EMERITUS CORP\WA\
LEASE AGREEMENT DATED 9/29/00
<DOCUMENT>
<TYPE>EX-10.66.1
<SEQUENCE>5
<FILENAME>dex10661.txt
<DESCRIPTION>LEASE AGREEMENT DATED 9/29/00
<TEXT>

<PAGE>

                                                                 Exhibit 10.66.1

                                LEASE AGREEMENT

                          HR ACQUISITION I CORPORATION
                             a Maryland corporation
                                   ("LESSOR")

                                      AND

                              EMERITUS CORPORATION
                            a Washington corporation
                                   ("LESSEE")

                              September 29, 2000

                                      for

                            ASSISTED LIVING FACILITY
                                   located at
                              Biloxi, Mississippi
<PAGE>

                               TABLE OF CONTENTS
<TABLE>
<S>                                                                                         <C>
ARTICLE 1   LEASED PROPERTY; TERM..........................................................   1
ARTICLE 2   RENT...........................................................................   2
            2.1  Minimum Rent and Adjustments to Minimum Rent..............................   2
                 --------------------------------------------
            2.2  Calculation of Increases to Minimum Rent..................................   3
                 ----------------------------------------
            2.3  Additional Charges........................................................   3
                 ------------------
            2.4  Net Lease.................................................................   4
                 ---------
            2.5  Rent Reserve Deposit......................................................   4
                 --------------------
            2.6  Abatement of Rent Limited.................................................   5
                 -------------------------
ARTICLE 3   IMPOSITIONS....................................................................   5
            3.1  Payment of Impositions....................................................   5
                 ----------------------
            3.2  Proration of Impositions..................................................   6
                 ------------------------
            3.3  Utility Charges...........................................................   6
                 ---------------
            3.4  Insurance Premiums........................................................   6
                 ------------------
ARTICLE 4   NO TERMINATION.................................................................   6
ARTICLE 5   OWNERSHIP OF LEASED PROPERTY...................................................   7
            5.1  Ownership of the Property.................................................   7
                 -------------------------
            5.2  Personal Property.........................................................   7
                 -----------------
ARTICLE 6   CONDITION AND USE OF LEASED PROPERTY...........................................   8
            6.1  Condition of the Leased Property..........................................   8
                 --------------------------------
            6.2  Use of the Leased Property................................................   8
                 -------------------------
            6.3  Management of Facility....................................................   9
                 ----------------------
            6.4  Lessor to Grant Easements.................................................   9
                 -------------------------
ARTICLE 7   LEGAL, INSURANCE AND FINANCIAL REQUIREMENTS....................................   9
            7.1  Compliance with Legal and Insurance Requirements..........................   9
                 ------------------------------------------------
            7.2  Legal Requirement Covenants...............................................  10
                 ---------------------------
            7.3  Rent and Debt Service Coverage - Facility.................................  10
                 -----------------------------------------
ARTICLE 8   REPAIRS; RESTRICTIONS AND ANNUAL INSPECTIONS...................................  10
            8.1  Maintenance and Repair....................................................  10
                 ----------------------
            8.2  Encroachments; Restrictions...............................................  12
                 ---------------------------
            8.3  Inspections...............................................................  12
                 -----------
ARTICLE 9   CAPITAL ADDITIONS..............................................................  12
             9.1  Construction of Capital Additions to the Leased Property.................  12
                  --------------------------------------------------------
             9.2  Capital Additions Financed by Lessee.....................................  13
                  ------------------------------------
             9.3  Capital Additions Financed by Lessor.....................................  13
                  ------------------------------------
             9.4  Remodeling and Non-Capital Additions.....................................  15
                  ------------------------------------
             9.5  Salvage..................................................................  16
                  -------
ARTICLE 10  LIENS..........................................................................  16
ARTICLE 11  PERMITTED CONTESTS.............................................................  16
ARTICLE 12  INSURANCE......................................................................  17
            12.1  General Insurance Requirements...........................................  17
            ------------------------------------
            12.2  Replacement Cost.........................................................  18
             ----------------------
            12.3  Additional Insurance.....................................................  18
            --------------------------
            12.4  Waiver of Subrogation....................................................  19
            ---------------------------
            12.5  Form of Insurance........................................................  19
            -----------------------
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                                                <C>
            12.6  Change in Limits...............................................................  19
                  ----------------
            12.7  Blanket Policy.................................................................  19
                  --------------
            12.8  No Separate Insurance..........................................................  20
                  ---------------------
            12.9  Insurance for Contractors......................................................  20
                  -------------------------
ARTICLE 13  FIRE AND CASUALTY....................................................................  20
            13.1  Insurance Proceeds.............................................................  20
                  ------------------
            13.2  Reconstruction in the Event of Damage or Destruction Covered by Insurance......  20
                  -------------------------------------------------------------------------
            13.3  Reconstruction in the Event of Damage or Destruction Not Covered by Insurance..  22
                  -----------------------------------------------------------------------------
            13.4  Personal Property..............................................................  23
                  -----------------
            13.5  Restoration of Capital Additions...............................................  23
                  --------------------------------
            13.6  No Abatement of the Rent.......................................................  23
                  ------------------------
            13.7  Damage Near End of Term........................................................  23
                  -----------------------
            13.8  Purchase or Substitution.......................................................  23
                  ------------------------
            13.9  Waiver.........................................................................  23
                  ------
ARTICLE 14  CONDEMNATION.........................................................................  23
            14.1  Parties' Rights and Obligations................................................  23
                  -------------------------------
            14.2  Total Taking...................................................................  24
                  ------------
            14.3  Partial Taking.................................................................  24
                  --------------
            14.4  Restoration....................................................................  24
                  -----------
            14.5  Award Distribution.............................................................  24
                  ------------------
            14.6  Temporary Taking...............................................................  25
                  ----------------
            14.7  Purchase or Substitution.......................................................  25
                  ------------------------
ARTICLE 15  DEFAULT..............................................................................  25
            15.1  Events of Default..............................................................  25
                  -----------------
            15.2  Remedies.......................................................................  26
                  --------
            15.3  Additional Expenses............................................................  28
                  -------------------
            15.4  Waiver.........................................................................  28
                  ------
            15.5  Application of Funds...........................................................  28
                  --------------------
            15.6  Notices by Lessor..............................................................  28
                  -----------------
            15.7  Lessor's Security Interest.....................................................  28
                  --------------------------
ARTICLE 16  LESSOR'S RIGHT TO CURE...............................................................  29
ARTICLE 17  PURCHASE OF THE LEASED PROPERTY......................................................  30
ARTICLE 18  HOLDING OVER.........................................................................  31
ARTICLE 19  ABANDONMENT..........................................................................  31
            19.1  Discontinuance of Operations on the Leased Property; Offer of Substitution.....  31
                  --------------------------------------------------------------------------
            19.2  Obsolescence of the Leased Property; Offer to Purchase.........................  31
                  ------------------------------------------------------
            19.3  Conveyance of Leased Property..................................................  32
                  -----------------------------
ARTICLE 20  SUBSTITUTION OF PROPERTY.............................................................  32
            20.1  Substitution of Property for the Leased Property...............................  32
                  ------------------------------------------------
            20.2  Conditions to Substitution.....................................................  34
                  --------------------------
            20.3  Conveyance to Lessee...........................................................  35
                  --------------------
            20.4  Expenses.......................................................................  35
                  --------
ARTICLE 21  RISK OF LOSS.........................................................................  35
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                                                <C>
ARTICLE 22  INDEMNIFICATION......................................................................  36
ARTICLE 23  SUBLETTING AND ASSIGNMENT............................................................  36
            23.1  Subletting and Assignment......................................................  36
                  -------------------------
            23.2  Non-Disturbance, Subordination and Attornment..................................  37
                  ---------------------------------------------
            23.3  Sublease Limitation............................................................  37
                  -------------------
            23.4  Sublease to Current Licensee...................................................  37
                  ----------------------------
ARTICLE 24  OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS......................................  38
            24.1  Estoppel Certificate...........................................................  38
                  --------------------
            24.2  Financial Statements and Certificates..........................................  38
                  -------------------------------------
ARTICLE 25  INSPECTION...........................................................................  39
ARTICLE 26  QUIET ENJOYMENT......................................................................  40
ARTICLE 27  NOTICES..............................................................................  40
ARTICLE 28  APPRAISAL............................................................................  41
ARTICLE 29  PURCHASE RIGHTS......................................................................  42
            29.1  Right of First Refusal.........................................................  42
                  ----------------------
            29.2  Option to Purchase.............................................................  43
                  ------------------
ARTICLE 30  DEFAULT BY LESSOR....................................................................  43
            30.1  Default by Lessor..............................................................  43
                  -----------------
            30.2  Lessee's Right to Cure.........................................................  44
                  ----------------------
ARTICLE 31  ARBITRATION..........................................................................  44
            31.1  Controversies..................................................................  44
                  -------------
            31.2  Appointment of Arbitrators.....................................................  44
                  --------------------------
            31.3  Third Arbitrator...............................................................  44
                  ----------------
            31.4  Arbitration Procedure..........................................................  44
                  ---------------------
            31.5  Expenses.......................................................................  45
                  --------
ARTICLE 32  FINANCING OF THE LEASED PROPERTY.....................................................  45
ARTICLE 33  SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE........................................  45
ARTICLE 34  EXTENDED TERMS.......................................................................  46
ARTICLE 35  MISCELLANEOUS........................................................................  47
            35.1  No Waiver......................................................................  47
                  ---------
            35.2  Remedies Cumulative............................................................  47
                  -------------------
            35.3  Surrender......................................................................  47
                  ---------
            35.4  No Merger of Title.............................................................  47
                  ------------------
            35.5  Transfers by Lessor............................................................  47
                  ------------------
            35.6  General........................................................................  47
                  -------
            35.7  Memorandum of Lease............................................................  48
                  -------------------
            35.8  Transfer of Licenses...........................................................  48
                  --------------------
ARTICLE 36  GLOSSARY OF TERMS....................................................................  48
</TABLE>

                                      iii
<PAGE>

                                     LEASE


     THIS LEASE ("Lease") dated the ____ day of ____, 2000 between HR
Acquisition I Corporation, a Maryland corporation, having its principal office
at 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203 ("Lessor") and
EMERITUS CORPORATION, a Washington corporation, having its principal office at
3131 Elliott Avenue, Suite 500, Seattle, Washington 98121 ("Lessee").

