addition, in the event of a default in the terms of the mortgage, pursuant to which the loan has been accelerated, the Secretary may apply or authorize the application of the balance in such fund to the amount due on the mortgage debt as accelerated. (b) Where Owners are acquiring a project already subject to an insured mortgage, the reserve fund for replacements to be established will be equal to the amount due to be in such fund under existing agreements or charter provisions at the time Owners acquire such project, and payments hereunder shall begin with the first payment due on the mortgage after acquisition, unless some other method of establishing and maintaining the fund is approved in writing by the Secretary. 3. Real property covered by the mortgage and this agreement is described in Exhibit A attached hereto. (This paragraph 4 is not applicable to cases insured under Section 232). 3 -- 3 -- 5. (a) If the mortgage is originally a Secretary-held purchase money mortgage, or is originally endorsed for insurance under any Section other than Sections 231 or 232 and is not designed primarily for occupancy by elderly persons, Owners shall not in selecting tenants discriminate against any person or persons by reason of the fact that there are children in the family. (b) If the mortgage is originally endorsed for insurance under Section 221, Owners shall in selecting tenants give to displaced persons or families an absolute preference or priority of occupancy which shall be accomplished as follows: (1) For a period of sixty (60) days from the date of original offering, unless a shorter period of time is approved in writing by the Secretary, all units shall be held for such preferred applicants, after which time any remaining unrented units may be rented to non-preferred applicants; (2) Thereafter, and on a continuing basis, such preferred applicants shall be given preference over non-preferred applicants in their placement on a waiting list to be maintained by the Owners; and (3) Through such further provisions agreed to in writing by the parties. (c) Without the prior written approval of the Secretary not more than 25% of the number of units in a project insured under Section 231 shall be occupied by persons other than elderly persons. (d) All advertising or efforts to rent a project insured under Section 231 shall reflect a bona fide effort of the Owners to obtain occupancy by elderly persons. 6. Owners shall not without the prior written approval of the Secretary: (a) Convey, transfer, or encumber any of the mortgaged property, or permit the conveyance, transfer or encumbrance of such property. 4 -- 4 -- (b) Assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except from surplus cash, except for reasonable operating expenses and necessary repairs. (c) Convey, assign, or transfer any beneficial interest in any trust holding title to the property, or the interest of any general partner in a partnership owning the property, or any right to manage or receive the rents and profits from the mortgaged property. (d) Remodel, add to, reconstruct, or demolish any part of the mortgaged property or subtract from any real or personal property of the project. (e) Make, or receive and retain, any distribution of assets or any income of any kind of the project except surplus cash and except on the following conditions: (1) All distributions shall be made only as of and after the end of a semiannual or annual fiscal period, and only as permitted by the law of the applicable jurisdiction; (2) No distribution shall be made from borrowed funds, prior to the completion of the project or when there is any default under this Agreement or under the note or mortgage; (3) Any distribution of any funds of the project, which the party receiving such funds is not entitled to retain hereunder, shall be held in trust separate and apart from any other funds; and (4) There shall have been compliance with all outstanding notices of requirements for proper maintenance of the project. (f) Engage, except for natural persons, in any other business or activity, including the operation of any other rental project, or incur any liability or obligation not in connection with the project. (g) Require, as a condition of the occupancy or leasing of any unit in the project, any consideration or deposit other than the prepayment of the first month's rent plus a security deposit in an amount not in excess of one month's rent to guarantee the performance of the covenants of the lease. Any funds collected as security deposits shall be kept separate and apart from all other funds of the project in a trust account the amount of which shall at all times equal or exceed the aggregate of all outstanding obligations under said account. (h) Permit the use of the dwelling accommodations or nursing facilities of the project for any purpose except the use which was originally intended, or permit commercial use greater than that originally approved by the Secretary. 