NOTE 14. MAJOR CUSTOMER - NHC

Leases

National HealthCare Corporation ("NHC"), is a publicly-held company and our largest customer. We lease 41 health care facilities to NHC. Our rental income from continuing operations in 2011 was $76,050,000 ($35,996,000 or 47% from NHC); in 2010 was $71,289,000 ($35,212,000 or 49% from NHC); and in 2009 was $53,648,000 ($34,782,000 or 65% from NHC).

The Master Agreement with NHC (originally dated October 17, 1991) is a "triple net lease" under which NHC is responsible for paying all taxes, utilities, insurance premium costs, repairs and other charges relating to the ownership and operation of the facilities. NHC is obligated at its expense to maintain adequate insurance on the facilities' assets.

On December 27, 2005, under an amendment to the original Master Agreement, NHI and NHC agreed to a lease extension to cover the 41 facilities for the second renewal term. The 41 properties include 38 skilled nursing facilities (4 of which are subleased to other parties, the lease payments of which are guaranteed to us by NHC under the Master Agreement) and 3 independent living facilities. The 15 year lease extension began January 1, 2007, and includes 3 additional 5-year renewal options, each at fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by the tenant at its expense. Under the terms of the lease, base rent for 2007 was $33,700,000 with additional percentage rent being equal to 4% of the increase in the gross revenue of each facility over a 2007 base year.

The following table summarizes the percentage rent received and recognized (in thousands):

		2011		2010		2009
Current year		1,661		1,026		541
Prior year final certification⁽¹⁾		635		485		541
	$	2,296	$	1,511	$	1,082

⁽¹⁾For purposes of the percentage rent calculation described in the master lease agreement, NHC's annual revenue by facility for a given year is certified to NHI by March 31st of the following year.

Advisory Agreements

Beginning with our inception in 1991, NHC provided advisory services to us under an Advisory, Administrative Services and Facilities Agreement (the "Advisory Agreement"). Effective November 1, 2004, we assigned the Advisory Agreement with NHC to Management Advisory Source, LLC ("MAS"), a company formed by Board Chairman and former CEO W. Andrew Adams. On December 3, 2007, we elected to become a self-managed REIT, with our own management reporting directly to the Board of Directors, and we terminated the Advisory Agreement with MAS on March 31, 2008. Under a consulting agreement with our Board of Directors, Mr. Adams served as Chief Executive Officer until March of 2011. He remains Chairman of the Board.

Our expense under the consulting agreement with Mr. Adams to serve as Chief Executive Officer for the years ended December 31, 2011, 2010 and 2009 was $144,000, $1,071,000 and $722,000, respectively.

Ownership of Common and Preferred Stock – At December 31, 2011, NHC owned 1,630,462 shares of our common stock.