                                   ARTICLE 1
                             LEASED PROPERTY; TERM
                             ---------------------

     Upon and subject to the terms and conditions hereinafter set forth, Lessor
leases to Lessee and Lessee rents from Lessor all of Lessor's rights and
interest in and to the following real property (collectively, the "Leased
Property"):

     (a)  the real property more particularly described on Exhibit A attached
                                                           ---------
hereto together with all covenants, licenses, privileges and benefits thereto
belonging, and any easements, rights-of-way, rights of ingress and egress or
other interests of Lessor in, on or to any land, highway, street, road or
avenue, open or proposed, in, on, across, in front of, abutting or adjoining
such real property, including all strips and gores adjacent to or lying between
such real property and any adjacent real property (the "Land");

     (b)  the 82-unit assisted living facility (the "Facility") located on the
Land together with all buildings, structures, Fixtures (as hereinafter defined)
and other improvements of every kind (including all alleyways and connecting
tunnels, crosswalks, sidewalks, landscaping, parking lots and structures and
roadways appurtenant to such buildings and structures presently or hereafter
situated upon the Land, drainage and all above-ground and underground utility
structures) (collectively, together with the Facility, and any Capital Additions
financed by Lessor, the "Leased Improvements" now or hereafter located therein
or thereon);

     (c)  all permanently affixed equipment, machinery, fixtures and other items
of real and/or personal property, including all components thereof, now and
hereafter located in, on or used in connection with, and permanently affixed to
or incorporated into the Leased Improvements, including all furnaces, boilers,
heaters, electrical equipment, heating, plumbing, lighting, ventilating,
refrigerating, incineration, air and water pollution control, waste disposal,
air-cooling and air conditioning systems and apparatus, sprinkler systems and
fire and theft protection equipment, carpet, moveable or immovable walls or
partitions and built-in oxygen and vacuum systems, all of which are hereby
deemed by the parties hereto to constitute real estate, together with all
replacements, modifications, alterations and additions thereto, but specifically
excluding all items included within the category of Personal Property
(collectively the "Fixtures");

     (d)  the Personal Property;

                                       1
<PAGE>

     (e)  to the extent permitted by law, all permits, approvals and other
intangible property or any interest therein now or hereafter owned or held by
Lessor in connection with the Leased Property or any business or businesses now
or hereafter conducted by Lessee or any Tenant or with the use thereof,
including all leases, contract rights, agreements, trade names, water rights and
reservations, zoning rights, business licenses and warranties (including those
relating to construction or fabrication) related to the Leased Property or any
part thereof, but specifically excluding the general corporate trademarks,
service marks, logos, insignia or books and records of Lessee; and

     (f)  all site plans, surveys, soil and substrata studies, architectural
drawings, plans and specifications, engineering plans and studies, floor plans,
landscape plans, and other plans and studies that relate to the Land or the
Leased Improvements and are in Lessor's possession or control.

     SUBJECT, HOWEVER, to the matters set forth on Exhibit B attached hereto
                                                   ---------
(the "Permitted Exceptions"), to have and to hold for a fixed term of 10 years
(the "Initial Term") commencing October 1, 2000 (the "Commencement Date"), and
ending at midnight on the last day of the 120th month after the Commencement
Date, as may be extended pursuant to the terms of Article 34.

                                   ARTICLE 2
                                      RENT
                                      ----

     2.1  Minimum Rent and Adjustments to Minimum Rent.  Lessee shall pay to
          --------------------------------------------
Lessor, without notice, demand, set off (except as set forth in Section 30.2 or
Article 32 hereof) or counterclaim, in advance in lawful money of the United
States of America, at Lessor's address set forth herein or at such other place
or to such other person, firms or corporations as Lessor from time to time may
designate in writing, Minimum Rent, as adjusted annually pursuant to Section
2.1(b) during the Term, as follows:

          (a)  Minimum Rent. Lessee will pay to Lessor as rent (as adjusted from
               ------------
time to time in accordance with Sections 2.1 (b) and 2.1(e), the "Minimum Rent")
for the Leased Property the annual sum of $681,995.60.  The Minimum Rent shall
be payable in advance in 12 equal, consecutive monthly installments on the first
day of each calendar month during the Term; provided, however no such payment
shall be due on October 1, 2000 but instead the first such payment shall not be
due until November 1, 2000. The parties shall execute an acknowledgement of the
Commencement Date as soon as reasonably practicable after the Commencement Date.
The Minimum Rent shall be prorated for any partial month, shall include Minimum
Rent from the Effective Date to the Commencement Date and is subject to
adjustment as provided in Sections 2.1(b) and 9.3(b)(iv) below.

          (b)  Increases to Minimum Rent. On each anniversary of the
               -------------------------
Commencement Date (each such annual date individually referred to as the
"Adjustment Date") throughout the Term, the then-current Minimum Rent shall be
increased annually effective as of such Adjustment Date by the increase in the
Consumer Price Index from the Commencement Date to

                                       2
<PAGE>

the first Adjustment Date and, thereafter, from the prior Adjustment Date to the
then-current Adjustment Date, provided that in no event will the annual change
in the Minimum Rent be more than 3.5% of the Minimum Rent for the prior year.

          (c)  Capital Expenditures. Lessee will make expenditures for repairs
               --------------------
and replacements for the Facility as approved by Lessor, the costs of which
according to generally accepted accounting principles must be depreciated over
periods greater than one year in the amounts and for the periods set forth on
Exhibit C attached hereto. Within 45 days after each anniversary of the
---------
Commencement Date, Lessee provide evidence of such expenditures satisfactory to
Lessor. In the event such expenditures are not made, then within such 45-day
period following each anniversary of the Commencement Date, Lessee will pay to
Lessor for deposit in a money market account in a federally insured bank in
Nashville, Tennessee acceptable to Lessor and Lessee the difference between the
expenditures required and the amount actually spent for such purposes, which
funds (the "Capital Replacement Account") shall be made available to Lessee to
make such repairs and replacements. The Capital Replacement Account shall be in
the name of Lessor, and interest earned on such account shall be retained in the
Capital Replacement Account. Lessee shall make detailed requests for such funds
in writing to Lessor in the same form as a Request pursuant Section 9.3 hereof.
Within 30 days of such Request, Lessor shall reasonably approve the amount of
requested funds and make mutually agreeable arrangements for the disbursement of
the funds, or provide Lessee with written notice in reasonable detail specifying
Lessor's objections to such Request. So long as this Lease is still in effect at
the end of the Term, up to $100,000.00 of the Capital Replacement Account will
be paid to Lessee and the balance of such account shall be the sole property of
Lessor. Until released or until the end of the Term, such escrow funds will
constitute security for Lessee's obligations under this Lease in the event of a
termination of Lessee's interest hereunder, and Lessee hereby grants to Lessor
an assignment of, a security interest in and a right of setoff against all such
escrow funds.

          (d)  Payment of Minimum Rent. All payments of Minimum Rent shall be
               -----------------------
made in lawful money of the United States by wire transfer of same day funds to
such account or location specified by Lessor from time to time in writing. In
the event that Lessor fails to timely provide such notice, Lessee shall make the
payment to Lessor at the address provided for notices below or such other
address as Lessor may from time to time designate in writing to Lessee.

     2.2  Calculation of Increases to Minimum Rent. On or about each Adjustment
          ----------------------------------------
Date, Lessor will calculate the increase in the Minimum Rent pursuant to the
provisions of Section 2.1(b) and will provide Lessee with written notice of
same.  Lessee shall continue to pay the Current Minimum Rent until it receives
notice of the increase in the Minimum Rent.

     2.3  Additional Charges. Subject to Article 11 relating to permitted
          ------------------
contests, Lessee will also pay and discharge as and when due (a) all other
amounts, liabilities and obligations, which Lessee assumes or agrees to pay
under this Lease including, to the extent applicable, any condominium
association dues, assessments or other charges, and (b) in the event of any
failure on the part of Lessee to pay any of those items referred to in clause
(a) above, Lessee will also promptly pay and discharge every fine, penalty,
interest and cost which may be added for non-

                                       3
<PAGE>

payment or late payment of such items (the items referred to in clauses (a) and
(b) above being referred to herein collectively as the "Additional Charges"),
and Lessor shall have all legal, equitable and contractual rights, powers and
remedies provided in this Lease, by statute or otherwise, in the case of non-
payment of the Additional Charges, as well as the Minimum Rent. If any
installment of Minimum Rent or Additional Charges (but only as to those
Additional Charges which are payable directly to Lessor) shall not be paid
within ten days after the date when due, Lessee will pay Lessor on demand, as
Additional Charges, interest (to the extent permitted by law) computed at the
Overdue Rate on the amount of such installment, from the date when due to the
date of payment in full thereof. In the event Lessor provides Lessee with
written notice of failure to timely pay any installment of Minimum Rent or any
Additional Charges pursuant to Section 15.1(b) more than three times within any
twelve month period, Lessee shall pay an administrative fee to Lessor in the
amount of $500.00 for each additional written notice Lessor gives pursuant to
Section 15.1(b) during the next twelve months. To the extent that Lessee pays
any Additional Charges to Lessor or the Facility Mortgagee pursuant to any
requirement of this Lease, Lessee shall be relieved of its obligation to pay
such Additional Charges to the entity to which such Additional Charges would
otherwise be due. Additional Charges shall be deemed Rent hereunder.

     2.4  Net Lease. The Rent shall be paid absolutely net to Lessor, so that
          ---------
this Lease shall yield to Lessor the full amount of the installments of Minimum
Rent and the payments of Additional Charges (but only those which are payable
directly to Lessor) throughout the Term but subject to any provisions of this
Lease which expressly provide for payments by a party other than Lessor or the
adjustment of the Rent or other charges.

     2.5  Rent Reserve Deposit. On or prior to the Commencement Date, Lessee
          --------------------
will deposit, as security for the performance of Lessee's covenants and
obligations under this Lease, the sum of three times the monthly amount of
Minimum Rent computed in accordance with Section 2.1(a) above (the "Rent Reserve
Deposit") in the form of either (i) cash or (ii) an unconditional, irrevocable
letter of credit drawn upon a national bank acceptable to Lessor.  Lessee shall
provide Lessor each year during the Term evidence satisfactory to Lessor in its
sole opinion not later than thirty (30) days prior to the expiration of the
letter of credit that such letter of credit has been unconditionally renewed for
twelve (12) months.  Should Lessee fail or refuse to provide Lessor with such
evidence of renewal, Lessor shall have the right to exercise a call upon the
full amount of the letter of credit and convert the Rent Reserve Deposit to a
cash deposit to be held by Lessor.  Lessor may, from time to time, without
prejudice to any other remedy apply or appropriate funds from the Rent Reserve
Deposit to make good any arrearage of Rent, to satisfy any other covenant or
obligation of Lessee hereunder, to compensate Lessor for any other loss or
damage which Lessor may suffer by reason of any default by Lessee; provided that
the Rent Reserve Deposit shall not be considered a limit on the measure of
Lessor's damages in case of an Event of Default by Lessee. At such time as
Lessee has discharged its obligations under all of the provisions of this Lease
to be performed by Lessee, including surrender of the Leased Property in
accordance with the provisions hereof, the Rent Reserve Deposit, shall be
returned by Lessor to Lessee. Until released or until the end of the Term, such
cash or letter of credit will constitute security for Lessee's obligations under
this Lease, and Lessee hereby grants

                                       4
<PAGE>

to Lessor an assignment of, a security interest in and a right of setoff against
such cash or letter of credit.