7. Owners shall maintain the mortgaged premises, accommodations and the grounds and equipment appurtenant thereto, in good repair and condition. In the event all or 5 -- 5 -- any of the buildings covered by the mortgage shall be destroyed or damaged by fire or other casualty, the money derived from any insurance on the property shall be applied in accordance with the terms of the mortgage. 8. Owners shall not file any petition in bankruptcy or for a receiver or in insolvency or for reorganization or composition, or make any assignment for the benefit of creditors or to a trustee for creditors, or permit an adjudication in bankruptcy or the taking possession of the mortgaged property or any part thereof by a receiver or the seizure and sale of the mortgaged property or any part hereof under judicial process or pursuant to any power of sale, and fail to have such adverse actions set aside within forty-five (45) days. 9. (a) Any management contract entered into by Owners or any of them involving the project shall contain a provision that, in the event of default hereunder, it shall be subject to termination without penalty upon written request by the Secretary. Upon such request Owners shall immediately arrange to terminate the contract within a period of not more than thirty (30) days and shall make arrangements satisfactory to the Secretary for continuing proper management of the project. (b) Payment for services, supplies, or materials shall not exceed the amount ordinarily paid for such services, supplies, or materials in the area where the services are rendered or the supplies or materials furnished. (c) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and subject to examination and inspection at any reasonable time by the Secretary or his duly authorized agents. Owners shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Secretary or his duly authorized agents. (d) The books and accounts of the operations of the mortgaged property and of the project shall be kept in accordance with the requirements of the Secretary. (e) Within sixty (60) days following the end of each fiscal year the Secretary shall be furnished with a complete annual financial report based upon an examination of the books and records of mortgagor prepared in accordance with the requirements of the Secretary, prepared and certified to by an officer or responsible Owner and, when required by the Secretary, prepared and certified by a Certified Public Accountant, or other person acceptable to the Secretary. (f) At the request of the Secretary, his agents, employees, or attorneys, the Owners shall furnish monthly occupancy reports and shall give specific answers to questions upon which information is desired from time to time relative to income, assets, liabilities, contracts, operation, and condition of the property and the status of the insured mortgage. 6 -- 6 -- (g) All rents and other receipts of the project shall be deposited in the name of the project in a financial institution, whose deposits are insured by an agency of the Federal Government. Such funds shall be withdrawn only in accordance with the provisions of this Agreement for expenses of the project or for distributions of surplus cash as permitted by paragraph 6(e) above. Any Owner receiving funds of the project other than by such distribution of surplus cash shall immediately deposit such funds in the project bank account and failing so to do in violation of this Agreement shall hold such funds in trust. Any Owner receiving property of the project in violation of this Agreement shall hold such funds in trust. At such time as the Owners shall have lost control and/or possession of the project, all funds held in trust shall be delivered to the mortgagee to the extent that the mortgage indebtedness has not been satisfied. (h) If the mortgage is insured under Section 232: 1. The Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as a nursing home and shall not lease all or part of the project except on terms approved by the Secretary. 2. The Owners shall suitably equip the project for nursing home operations. 3. The Owners shall execute a Security Agreement and Financing Statement (or other form of chattel lien) upon all items of equipment, except as the Secretary may exempt, which are not incorporated as security for the insured mortgage. The Security Agreement and Financing Statement shall constitute a first lien upon such equipment and shall run in favor of the mortgagee as additional security for the insured mortgage. 4. The Owners will not alter, or suffer or permit the alteration of, the nursing home license, bed authority or other operating authority of the Project without the advance written approval of the Secretary. In the event that any such alteration is proposed, upon learning of that event the Owners will advise the Secretary promptly. The Owners will insert the foregoing requirements into any operating lease for the Project. 5. The Owners will not enter into, amend, or agree to the assignment of, any operating lease for all or part of the Project without the advance written approval of, and on terms satisfactory to, the Secretary. (i) If the mortgage is insured under Section 231, Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as housing for the elderly. 