     2.6  Abatement of Rent Limited.  There shall be no abatement of Rent on
          -------------------------
account of any Casualty, Taking or other event, except that (a) in the event of
a partial Taking or a temporary Taking as described in Section 14.3, the Base
Rent shall be abated as follows:  (i) in the case of such a partial Taking, the
Project Amount shall be reduced for the purposes of calculating Base Rent
pursuant to Section 3.1 by subtracting therefrom, as applicable, the net amount
of the Award received by Lessor, and (ii) in the case of such a temporary
Taking, by reducing the Base Rent for the period of such a temporary Taking, by
the net amount of the Award received by Lessor and (b) in the event of a
Casualty, the Base Rent shall be abated as follows:  The Project Amount shall be
reduced for the purposes of calculating Base Rent pursuant to Section 2.1 by
subtracting therefrom, as applicable, the net amount of the insurance proceeds.

          For the purposes of this Section 2.6, the "net amount of the Award
received by Lessor" shall mean the Award paid to Lessor or Lessor's mortgagee on
account of such Taking, minus all costs and expenses incurred by Lessor in
connection therewith, and minus any amounts paid to or for the account of Lessee
to reimburse for the costs and expenses of reconstructing the Facility following
such Taking in order to create a viable and functional Facility under all of the
circumstances ("Net Award Amount") and the "net amount of the insurance
proceeds" shall mean the insurance proceeds paid to Lessor or Lessor's mortgagee
on account of such Casualty, minus all costs and expenses incurred by Lessor in
connection therewith and minus any amounts paid to or for the account of Lessee
to reimburse for the costs and expenses of reconstructing the Facility following
such Casualty in order to create a viable and functional Facility under all of
the circumstances ("Net Proceeds Amount").

                                   ARTICLE 3
                                  IMPOSITIONS
                                  -----------

     3.1  Payment of Impositions. Subject to Article 11 relating to permitted
          ----------------------
contests, Lessee will pay, or cause to be paid, all Impositions which are due
and owing during the Term and which relate to the period covered by the Term
before any fine, penalty, interest or cost may be added for non-payment, such
payments to be made directly to the taxing authorities where feasible, and
Lessee will promptly, upon request, furnish to Lessor copies of official
receipts or other satisfactory proof evidencing such payments. Lessee's
obligation to pay such Impositions and the amount thereof shall be deemed
absolutely fixed upon the date such Impositions become a lien upon the Leased
Property or any part thereof. If any such Imposition may lawfully be paid in
installments (whether or not interest shall accrue on the unpaid balance of such
Imposition), Lessee may exercise the option to pay the same (and any accrued
interest on the unpaid balance of such Imposition) in installments and, in such
event, shall pay such installments during the Term hereof as the same become due
and before any fine, penalty, premium, further interest or cost may be added
thereto. Lessor, at its expense, shall, to the extent permitted by applicable
law, prepare and file all tax returns and reports as may be required by
governmental authorities in respect of Lessor's net income, gross receipts,
franchise taxes and taxes on its capital stock.

                                       5
<PAGE>

Lessee, at its expense, shall, to the extent permitted by applicable laws and
regulations, prepare and file all other tax returns and reports in respect of
any Imposition as may be required by governmental authorities. If any refund
shall be due from any taxing authority in respect of any Imposition paid by
Lessee, the same shall be paid over to or retained by Lessee if no Event of
Default shall have occurred hereunder and be continuing. Any such funds retained
by Lessor due to an Event of Default shall be applied as provided in Article 15.
Lessor and Lessee shall, upon request of the other, provide such data as is
maintained by the party to whom the request is made with respect to the Leased
Property as may be necessary to prepare any required returns and reports. In the
event governmental authorities classify any property covered by this Lease as
personal property, Lessee shall file all personal property tax returns in such
jurisdictions where filing is required. Lessor and Lessee will provide the other
party, upon request, with cost and depreciation records necessary for filing
returns for any property so classified as personal property. Where Lessor is
legally required to file personal property tax returns, and Lessee is obligated
for the same hereunder, Lessee will be provided with copies of assessment
notices in sufficient time for Lessee to file a protest. Lessee may, upon giving
30 days' prior written notice to Lessor, at Lessee's option and at Lessee's sole
cost and expense, protest, appeal, or institute such other proceedings as Lessee
may deem appropriate to effect a reduction of real estate or personal property
assessments and Lessor, if requested by Lessee and at Lessee's expense as
aforesaid, shall fully cooperate with Lessee in such protest, appeal, or other
action. Billings for reimbursement by Lessee to Lessor of personal property
taxes shall be accompanied by copies of an invoice therefor and payments thereof
which identify the personal property with respect to which such payments are
made. Lessor will cooperate with Lessee in order that Lessee may fulfill its
obligations hereunder, including the execution of any instruments or documents
reasonably requested by Lessee.

     3.2  Proration of Impositions. Impositions imposed in respect of the tax-
          ------------------------
fiscal period during which the Term commences and terminates shall be prorated
between Lessor and Lessee, whether or not such Imposition is imposed before or
after such termination, and Lessee's and Lessor's obligation to pay their
respective prorated shares thereof with respect to any tax period which relates
to the period after termination of the Lease shall survive such termination.

     3.3  Utility Charges. Lessee will, or will cause its Tenants, if any, to,
          ---------------
contract for, in its own name, and will pay or cause to be paid all charges for,
electricity, power, gas, oil, water and other utilities used in the Leased
Property during the Term.

     3.4  Insurance Premiums.  Lessee will contract for, in its own name, and
          ------------------
will pay or cause to be paid all premiums for, the insurance coverage required
to be maintained by Lessee pursuant to Article 12 during the Term.

                                   ARTICLE 4
                                 NO TERMINATION
                                 --------------

     Except as provided in this Lease, Lessee shall remain bound by this Lease
in accordance with its terms and shall neither take any action without the
consent of Lessor to modify, surrender or terminate the same, nor seek nor be
entitled to any abatement, deduction, deferment

                                       6
<PAGE>

or reduction of Rent, or set-off against the Rent, nor shall the respective
obligations of Lessor and Lessee be otherwise affected by reason of (a) any
damage to, or destruction of, the Leased Property or any portion thereof from
whatever cause or any Taking of the Leased Property or any portion thereof,
except as otherwise provided in Articles 13 or 14, (b) the lawful prohibition
of, or restriction upon, Lessee's use of the Leased Property, or any portion
thereof, or the interference with such use by any person, corporation,
partnership or other entity, or by reason of eviction by paramount title, (c)
any claim which Lessee has or might have against Lessor or by reason of any
default or breach of any warranty by Lessor under this Lease or any other
agreement between Lessor and Lessee or to which Lessor and Lessee are parties,
(d) any bankruptcy, insolvency, reorganization, composition, readjustment,
liquidation, dissolution, winding up or other proceedings affecting Lessor or
any assignee or transferee of Lessor, or (e) for any other cause whatsoever
whether similar or dissimilar to any of the foregoing. Lessee hereby
specifically waives all rights arising from any occurrence whatsoever which may
now or hereafter be conferred upon it by law to (i) modify, surrender or
terminate this Lease or quit or surrender the Leased Property or any portion
thereof, or (ii) entitle Lessee to any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Lessee hereunder, except as
otherwise specifically provided in this Lease. The obligations of Lessor and
Lessee hereunder shall be separate and independent covenants and agreements and
the Rent and all other sums payable by Lessee hereunder shall continue to be
payable in all events, unless the obligations to pay the same shall be
terminated pursuant to the express provisions of this Lease. Notwithstanding the
foregoing, Lessee shall have the right by separate and independent action to
pursue any claim or seek any damages it may have against Lessor as a result of a
breach by Lessor of the terms of this Lease.

                                   ARTICLE 5
                          OWNERSHIP OF LEASED PROPERTY
                          ----------------------------

     5.1  Ownership of the Property. Lessee acknowledges that the Leased
          -------------------------
Property is the property of Lessor and that Lessee has only the right to the
possession and use of the Leased Property upon the terms and conditions of this
Lease.

     5.2  Personal Property. Lessee may (and shall as provided hereinbelow), at
          -----------------
its expense, install, affix or assemble or place on any parcels of the Land or
in any of the Leased Improvements any items of the Personal Property, and may
remove, replace or substitute for the same from time to time in the Ordinary
Course of Business or upon expiration of the Term.  Lessee shall provide and
maintain during the entire Term all such Personal Property as shall be necessary
in order to operate the Facility in compliance with all licensure and
certification requirements, in compliance with all applicable Legal Requirements
and Insurance Requirements and otherwise in accordance with customary practice
in the industry for the Primary Intended Use.



                                   ARTICLE 6

                                       7
<PAGE>

                      CONDITION AND USE OF LEASED PROPERTY
                      ------------------------------------

     6.1  Condition of the Leased Property. Lessor hereby assigns for Lessee's
          --------------------------------
benefit any covenants, representations and warranties made in favor of Lessor or
any predecessor to Lessor with respect to the design and construction of the
Improvements pursuant to the Loan Agreement. Lessee will examine and otherwise
acquire knowledge of the condition of the Leased Property prior to the occupancy
of the Leased. Property. Lessee is leasing the Leased Property "as is" in its
condition at the time of occupancy. Lessee waives any claim or action against
Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, SUITABILITY,
DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO
QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING
AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT
THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT IN
ALL RESPECTS.  Notwithstanding the foregoing, Lessee shall have no liability to
Lessor for any liens which may be imposed against the Leased Property as a
result of the acts or omissions of any party other than Lessee during the period
prior to the Commencement Date but the same shall be and remain the
responsibility of Lessor.

     6.2  Use of the Leased Property.
          --------------------------

          (a)  After the Commencement Date and during the entire Term, Lessee
shall me or cause to be used the Facility and the Leased Property as an 82 unit
assisted living facility and for such other uses as may be necessary in
connection with or incidental to such use (the "Primary Intended Use").  Lessee
shall not use the Leased Property or any portion thereof for any other use
without the prior written consent of Lessor, which consent shall not be
unreasonably withheld or delayed.

          (b)  Lessee covenants that it will obtain and maintain all material
approvals needed to use and operate the Leased Property and the Facility for the
Primary Intended Use in compliance with all applicable Legal Requirements.

          (c)  Lessee covenants and agrees that during the Term it will use its
reasonable best efforts to operate continuously the Leased Property in
accordance with its Primary Intended Use and to maintain its certifications for
reimbursement, if any, and licensure and its accreditation, if compliance with
accreditation standards is required to maintain the operations of the Facility
and if a failure to comply would adversely affect operations of the Facility.

          (d)  Lessee shall not commit or suffer to be committed any waste on
the Leased Property, or in the Facility or cause or permit any nuisance thereon.

                                       8
<PAGE>

          (e)  Lessee shall neither suffer nor permit the Leased Property or any
portion thereof, including any Capital Addition whether or not financed by
Lessor, to be used in such a manner as (i) is reasonably likely to impair
Lessor's estate therein or any portion thereof, or (ii) is reasonably likely to
result in a claim or claims of adverse usage or adverse possession by the
public, as such, or of implied dedication of the Leased Property or any portion
thereof.

          (f)  Lessee will not utilize any Hazardous Materials on the Leased
Property except in accordance with applicable Legal Requirements and will not
permit any contamination which may require remediation under any applicable
Hazardous Materials Law. Lessee agrees not to dispose of any Hazardous Materials
or substances within the sewerage system of the Leased Property, and that it
will handle all "red bag" wastes in accordance with applicable Hazardous
Materials Laws.

     6.3  Management of Facility. Unless otherwise agreed to in writing by
          ----------------------
Lessor (i) Lessee shall cause the Facility to be managed and leased to Residents
and Tenants at all times by Lessee or an Affiliate of Lessee, (ii) Lessee shall
not enter into any agreement (oral or written) with respect to such management
and leasing activities unless the terms thereof and the proposed manager or
leasing agent have been approved in writing by Lessor, (iii) all such management
or leasing agreements must be in writing, and (iv) all management or leasing
agreements with an Affiliate of Lessee must contain provisions to the effect
that (A) the obligation of Lessee to pay management fees is subordinate to its
obligation to pay the Rent, and (B) the manager shall not have the right to
collect any management fees during the continuance of an Event of Default.

     6.4  Lessor to Grant Easements.  Lessor will, from time to time, at the
          -------------------------
request of Lessee and at Lessee's cost and expense, but subject to the approval
of Lessor (a) grant easements and other rights in the nature of easements, (b)
release existing easements or other rights in the nature of easements which are
for the benefit of the Leased Property, (c) dedicate or transfer unimproved
portions of the Leased Property for road, highway or other public purposes, (d)
execute petitions to have the Leased Property annexed to any municipal
corporation or utility district, (e) execute amendments to any covenants and
restrictions affecting the Leased Property, and (f) execute and deliver to any
person such instruments as may be necessary or appropriate to confirm or effect
such grants, releases, dedications and transfers (to the extent of its interest
in the Leased Property), but only upon delivery to Lessor of an Officer's
Certificate stating (and such other information as Lessor may reasonably require
confirming) that such grant, release, dedication, transfer, petition or
amendment is required or beneficial for and not detrimental to the proper
conduct of the business of Lessee on the Leased Property and does not reduce the
value thereof.

                                   ARTICLE 7
                  LEGAL, INSURANCE AND FINANCIAL REQUIREMENTS
                  -------------------------------------------

     7.1  Compliance with Legal and Insurance Requirements. Subject to Article
          ------------------------------------------------
11 relating to permitted contests, Lessee, at its expense, will promptly (a)
comply with all material Legal Requirements and Insurance Requirements in
respect of the use, operation, maintenance, repair and restoration of the Leased
Property, whether or not compliance therewith shall require

                                       9
<PAGE>

structural change in any of the Leased Improvements or interfere with the use
and enjoyment of the Leased Property, and (b) directly or indirectly with the
cooperation of Lessor, but at Lessee's sole cost and expense, procure, maintain
and comply with all material licenses, certificates of need, if any, and other
authorizations required for (i) any use of the Leased Property then being made,
and for (ii) the proper erection, installation, operation and maintenance of the
Leased Improvements or any part thereof, including any Capital Additions.

     7.2  Legal Requirement Covenants. Lessee covenants and agrees that the
          ---------------------------
Leased Property shall not be used for any unlawful purpose. Lessee shall,
directly or indirectly with the cooperation of Lessor, but at Lessee's sole cost
and expense, acquire and maintain all material licenses, certificates, permits
and other authorizations and approvals needed to operate the Leased Property in
its customary manner for the Primary Intended Use and any other use conducted on
the Leased Property as may be permitted from time to time hereunder. Lessee
further covenants and agrees that Lessee's use of the Leased Property and
Lessee's maintenance, alteration, and operation of the same, and all parts
thereof, shall at all times conform to all applicable Legal Requirements.

     7.3  Rent and Debt Service Coverage - Facility. As used herein, the term
          -----------------------------------------
"Coverage Ratio" means EBITDAR (as defined below) for the Facility only for the
applicable period minus assumed management fees of five percent of the total
revenues (regardless of the amount of the management fees actually paid or
incurred) earned from the Facility divided by the principal (excluding any
prepayments or principal at maturity), interest and lease (capital and
operating) payment obligations of Lessee (including the Rent) for the same
period. As used herein, the term "EBITDAR" means, for any period, the sum of (i)
the income (or deficit) from all operations before provision of income taxes for
such period and without deduction for actual management fees paid or incurred,
plus (ii) the interest charges paid or accrued during such period (including
imputed interest on lease (capital or operating) obligations (including this
Lease), but excluding amortization of debt discount and expense), plus (iii) all
amounts in respect of depreciation and amortization for such period, plus (iv)
the rent due under all leases (capital or operating, including this Lease) for
such period. Lessee agrees and covenants with Lessor that commencing with the
first day of the sixth month after the Commencement Date and on the first day of
every six months thereafter so long thereafter as the Lease is in effect, Lessee
will achieve and will provide Lessor with evidence of the achievement of a
Coverage Ratio for the immediately preceding three month period equal to or
greater than the following:

     After the first six months:   1:1.05
     After one year:               1:1.10

                                   ARTICLE 8
                  REPAIRS; RESTRICTIONS AND ANNUAL INSPECTIONS
                  --------------------------------------------

     8.1  Maintenance and Repair.
          ----------------------

          (a)  Lessee, at its expense, will keep the Leased Property and all
private roadways, sidewalks and curbs appurtenant thereto in reasonably good
order and repair (whether

                                       10
<PAGE>

or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements, the age of the Leased Property or any portion thereof), and
except as otherwise provided in Articles 13 and 14, with reasonable promptness
will make all necessary and appropriate repairs thereto of every kind and nature
(including remodeling to the extent necessary to maintain the Leased Property in
a condition substantially the same as exists on the date hereof), whether
interior or exterior, structural or non-structural, ordinary or extraordinary,
foreseen or unforeseen or arising by reason of a condition existing prior to or
after the commencement of the Term of this Lease (concealed or otherwise). All
repairs and remodeling shall, to the extent reasonably achievable, be at least
equivalent in quality to the original work and shall be accomplished by Lessee
or a party selected by Lessee. Lessee will not take or omit to take any action
the taking or omission of which might materially impair the value or usefulness
of the Leased Property or any part thereof for the Primary Intended Use. If
Lessee fails to perform any of its obligations hereunder, or if Lessor
reasonably determines that action is necessary and is not being taken, Lessor
may, on giving 30 days' written notice to Lessee (other than in a case
reasonably deemed by Lessor to be an emergency, in which case no such notice
shall be required), without demand on Lessee, perform any such obligations in
such manner and to such extent and take such other action as Lessor may deem
appropriate in the event that Lessee has not timely commenced to perform such
obligation or take such action, and all costs, expenses and charges of Lessor
relating to any such action shall constitute Additional Charges and shall be
payable by Lessee to Lessor in accordance with Section 2.3.

          (b)  Except for the use of any insurance proceeds (to the extent
required by Sections 13.1 and 13.2) and any Award (to the extent required by
Section 14.3) Lessor shall not under any circumstances be required to build or
rebuild any improvements on the Leased Property, or to make any repairs,
replacements, alterations, restorations, or renewals of any nature or
description to the Leased Property, whether ordinary or extraordinary,
structural or nonstructural, foreseen or unforeseen, or to make any expenditure
whatsoever with respect thereto in connection with this Lease, or to maintain
the Leased Property in any way.

          (c)  Nothing contained in this Lease and no action or inaction by
Lessor shall be construed as (i) constituting the consent or request of Lessor,
expressed or implied, to any contractor, subcontractor, laborer, materialman or
vendor to or for the performance of any particular labor or services or the
furnishing of any particular materials or other property for the construction,
alteration, addition, repair or demolition of or to the Leased Property or any
part thereof.

          (d)  Unless Lessor shall convey any of the Leased Property to Lessee
pursuant to the provisions of this Lease, Lessee will, upon the expiration or
prior termination of this Lease, vacate and surrender the Leased Property to
Lessor in the condition in which the Leased Property was originally received
from Lessor, except for ordinary wear and tear (subject to the obligation of
Lessee to maintain the Property in good order and repair during the entire
Term), damage caused by the gross negligence or willful acts of Lessor, and
damage or destruction described in Article 13 or resulting from a Taking
described in Article 14 which Lessee is not required by the terms of this Lease
to repair or restore, and except as repaired, rebuilt, restored, altered or
added to as permitted or required by the provisions of this Lease.

                                       11
<PAGE>

     8.2  Encroachments; Restrictions. If any of the Improvements shall, at any
          ---------------------------
time, encroach upon any property, street or right-of-way adjacent to the Leased
Property, or shall violate the agreements or conditions contained in any
applicable Legal Requirement, lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or shall impair the rights
of others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor, Lessee shall at its expense,
subject to its right to contest the existence of any such encroachment,
violation or impairment, (a) obtain valid and effective waivers or settlements
of all claims, liabilities and damages resulting from each such encroachment,
violation or impairment, whether the same shall affect Lessor or Lessee, or (b)
make such changes in the Improvements, and take such other actions, as Lessor in
the good faith exercise of its judgment deems reasonably practicable, to remove
such encroachment, or to end such violation or impairment, including, if
necessary, the alteration of any of the Leased Improvements, and in any event
take all such actions as may be necessary in order to be able to continue the
operation of the Facility for the Primary Intended Use substantially in the
manner and to the extent the Facility was operated prior to the assertion of
such violation or encroachment. Any such alteration shall be made in conformity
with the applicable requirements of Article 9. Lessee's obligations under this
Section 8.2 shall be in addition to and shall in no way discharge or diminish
any obligation of any insurer under any policy of title or other insurance and
Lessee shall be entitled to a credit for any sums recovered by Lessor under any
such policy of title or other insurance.