10. Owners will comply with the provisions of any Federal, State, or local law prohibiting discrimination in housing on the grounds of race, color, religion or creed, sex, or national origin, including Title VIII of the Civil Rights Act of 1968 (Public 7 -- 7 -- Law 90-284; 82 Stat. 73), as amended, Executive Order 11063, and all requirements imposed by or pursuant to the regulations of the Department of Housing and Urban Development implementing these authorities (including 24 CFR Parts 100, 107 and 110, and Subparts I and M of Part 200). 11. Upon a violation of any of the above provisions of this Agreement by Owners, the Secretary may give written notice thereof, to Owners, by registered or certified mail, addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate written notice thereof to the Secretary, be designated by the Owners as their legal business address. If such violation is not corrected to the satisfaction of the Secretary within thirty (30) days after the date such notice is mailed or within such further time as the Secretary determines is necessary to correct the violation, without further notice the Secretary may declare a default under this Agreement effective on the date of such declaration of default and upon such default the Secretary may: (a) (i) If the Secretary holds the note - declare the whole of said indebtedness immediately due and payable and then proceed with the foreclosure of the mortgage; (ii) If said note is not held by the Secretary - notify the holder of the note of such default and request holder to declare a default under the note and mortgage, and holder after receiving such notice and request, but not otherwise, at its option, may declare the whole indebtedness due, and thereupon proceed with foreclosure of the mortgage, or assign the note and mortgage to the Secretary as provided in the Regulations; (b) Collect all rents and charges in connection with the operation of the project and use such collections to pay the Owners' obligations under this Agreement and under the note and mortgage and the necessary expenses of preserving the property and operating the project. (c) Take possession of the project, bring any action necessary to enforce any rights of the Owners growing out of the project operation, and operate the project in accordance with the terms of this Agreement until such time as the Secretary in his discretion determines that the Owners are again in a position to operate the project in accordance with the terms of this Agreement and in compliance with the requirements of the note and mortgage. (d) Apply to any court, state or Federal, for specific performance of this Agreement, for an injunction against any violation of the Agreement, for the appointment of a receiver to take over and operate the project in accordance with the terms of the Agreement, or for such other relief as may be appropriate, since the injury to the Secretary arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain. 8 -- 8 -- 12. As security for the payment due under this Agreement to the reserve fund for replacements, and to secure the Secretary because of his liability under the endorsement of the note for insurance, and as security for the other obligations under this Agreement, the Owners respectively assign, pledge and mortgage to the Secretary their rights to the rents, profits, income and charges of whatsoever sort which they may receive or be entitled to receive from the operation of the mortgaged property, subject, however, to any assignment of rents in the insured mortgage referred to herein. Until a default is declared under this Agreement, however, permission is granted to Owners to collect and retain under the provisions of this Agreement such rents, profits, income, and charges, but upon default this permission is terminated as to all rents due or collected thereafter. 13. As used in this Agreement the term: (a) "Mortgage" includes "Deed of Trust", "Chattel Mortgage", "Security Instrument", and any other security for the note identified herein, and endorsed for insurance or held by the Secretary; (b) "Mortgagee" refers to the holder of the mortgage identified herein, its successors and assigns; (c) "Owners" refers to the persons named in the first paragraph hereof and designated as Owners, their successors, heirs and assigns; (d) "Mortgaged Property" includes all property, real, personal or mixed, covered by the mortgage or mortgages securing the note endorsed for insurance or held by the Secretary; (e) "Project" includes the mortgaged property and all its other assets of whatsoever nature or wheresoever situate, used in or owned by the business conducted on said mortgaged property, which business is providing housing and other activities as are incidental thereto; (f) "Surplus Cash" means any cash remaining after: (1) the payment of: (i) All sums due or currently required to be paid under the terms of any mortgage or note insured or held by the Secretary; (ii) All amounts required to be deposited in the reserve fund for replacements; (iii) All obligations of the project other than the insured mortgage unless funds for payment are set aside or deferment of payment has been approved by the Secretary; and 