     8.3  Inspections.  From time to time during the Term but no more often than
          -----------
one time per year, Lessor and its agents shall have the right to inspect the
Leased Property and all systems contained therein at any reasonable time to
determine Lessee's compliance with its obligations under this Lease, including
those obligations set forth in Article 7 and this Article 8. Lessee shall pay
Lessor the sum of $2,000.00 per year to cover the time and expense associated
with such inspections as and when performed.

                                   ARTICLE 9
                               CAPITAL ADDITIONS
                               -----------------

     9.1  Construction of Capital Additions to the Leased Property.
          --------------------------------------------------------

          (a)  If no Event of Default shall have occurred and be continuing,
Lessee shall have the right, upon and subject to the terms and conditions set
forth below, to construct or install Capital Additions on the Leased Property
with the prior written consent of Lessor which consent shall not be unreasonably
withheld; provided that Lessee shall not be permitted to create any Encumbrance
on the Leased Property in connection with such Capital Addition without first
complying with Section 9.1(b) hereof. Prior to commencing construction of any
Capital Addition, Lessee shall submit to Lessor in writing a proposal setting
forth in reasonable detail any proposed Capital Addition and shall provide to
Lessor such plans and specifications, permits, licenses, contracts and other
information concerning the proposed Capital Addition as Lessor may reasonably
request. Without limiting the generality of the foregoing, such proposal

                                       12
<PAGE>

shall indicate the approximate projected cost of constructing such Capital
Addition and the use or uses to which it will be put.

          (b)  Prior to commencing construction of any Capital Addition, Lessee
shall first request Lessor to provide funds to pay for such Capital Addition in
accordance with the provisions of Section 9.3. If Lessor declines or is unable
to provide such financing on terms acceptable to Lessee and Lessee rejects
Lessor's offer of financing, Lessee may arrange or provide other financing,
subject to the provisions of Section 9.2. Lessor will reasonably cooperate with
Lessee regarding the grant of any consents or easements or the like necessary or
appropriate in connection with any Capital Addition; provided that no Capital
Addition shall be made which would tie in or connect any Leased Improvements on
the Leased Property with any other improvements on property adjacent to the
Leased Property (and not part of the Land covered by this Lease) including tie-
ins of buildings or other structures or utilities, unless Lessee shall have
obtained the prior written approval of Lessor, which approval shall not be
unreasonably withheld. All proposed Capital Additions shall be architecturally
integrated into and consistent with the Leased Property.

     9.2  Capital Additions Financed by Lessee. If Lessee finances or arranges
          ------------------------------------
to finance any Capital Addition with a party other than Lessor or if Lessee pays
cash for any Capital Addition, this Lease shall be and hereby is amended to
provide as follows:

          (a) There shall be no adjustment in the Minimum Rent by reason of any
such Capital Addition.

          (b) Upon the expiration or earlier termination of this Lease, Lessor
shall compensate Lessee for all Capital Additions paid for or financed by Lessee
in any of the following ways:

               (i) By purchasing all Capital Additions paid for by Lessee from
          Lessee for cash in the amount of the Fair Market Added Value at the
          time of purchase by Lessor of all such Capital Additions paid for or
          financed by Lessee; or

               (ii) Such other arrangement regarding such compensation as shall
          be mutually acceptable to Lessor and Lessee.

Any amount owed by Lessee to Lessor under this Lease at such termination or
expiration may be deducted from any compensation for Capital Additions payable
by Lessor to Lessee under this Section 9.2.

     9.3  Capital Additions Financed by Lessor.
          ------------------------------------

          (a)  Lessee shall request that Lessor provide or arrange financing for
a Capital Addition by providing to Lessor such information about the Capital
Addition as Lessor may reasonably request (a "Request"), including all
information referred to in Section 9.1 above.

                                       13
<PAGE>

Lessor may, but shall be under no obligation to provide or obtain the funds
necessary to meet the Request. Within 30 days of receipt of a Request, Lessor
shall notify Lessee as to whether it will finance the proposed Capital Addition
and, if so, the terms and conditions upon which it would do so, including the
terms of any amendment to this Lease. In no event (i) shall the portion of the
projected Capital Addition Cost comprised of land (if any), materials, labor
charges, fixtures and out-of-pocket expenses (including a reasonable
construction management fee) be less than 100% of the total amount of such cost,
or (ii) shall Lessee or any of its Affiliates be entitled to any commission or
development fee, directly or indirectly, as a portion of the Capital Addition
Cost. Any Capital Addition not financed by Lessor, which Lessee intends to
finance or arrange financing for pursuant to Section 9.2, must still be approved
in writing by Lessor pursuant to the terms of Section 9.1 hereof, which consent
will not be unreasonably withheld. Lessee may withdraw its Request by notice to
Lessor at any time before or after receipt of Lessor's terms and conditions.

          (b)  If Lessor agrees to finance the proposed Capital Addition,
Lessor's obligation to advance any funds shall be subject to receipt of all of
the following, in form and substance reasonably satisfactory to Lessor:

               (i)    such loan documentation as may be required by Lessor;

               (ii)   any information, certificates, licenses, permits or
          documents requested by Lessor, or by any lender with whom Lessor has
          agreed or may agree to provide financing, which are necessary or
          appropriate to confirm that Lessee will be able to use the Capital
          Addition upon completion thereof in accordance with the Primary
          Intended Use, including all required federal, state or local
          government licenses and approvals;

               (iii)  an Officer's Certificate and, if requested, a certificate
          from Lessee's architect, setting forth in detail reasonably
          satisfactory to Lessor the projected (or actual, if available) cost of
          the proposed Capital Addition;

               (iv)   an amendment to this Lease, duly executed and
          acknowledged, in form and substance satisfactory to Lessor and Lessee
          (the "Lease Amendment"), containing such provisions as may be
          necessary or appropriate due to the Capital Addition, including any
          appropriate changes in the legal description of the Land and the Rent,
          all such changes to be mutually agreed upon by Lessor and Lessee;

               (v)    if appropriate, a deed conveying title to Lessor to any
          land and improvements or other rights acquired for the purpose of
          constructing the Capital Addition, free and clear of any liens or
          encumbrances except those approved in writing by Lessor and, both
          prior to and following completion of the Capital Addition, an as-built
          survey thereof reasonably satisfactory to Lessor;

               (vi)   if appropriate, endorsements to any outstanding policy of
          title insurance covering the Leased Property or a supplemental policy
          of title insurance

                                       14
<PAGE>

          covering the Leased Property reasonably satisfactory in form and
          substance to Lessor (A) updating the same without any additional
          exceptions, except as may be permitted by Lessor; and (B) increasing
          the coverage thereof by an amount equal to the Fair Market Value of
          the Capital Addition (except to the extent covered by the owner's
          policy of title insurance referred to in subparagraph (vii) below);

               (vii)   if required by Lessor, (A) an owner's policy of title
          insurance insuring fee simple title to any land conveyed to Lessor
          pursuant to subparagraph (v), free and clear of all liens and
          encumbrances except those approved by Lessor and (B) a lender's policy
          of title insurance satisfactory in form and substance to Lessor and
          the Lending Institution advancing any portion of the Capital Addition
          Cost;

               (viii)  if required by Lessor upon completion of the Capital
          Addition, an M.A.I appraisal of the Leased Property; and

               (ix)    such other certificates (including endorsements
          increasing the insurance coverage, if any, at the time required by
          Section 12.1), documents, customary opinions of Lessee's counsel,
          appraisals, surveys, certified copies of duly adopted resolutions of
          the Board of Directors of Lessee authorizing the execution and
          delivery of the Lease Amendment and any other instruments or documents
          as may be reasonably required by Lessor.

          (c)  Upon making a Request to finance a Capital Addition, whether or
not such financing is actually consummated, Lessee shall pay the reasonable
costs and expenses of Lessor and any Lending Institution which has committed to
finance such Capital Addition paid or incurred in connection with the financing
of the Capital Addition, including (i) the fees and expenses of their respective
counsel, (ii) the amount of any recording or transfer taxes and fees, (iii)
documentary stamp taxes, if any, (iv) title insurance charges, (v) appraisal
fees, if any, and (vi) commitment fees, if any. Notwithstanding the foregoing,
Lessee shall have no obligation to reimburse Lessor for any of the fees, charges
and expenses described in this Section 9.3(c), if such Capital Addition
financing fails to close subsequent to Lessor issuing Lessee a written
commitment to finance said Capital Additions; provided that this provision shall
not apply if such financing fails to close due to the acts or omissions of
Lessee.

     9.4  Remodeling and Non-Capital Additions. Lessee shall have the right and
          ------------------------------------
the obligation to make additions, modifications or improvements to the Leased
Property which are not Capital Additions, including tenant improvements made in
connection with the Tenant Leases, from time to time as may reasonably be
necessary for its uses and purposes and to permit Lessee to comply fully with
its obligations set forth in this Lease; provided that such action will be
undertaken expeditiously, in a workmanlike manner and will not significantly
alter the character or purpose or detract from the value or operating efficiency
of the Leased Property and will not significantly impair the revenue producing
capability of the Leased Property or adversely affect the ability of Lessee to
comply with the provisions of this Lease. Title to all non-Capital Additions,
modifications and improvements shall, without payment by Lessor at any

                                       15
<PAGE>

time, be included under the terms of this Lease and, upon expiration or earlier
termination of this Lease, shall pass to and become the property of Lessor.

     9.5  Salvage. All materials which are scrapped or removed in connection
          -------
with the making of either Capital Additions permitted by Section 9.1 or repairs
required by Article 8 shall be or become the property of Lessor; provided that
Lessor may require Lessee to dispose of such materials and remit the net
proceeds thereof to Lessor within 15 days of such disposal.

                                  ARTICLE 10
                                     LIENS
                                     -----

     Subject to the provisions of Article 11 relating to permitted contests,
Lessee will not directly or indirectly create or suffer to exist and will
promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property or any attachment, levy,
claim or encumbrance in respect of the Rent, not including, however, (a) this
Lease, (b) the matters, if any, set forth in Exhibit B attached hereto, (c)
                                             ---------
restrictions, liens and other encumbrances which are consented to in writing by
Lessor, or any easements granted pursuant to the provisions of Section 6.4 of
this Lease, (d) liens for those taxes of Lessor which Lessee is not required to
pay hereunder, (e) subleases permitted by Article 23, (f) liens for Impositions
or for sums resulting from noncompliance with Legal Requirements so long as (1)
the same are not yet payable or are payable without the addition of any fine or
penalty or (2) such liens are in the process of being contested in accordance
with the provisions of Article 11, (g) liens of mechanics, laborers,
materialmen, suppliers or vendors for sums either disputed or not yet due,
provided that (1) the payment of such sums shall not be postponed for more than
60 days after the completion of the action (including any appeal from any
judgment rendered therein) giving rise to such lien and such reserve or other
appropriate provisions as shall be required by law or generally accepted
accounting principles shall have been made therefor or (2) any such liens are in
the process of being contested in accordance with the provisions of Article 11,
and (h) any Encumbrance placed on the Leased Property by Lessor. Notwithstanding
the foregoing, Lessee shall have no liability to Lessor for any liens which may
be imposed against the Leased Property as a result of the acts or omissions of
any party other than Lessee during the period prior to the Commencement Date but
the same shall be and remain the responsibility of Lessor.

                                  ARTICLE 11
                              PERMITTED CONTESTS
                              ------------------

     Lessee, after ten days' prior written notice to Lessor, on its own or on
Lessor's behalf (or in Lessor's name), but at Lessee's expense, may contest, by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount, validity or application, in whole or in part, of any Imposition,
Legal Requirement, Insurance Requirement, lien, attachment, levy, encumbrance,
charge or claim (collectively "Charge") not otherwise permitted by Article 10,
which is required to be paid or discharged by Lessee, any Resident or any
Tenant; provided that (a) in the case of an unpaid Charge, the commencement and
continuation of such proceedings, or the posting of a bond or certificate of
deposit as may be permitted by applicable law, shall

                                       16
<PAGE>

suspend the collection thereof from Lessor and from the Leased Property; (b)
neither the Leased Property nor any Rent therefrom nor any part thereof or
interest therein would be in any immediate danger of being sold, forfeited,
attached or lost; (c) Lessor would not be in any immediate danger of civil or
criminal liability for failure to comply therewith pending the outcome of such
proceedings; (d) in the event that any such contest shall involve a sum of money
or potential loss in excess of $50,000.00, then Lessee shall deliver to Lessor
and its counsel an Officer's Certificate and such opinions of legal counsel as
Lessor may reasonably request as to the matters set forth in clauses (a), (b)
and (c); (e) in the case of an Insurance Requirement, the coverage required by
Article 12 shall be maintained; and (f) if such contest be finally resolved
against Lessor or Lessee, Lessee shall, as Additional Charges due hereunder,
promptly pay the amount required to be paid, together with all interest and
penalties accrued thereon, or otherwise comply with the applicable Charge;
provided further that nothing contained herein shall be construed to permit
Lessee to contest the payment of the Rent, or any other sums payable by Lessee
to Lessor hereunder. Lessor, at Lessee's expense, shall execute and deliver to
Lessee such authorizations and other documents as may reasonably be required in
any such contest and, if reasonably requested by Lessee or if Lessor so desires
and then at its own expense, Lessor shall join as a party therein. Lessor shall
do all things reasonably requested by Lessee in connection with such action.
Lessee shall indemnify and save Lessor harmless against any liability, cost or
expense of any kind that may be imposed upon Lessor in connection with any such
contest and any loss resulting therefrom.

                                  ARTICLE 12
                                   INSURANCE
                                   ---------

     12.1 General Insurance Requirements. During the Term of this Lease, Lessee
          ------------------------------
shall at all times keep the Leased Property, and all property located in or on
the Leased Property insured with the kinds and amounts of insurance described
below and written by companies reasonably acceptable to Lessor authorized to do
insurance business in the state in which the Leased Property is located. The
policies must name Lessor as an additional insured and losses shall be payable
to Lessor and/or Lessee as provided in Article 13. In addition, the policies
shall name as an additional insured the holder ("Facility Mortgagee") of any
mortgage, deed of trust or other security agreement securing any Encumbrance
placed on the Leased Property or any part thereof in accordance with the
provisions of Article 32 ("Facility Mortgage"), if any, by way of a standard
form of mortgagee's loss payable endorsement. Any loss adjustment in excess of
$100,000.00 shall require the written consent of Lessor and each affected
Facility Mortgagee. Evidence of insurance shall be deposited with Lessor and, if
requested, with any Facility Mortgagee(s). The policies on the Leased Property,
including the Leased Improvements, the Fixtures and the Personal Property, shall
insure against the following risks:

          (a)  Loss or damage by fire, vandalism and malicious mischief,
extended coverage perils commonly known as "All Risk" and all physical loss
perils, including sprinkler leakage and business interruption, in an amount not
less than 100% of the then Full Replacement Cost thereof (as defined below in
Section 12.2) after deductible with a replacement cost endorsement sufficient to
prevent Lessee from becoming a co-insurer together with an agreed value
endorsement;

                                       17
<PAGE>

          (b)  Loss or damage by explosion of steam boilers, pressure vessels or
similar apparatus now or hereafter installed in the Facility, in such limits
with respect to any one accident as may be reasonably requested by Lessor from
time to time;

          (c)  Loss or damage by hurricane, tornado and earthquake in the amount
of the Full Replacement Cost, after deductible;

          (d)  Loss of income under a business interruption insurance policy
covering risk of loss during the first 12 months of reconstruction necessitated
by the occurrence of any of the hazards described in Sections 12.1(a), 12.1(b)
or 12.1(c), in an amount sufficient to prevent Lessee from becoming a co-
insurer; provided that in the event that Lessee shall not be in default
hereunder and Lessor shall receive any proceeds from such income insurance
which, when added to income amounts received with respect to the applicable time
period, exceed the amount of income owed by Lessee hereunder, Lessor shall
immediately pay such excess to Lessee;

          (e)  Claims for personal injury or property damage under a policy of
commercial general liability insurance including insurance against assumed or
contractual liability including indemnities under this Lease, with amounts not
less than $5,000,000.00 per occurrence in respect of bodily injury and death and
$10,000,000.00 for property damage; and

          (f)  Flood (when the Leased Property is located in whole or in part
within a designated flood plain area) and upon written request of Lessor such
other hazards and in such amounts as may be customary for comparable properties
in the area and if available at commercially reasonable rates from insurance
companies authorized to do business in the state in which the Leased Property is
located.

     12.2 Replacement Cost. The term "Full Replacement Cost" as used herein
          ----------------
shall mean the actual replacement cost of the Facility from time to time,
including increased cost of construction endorsement, less exclusions provided
in the normal fire insurance policy. In the event Lessor or Lessee believes that
the Full Replacement Cost has increased or decreased at any time during the
Term, it shall have the right at its own expense to have such Full Replacement
Cost redetermined by the insurance company which is then providing the largest
amount of casualty insurance carried on the Leased Property, hereinafter
referred to as the "impartial appraiser". The party desiring to have the Full
Replacement Cost so redetermined shall forthwith, on receipt of such
determination by the impartial appraiser, give written notice thereof to the
other party hereto. The determination of such impartial appraiser shall be final
and binding on the parties hereto, and Lessee shall forthwith increase, or may
decrease, the amount of the insurance carried pursuant to this Article to the
amount so determined by the impartial appraiser.

     12.3 Additional Insurance. In addition to the insurance described above,
          --------------------
Lessee shall upon written request of Lessor maintain such additional insurance
as may be reasonably required from time to time by any Facility Mortgagee which
is consistent with insurance coverage for similar properties in the city, county
and state where the Leased Property is located and is available at commercially
reasonable rates, or required pursuant to any applicable Legal

                                       18
<PAGE>

Requirement, and shall at all times maintain or cause to be maintained adequate
worker's compensation insurance coverage for all persons employed by Lessee on
the Leased Property, in accordance with all applicable Legal Requirements or is
self insured in accordance with an approved self insurance program.

     12.4   Waiver of Subrogation. All insurance policies carried by either
            ---------------------
party covering the Leased Property, the Fixtures, the Facility and/or the
Personal Property, including contents, fire and casualty insurance, shall
expressly waive any right of subrogation on the part of the insurer against the
other party except with respect to claims arising out of the negligence and
willful misconduct of such other party. The parties hereto agree that their
policies will include such a waiver clause or endorsement so long as the same is
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may request and pay the same, but shall not be
obligated to do so.

     12.5   Form of Insurance. All of the policies of insurance referred to in
            -----------------
this Section shall be written in form reasonably satisfactory to Lessor by
insurance companies reasonably satisfactory to Lessor.  Lessee shall pay all
premiums therefor, and deliver such policies or certificates thereof to Lessor
prior to their effective date (and, with respect to any renewal policy, prior to
the expiration of the existing policy). In the event of the failure of Lessee to
effect such insurance in the names herein called for or to pay the premiums
therefor, or to deliver such policies or certificates thereof to Lessor at the
times required, Lessor shall be entitled, but shall have no obligation, to enact
such insurance and pay the premiums therefor, which premiums shall be repayable
by Lessee to Lessor upon written demand therefor, and failure to repay the same
shall constitute an Event of Default within the meaning of Section 15.1(c). Each
insurer mentioned in this Section shall agree, by endorsement on the policy or
policies issued by it, or by independent instrument furnished to Lessor, that it
will give to Lessor prior written notice before the policy or policies in
question shall be altered, allowed to expire or canceled.

     12.6   Change in Limits. In the event that Lessor shall at any time
            ----------------
reasonably and in good faith believe the limits of the personal injury, property
damage or general public liability insurance then carried to be insufficient,
the parties shall endeavor to agree on the proper and reasonable limits for such
insurance to be carried and such insurance shall thereafter be carried with the
limits thus agreed on until further change pursuant to the provisions of this
Section. If the parties shall be unable to agree thereon, the proper and
reasonable limits for such insurance shall be determined by an impartial third
party selected by the parties the costs of which shall be divided equally
between the parties. Such redeterminations, whether made by the parties or by
arbitration, shall be made no more frequently than every year. Nothing herein
shall permit the amount of insurance to be reduced below the amount or amounts
reasonably required by any Facility Mortgagee.

     12.7   Blanket Policy. Notwithstanding anything to the contrary contained
            --------------
in this Section, Lessee's obligations to carry the insurance provided for herein
may be brought within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Lessee; provided that the coverage afforded
Lessor will not be reduced or diminished or otherwise be different from that
which would exist under separate policies meeting all other

                                       19
<PAGE>

requirements of this Lease; provided further that the requirements of this
Article 12 are otherwise satisfied.

     12.8   No Separate Insurance. Without the prior written consent of Lessor,
            ---------------------
Lessee shall not, on Lessee's own initiative or pursuant to the request or
requirement of any third party, take out separate insurance concurrent in form
or contributing in the event of loss with that required in this Article 12 to be
furnished by, or which may reasonably be required by a Facility Mortgagee to be
furnished by, Lessee, or increase the amounts of any then-existing insurance
required under this Article 12 by securing an additional policy or additional
policies, unless all parties having an insurable interest in the subject matter
of the insurance, including in all cases Lessor and all Facility Mortgagees, are
included therein as additional insureds and the loss is payable under said
insurance in the same manner as losses are required to be payable under this
Lease. Lessee shall immediately notify Lessor of the taking out of any such
separate insurance or of the increasing of any of the amounts of the then-
existing insurance required under this Article 12 by securing an additional
policy or additional policies.