9 -- 9 -- (2) the segregation of: (i) An amount equal to the aggregate of all special funds required to be maintained by the project; and (ii) All tenant security deposits held. (g) "Distribution" means any withdrawal or taking of cash or any assets of the project, including the segregation of cash or assets for subsequent withdrawal within the limitations of Paragraph 6(e) hereof, and excluding payment for reasonable expenses incident to the operation and maintenance of the project. (h) "Default" means a default declared by the Secretary when a violation of this Agreement is not corrected to his satisfaction within the time allowed by this Agreement or such further time as may be allowed by the Secretary after written notice; (i) "Section" refers to a Section of the National Housing Act, as amended. (j) "Displaced persons or families" shall mean a family or families, or a person, displaced from an urban renewal area, or as the result of government action, or as a result of a major disaster as determined by the President pursuant to the Disaster Relief Act of 1970. (k) "Elderly person" means any person, married or single, who is sixty-two years of age or over. 14. This instrument shall bind, and the benefits shall inure to, the respective Owners, their heirs, legal representatives, executors, administrators, successors in office or interest, and assigns, and to the Secretary and his successors so long as the contract of mortgage insurance continues in effect, and during such further time as the Secretary shall be the owner, holder, or reinsurer of the mortgage, or obligated to reinsure the mortgage. 15. Owners warrant that they have not, and will not, execute any other agreement with provisions contradictory of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other requirements in conflict therewith. 16. The invalidity of any clause, part or provision of this Agreement shall not affect the validity or the remaining portions thereof. 17. The following Owners: ARV Chandler Villas, L.P., and all present and future general and limited partners thereof, do not assume personal liability for payments due under the note and mortgage, or for the payments to the reserve for replacements, or for matters not under their control, provided that said Owners shall remain liable under this Agreement only with respect to the matters hereinafter stated; namely: 10 -- 10 -- (a) for funds or property of the project coming into their hands which, by the provisions hereof, they are not entitled to retain; and (b) for their own acts and deeds or acts and deeds of others which they have authorized in violation of the provisions hereof. (To be executed with formalities for recording a deed to real estate) [SIGNATURES AND NOTARIES APPEAR ON FOLLOWING PAGES] 11 -- 11 -- All references herein to the terms "nursing home" or nursing homes" shall mean and include the terms "assisted living facility" and "assisted living facilities." See Rider I attached hereto and made a part hereof. IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the date first hereinabove written. ARV CHANDLER VILLAS, L.P. a California limited partnership By: American Retirement Villas Properties III, L.P. a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: -------------------------------------- Douglas Armstrong Vice President SECRETARY OF HOUSING AND URBAN DEVELOPMENT ACTING BY AND THROUGH THE FEDERAL HOUSING COMMISSIONER By: ------------------------------------- Authorized Agent 12 -- 12 -- ACKNOWLEDGMENTS State of Arizona ] ]: ss County of Maricopa ] Before me, ______________________________, of the State and County aforementioned, personally appeared Douglas Armstrong, known to me (or satisfactorily proven to me) to be the person who executed the foregoing instrument and who, upon oath, acknowledged himself to be the Vice President of ARV Assisted Living, Inc., a Delaware corporation, the General Partner of American Retirement Villas Properties III, L.P., a California limited partnership, the General Partner of ARV CHANDLER VILLAS, L.P., a California limited partnership, and that he as such General Partner, executed the foregoing instrument for the purposes therein contained, by signing his name on behalf of the said ARV CHANDLER VILLAS, L.P. WITNESS my hand and seal, as of this ____ day of January ___, 2001. _________________________________ [SEAL] Notary Public My Commission Expires: ______________________________ State of Arizona ] ]: ss County of Maricopa ] On this ___ day of January, 2001, before me personally appeared ____________________________ to me personally known, who, being by me duly sworn, did say that he/she is the Authorized Agent of the SECRETARY OF HOUSING AND URBAN DEVELOPMENT, who executed the foregoing instrument, and that said instrument was signed and sealed on behalf of said SECRETARY OF HOUSING AND URBAN DEVELOPMENT the day and year first above written for the purposes therein contained. WITNESS my hand and seal, as of this ____ day of January ___, 2001. _________________________________ [SEAL] Notary Public My Commission Expires: ______________________________ -----END PRIVACY-ENHANCED MESSAGE-----