     12.9   Insurance for Contractors. If Lessee shall engage or cause to be
            -------------------------
engaged any contractor to perform work on the Leased Property, Lessee shall
require such contractor to carry and maintain insurance coverage comparable to
the foregoing requirements, at no expense to Lessor.

                                  ARTICLE 13
                               FIRE AND CASUALTY
                               -----------------

     13.1   Insurance Proceeds. All proceeds payable by reason of any loss or
            ------------------
damage to the Leased Property or any portion thereof, and insured under any
policy of insurance required by Article 12 of this Lease shall be paid to Lessor
and held by Lessor in trust (subject to the provisions of Section 13.7) and
shall be made available for reconstruction or repair, as the case may be, of any
damage to or destruction of the Leased Property, or any portion thereof, and
shall be paid out by Lessor from time to time for the reasonable cost of such
reconstruction or repair in accordance with this Article 13 after Lessee has
expended an amount equal to or exceeding the deductible under any applicable
insurance policy. Any excess proceeds of insurance remaining after the
completion of the restoration or reconstruction of the Leased Property shall be
retained by Lessee free and clear upon completion of any such repair and
restoration except as otherwise specifically provided below in this Article 13;
provided that in the event neither Lessor nor Lessee is required or elects to
repair or restore the Leased Property, then all such insurance proceeds shall be
retained by Lessor. All salvage resulting from any risk covered by insurance
shall belong to Lessee, including any salvage relating to Capital Additions paid
for by Lessee.

     13.2   Reconstruction in the Event of Damage or Destruction Covered by
            ---------------------------------------------------------------
Insurance.
---------

            (a)  Facility Rendered Unsuitable for Its Primary Intended Use.
                 ---------------------------------------------------------
Except as provided in Section 2.7 and Section 13.7, if during the Term, the
Facility is totally or partially destroyed from a risk covered by the insurance
described in Article 12 and the Facility thereby is rendered Unsuitable for its
Primary Intended Use, such damage or destruction shall not terminate

                                       20
<PAGE>

this Lease and all of Lessee's obligations with respect to payment of Rent shall
continue in full force and effect and shall not be affected thereby and Lessee
shall either:

               (i)  apply all proceeds payable with respect thereto to restore
          the Facility to substantially the same condition as existed
          immediately prior to such damage or destruction, or

               (ii) offer either (A) to acquire the Leased Property from Lessor
          for a purchase price equal to the Minimum Purchase Price of the Leased
          Property immediately prior to such damage or destruction or (B) to
          substitute a new property or properties for the Leased Property
          pursuant to and in accordance with the provisions of Article 20 (which
          offer to substitute Lessor may in its reasonable discretion refuse).

Lessee shall give written notice to Lessor within 60 days after the date of such
damage or destruction whether Lessee chooses option (i) or option (ii), and if
option (ii) is chosen, such notice shall be accompanied by the offer referred to
therein. In the event Lessee fails to give such notice or does not make an offer
under option (ii), Lessee shall promptly proceed to restore the Facility to
substantially the same condition as existed immediately prior to the damage or
destruction. If Lessee's offer to substitute for the Leased Property is
reasonably refused by Lessor, Lessee shall promptly proceed to restore the
Facility to substantially the same condition as existed immediately prior to
such damage or destruction or acquire the Leased Property from Lessor for a
purchase price equal to the Minimum Purchase Price of the Leased Property
immediately prior to such damage or destruction.

          (b)  Facility Not Rendered Unsuitable for Its Primary Intended Use.
               -------------------------------------------------------------
Except as provided in Section 2.7 and Section 13.7, if during the Term, the
Facility is partially destroyed from a risk covered by the insurance described
in Article 12, but the Facility is not thereby rendered Unsuitable for its
Primary Intended Use, Lessee shall restore the Facility to substantially the
same condition as existed immediately prior to the damage or destruction and
such damage or destruction shall not terminate this Lease and all of Lessee's
obligations hereunder, including Lessee's obligations with respect to the
payment of the Rent, shall continue in full force and effect and shall not be
affected thereby; provided that if Lessee cannot within a reasonable time obtain
all necessary governmental approvals, including building permits, licenses,
conditional use permits and any certificates of need, after diligent efforts to
do so, in order to be able to perform all required repair and restoration work
and to operate the Facility for its Primary Intended Use in substantially the
same manner as immediately prior to such damage or destruction, then Lessee
shall:

          offer, either (i) to acquire the Leased Property from Lessor for a
     purchase price equal to the Minimum Purchase Price immediately prior to
     such damage or destruction, or (ii) to substitute a new property or
     properties for the Leased Property pursuant to and in accordance with the
     provisions of Article 20 (which offer to substitute Lessor in its
     reasonable discretion may refuse).

                                       21
<PAGE>

Lessee shall give written notice to Lessor within 60 days after the date of such
damage or destruction whether Lessee chooses option (i) or (ii) and such notice
shall be accompanied by the offer referred to therein. In the event Lessee fails
to give such notice or does not make an offer, Lessee shall promptly proceed to
restore the Facility to substantially the same condition as existed immediately
prior to the damage or destruction. If Lessee's offer to substitute for the
Leased Property is reasonably refused by Lessor, Lessee shall promptly proceed
to restore the Facility to substantially the same condition as existed
immediately prior to such damage for destruction or acquire the Leased Property
from Lessor for a purchase price equal to the Minimum Purchase Price of the
Leased Property immediately prior to such damage or destruction.

     13.3   Reconstruction in the Event of Damage or Destruction Not Covered by
            -------------------------------------------------------------------
Insurance. Except as provided in Section 13.7, if during the Term the Facility
---------
is totally or materially destroyed from a risk not covered by the insurance
described in Article 12, whether or not such damage or destruction renders the
Facility Unsuitable for Its Primary Intended Use, Lessee shall:

            (i)     restore the Facility to substantially the same condition it
     was in immediately prior to such damage or destruction and such damage or
     destruction shall not terminate this Lease, and all of Lessee's obligations
     hereunder, including Lessee's obligations with respect to the payment of
     the Rent, shall continue in full force and effect and not be affected
     thereby, or

            (ii)    offer either (A) to acquire the Leased Property from Lessor
     for a purchase price equal to the Minimum Purchase Price immediately prior
     to such damage or destruction, or (B) to substitute a new property or
     properties for the Leased Property pursuant to and in accordance with the
     provisions of Article 20 (which offer to substitute Lessor in its
     reasonable discretion may refuse); provided that if such damage or
     destruction is not material in the reasonable opinion of Lessor, Lessee
     shall restore the Facility to substantially the same condition as existed
     immediately prior to any such damage or destruction.

Lessee shall give written notice to Lessor within 60 days after the date of such
damage or destruction whether Lessee chooses option (i), (ii)(A) or (ii)(B) and,
in the event of either option (ii)(A) or (ii)(B), such notice shall be
accompanied by the offer referred to therein. In the event Lessee fails to give
such notice or does not make an offer, Lessee shall promptly proceed to restore
the Facility to substantially the same condition as existed immediately prior to
the damage or destruction. If Lessor does not accept Lessee's offer to
substitute for or purchase the Leased Property within 30 days after the date of
such offer, Lessee' offer shall be deemed withdrawn on such 30th day and Lessee
shall promptly proceed to restore the Facility to substantially the same
condition as existed immediately prior to such damage for destruction; provided
that if such damage or destruction occurs during any Extended Term, then Lessor
must accept Lessee's offer to acquire the Leased Property from Lessor for a
purchase price equal to the Minimum Purchase Price immediately prior to such
damage or destruction.

                                       22
<PAGE>

     13.4   Personal Property.  Lessee shall use any insurance proceeds payable
            -----------------
by reason of any loss of or damage to any of the Personal Property to restore
such Personal Property to the Leased Property with items of substantially
equivalent value to the items being replaced.

     13.5   Restoration of Capital Additions.  If Lessee is required or elects
            --------------------------------
to restore the Facility as provided in Sections 13.2 or 13.3, Lessee shall also
restore the Personal Property related thereto as required by Section 13.4 and
all Capital Additions paid for or financed by Lessor. Insurance proceeds payable
by reason of damage to Capital Additions paid for or financed by Lessor shall be
paid to Lessor and Lessor shall hold such insurance proceeds in trust to pay the
cost of repairing or replacing such Capital Additions in the event Lessee does
not purchase or substitute other property or properties for the Leased Property.

     13.6   No Abatement of the Rent. This Lease shall remain in full force and
            ------------------------
effect and Lessee's obligation to make rental payments and to pay all other
charges required by this Lease shall remain unabated during any period required
for repair and restoration.

     13.7   Damage Near End of Term. Notwithstanding any provisions of Sections
            -----------------------
13.2 or 13.3 to the contrary, if damage to or destruction of the Facility occurs
during the last 12 months of the Term, and if such damage or destruction cannot
be fully repaired and restored within the lesser of (i) six months or (ii) the
period remaining in the Term immediately following the date of loss, then either
party shall have the right to terminate this Lease by giving notice of
termination to the other within 30 days after the date of such damage or
destruction, in which event Lessor shall be entitled to retain the insurance
proceeds and Lessee shall pay to Lessor on demand the amount of any deductible
or uninsured loss arising in connection therewith; provided that any such notice
given by Lessor shall be void and of no force and effect if Lessee exercises an
available option to extend the Term for one Extended Term, or one additional
Extended Term, as the case may be, within 30 days following receipt of such
termination notice.

     13.8   Purchase or Substitution.  In the event Lessor accepts any offer by
            ------------------------
Lessee to purchase the Leased Property or to substitute a property or properties
for the Leased Property, this Lease shall terminate upon payment of the purchase
price and execution and delivery of all documentation in accordance with Article
17, or execution and delivery of all documents required in connection with a
Substitute Property under Article 20. Lessor shall remit to Lessee, or in the
case of a purchase allow Lessee a credit toward the purchase price, in an amount
equal to all insurance proceeds being held in trust by Lessor.

     13.9   Waiver.  Lessee hereby knowingly and expressly waives any statutory
            ------
or common law rights of termination which may arise by reason of any damage or
destruction of the Facility.

                                  ARTICLE 14
                                 CONDEMNATION
                                 ------------

     14.1   Parties' Rights and Obligations.  If during the Term there is any
            -------------------------------
Taking of all or any part of the Leased Property or any interest in this Lease
by Condemnation, the rights and obligations of the parties shall be determined
by this Article 14.

                                       23
<PAGE>

     14.2   Total Taking.  If there is a Taking of all of the Leased Property by
            ------------
Condemnation, this Lease shall terminate on the Date of Taking, and the Minimum
Rent and all Additional Charges paid or payable hereunder shall be apportioned
and paid to the Date of Taking.

     14.3   Partial Taking.  Except as provided in Section 2.7, if there is a
            --------------
Taking of a portion of the Leased Property by Condemnation such that the
Facility is not thereby rendered Unsuitable for Its Primary Intended Use, this
Lease shall not terminate and all of Lessee's obligations hereunder, including
Lessee's obligations with respect to the payment of the Rent, shall continue in
full force and effect and shall not be affected thereby. If, however, the
Facility is thereby rendered Unsuitable for Its Primary Intended Use, Lessee
shall either:

                 (i)     at Lessee's expense, restore the Facility, to the
            extent possible, to substantially the same condition as existed
            immediately prior to the partial Taking, in which case the proceeds
            of any Award shall be applied to such restoration to the extent
            necessary or appropriate, or

                 (ii)    offer either (A) to acquire the Leased Property from
            Lessor for a purchase price equal to the Minimum Purchase Price of
            the Leased Property immediately prior to such partial Taking, or (B)
            to substitute a new property or properties for the Leased Property
            pursuant to and in accordance with the provisions of Article 20
            (which offer to substitute Lessor may in its reasonable discretion
            refuse), or

                 (iii)   terminate this Lease effective upon the effective date
            of such Taking.

Lessee will give written notice to Lessor within 60 days after Lessee receives
notice of the Taking which option Lessee chooses, and if option (ii) is chosen,
such notice shall be accompanied by the offer referred to therein. In the event
Lessor does not accept Lessee's offer to so purchase the Leased Property within
30 days after receipt of the notice described in the preceding sentence, Lessee
may either (a) withdraw its offer to purchase the Leased Property and proceed to
restore the Facility, to the extent possible, to substantially the same
condition as existed immediately before the partial Taking, or (b) terminate the
offer and this Lease by written notice to Lessor.

     14.4   Restoration.  If there is a partial Taking of the Leased Property
            -----------
and this Lease remains in full force and effect pursuant to any provision of
this Article 14, Lessee shall accomplish all necessary restoration in order that
the Leased Property may continue to be used for its Primary Intended Use.

     14.5   Award Distribution.  In the event Lessee purchases the Leased
            ------------------
Property pursuant to Section 14.3 or Lessor accepts any offer by Lessee to
purchase the Leased Property or to provide a Substitute Property therefor
pursuant to this Article 14, then the entire Award shall belong to Lessee and
Lessor agrees to assign to Lessee all of its rights thereto. Except as

                                       24
<PAGE>

otherwise expressly provided in this Article 14, in any other event the entire
Award shall belong to and be paid to Lessor; provided that if this Lease is
terminated in accordance with Section 14.2(b) or 14.3(a), and subject to the
rights of any Facility Mortgagees, Lessee shall be entitled to receive from the
Award any sum attributable to Lessee's Personal Property, loss of Lessee's
business, moving expenses and any sum attributable to any Capital Additions for
which Lessee would be entitled to reimbursement at the end of the Term pursuant
to the provisions of Section 9.2(b), but only if any to the extent such Award
expressly includes such items and allocates a value thereto. If Lessee is
required or elects to restore the Facility, Lessor agrees that, subject to the
rights of the Facility Mortgagees, its portion of the Award shall be used for
such restoration and it shall hold such portion of the Award in trust, for
application to the costs of the restoration.

     14.6   Temporary Taking.  Except as provided in Section 2.7, the Taking of
            ----------------
the Leased Property, or any part thereof, by military or other public authority
shall constitute a Taking by Condemnation only when the use and occupancy by the
Taking authority has continued for longer than six months. During any such six-
month period all the provisions of this Lease shall remain in full force and
effect and the Rent shall not be abated or reduced during such period of Taking;
provided that to the extent any compensation is paid by the Taking authority as
a result of such temporary Taking, Lessee will retain such compensation.

     14.7   Purchase or Substitution.  In the event Lessor accepts any offer by
            ------------------------
Lessee to purchase the Leased Property or to substitute a property or properties
for the Leased Property, this Lease shall terminate upon payment of the purchase
price and execution and delivery of all appropriate documentation, in accordance
with Article 17, or execution and delivery of all documents required in
connection with a Substitute Property under Article 20.

                                  ARTICLE 15
                                    DEFAULT
                                    -------

     15.1   Events of Default.  The occurrence of any one or more of the
            -----------------
following events shall constitute events of default (individually, an "Event of
Default" and, collectively, "Events of Default") hereunder:

            (a)     An event of default shall occur under any other lease or
agreement (the "Related Leases") between Lessor or any of its Affiliates and
Lessee or any of its Affiliates, which event of default is not cured within the
applicable grace period set forth therein;

            (b)     Lessee shall fail to make a payment of the Rent payable by
Lessee under this Lease when the same becomes due and payable and such failure
continues for a period of ten calendar days after written notice from Lessor to
Lessee;

            (c)     Lessee shall fail to observe or perform any other term,
covenant or condition of this Lease or any document executed in connection
herewith and such failure is not cured by Lessee within a period of 30 days
after receipt by Lessee of notice thereof from Lessor specifying in reasonable
detail the nature of such default, unless such failure cannot with due diligence
be cured within a period of 30 days, in which case such failure shall not be
deemed to

                                       25
<PAGE>

continue if Lessee proceeds promptly and with due diligence to cure the failure
and diligently completes the curing thereof (as soon as reasonably possible);

            (d)     Lessee shall:

                    (i)     admit in writing its inability to pay its debts
            generally as they become due,

                    (ii)    file a petition in bankruptcy or a petition to take
            advantage of any insolvency law,

                    (iii)   make an assignment for the benefit of its creditors,

                    (iv)    consent to the appointment of a receiver of itself
            or of the whole or any substantial part of its property, or

                    (v)     file a petition or answer seeking reorganization or
            arrangement under the Federal bankruptcy laws or any other
            applicable law or statute of the United States of America or any
            state thereof; or

            (e)     Lessee shall default beyond any applicable grace period
contained in one or more major credit facilities which by their terms would
permit the acceleration of an outstanding balance equal to or greater than
$10,000,000.00 in the aggregate and the same shall be accelerated by the lenders
or other applicable parties.

     15.2   Remedies.  If an Event of Default shall have occurred, Lessor may,
            --------
at its election, then or at any time thereafter, apply or appropriate, as the
case may be, the Rent Reserve Deposit, or the then remaining balance thereof, as
its remedy for any damages sustained by Lessor caused by a continuing Event of
Default. If (i) Lessor elects not to apply or appropriate the Rent Reserve
Deposit, (ii) the full balance of the Rent Reserve Deposit is inadequate to
compensate Lessor for damages sustained arising out of said continuing Event of
Default, or (iii) should an Event of Default occur and be continuing after the
Rent Reserve Deposit is fully depleted, then, in such event, Lessor may, at its
election, then or at any time thereafter, pursue any one or more of the
following remedies, in addition to any remedies which may be permitted by law or
by other provisions of this Lease, without further notice or demand, except as
hereinafter provided:

            (a)     Without any notice or demand whatsoever, Lessor may take any
one or more actions permissible at law to ensure performance by Lessee of
Lessee's covenants and obligations under this Lease. In this regard, it is
agreed that if Lessee abandons or vacates the Leased Property, Lessor may enter
upon and take possession of such Leased Property in order to protect it from
deterioration and continue to demand from Lessee the monthly rentals and other
charges provided in this Lease. Lessor shall use reasonable efforts to relet but
shall have no absolute obligation to relet. If Lessor does, at its sole
discretion, elect to relet the Leased Property, such action by Lessor shall not
be deemed as an acceptance of Lessee's surrender of the

                                       26
<PAGE>

Leased Property unless Lessor expressly notifies Lessee of such acceptance in
writing, Lessee hereby acknowledging that Lessor shall otherwise be reletting as
Lessee's agent. It is further agreed in this regard that in the event of any
Event of Default described in this Article 15, Lessor shall have the right to
enter upon the Leased Property and do whatever Lessee is obligated to do under
the terms of this Lease. Lessee agrees to reimburse Lessor on demand for any
reasonable expenses which Lessor may incur in thus effecting compliance with
Lessee's obligations under this Lease, and further agrees that Lessor shall not
be liable for any damages resulting to Lessee from such action, except as may
result from Lessor's gross negligence or willful misconduct.

            (b)     Lessor may terminate this Lease by written notice to Lessee,
in which event Lessee shall immediately surrender the Leased Property to Lessor,
and if Lessee fails to do so, Lessor may, without prejudice to any other remedy
which Lessor may have for possession or arrearage in rent (including any
interest which may have accrued pursuant to Section 2.3 of this Lease or
otherwise), enter upon and take possession of the Leased Property and expel or
remove Lessee and any other person who may be occupying said premises or any
part thereof other than Residents pursuant to Resident Agreements or Tenants
pursuant to Tenant Leases. In addition, Lessee agrees to pay to Lessor on demand
the amount of all loss and damage which Lessor may suffer by reason of any
termination effected pursuant to this subsection (b), said loss and damage to be
determined, at Lessor's option, by either of the following alternative measures
of damages:

                    (i)     Although Lessor shall be under no absolute
            obligation to attempt and shall be obligated only to use reasonable
            efforts, to relet the Leased Property, until the Leased Property is
            relet Lessee shall pay to Lessor or paid by the new tenant directly
            to an applicable third party on or before the first day of each
            calendar month the monthly rentals and other charges provided in
            this Lease. After the Leased Property has been relet by Lessor,
            Lessee shall pay to Lessor on the 10th day of each calendar month
            the difference between the monthly rentals and other charges
            provided in this Lease for the preceding calendar month and that
            actually collected by Lessor for such month. If it is necessary for
            Lessor to bring suit in order to collect any deficiency, Lessor
            shall have a right to allow such deficiencies to accumulate and to
            bring an action on several or all of the accrued deficiencies at one
            time. Any such suit shall not prejudice in any way the right of
            Lessor to bring a similar action for any subsequent deficiency or
            deficiencies. Any amount collected by Lessor from subsequent tenants
            for any calendar month in excess of the monthly rentals and other
            charges provided in this Lease shall be credited to Lessee in
            reduction of Lessee's liability for any calendar month for which the
            amount collected by Lessor will be less than the monthly rentals and
            other charges provided in this Lease, but Lessee shall have no right
            to such excess other than the above described credit; or

                    (ii)    When Lessor desires, Lessor may demand a final
            settlement not to exceed the Minimum Purchase Price at the time of
            such final settlement. Upon demand for a final settlement, Lessor
            shall have a right to, and Lessee hereby agrees to pay, the
            difference between the total of all monthly rentals and other
            charges provided in this Lease for the remainder of the Term and the
            reasonable

                                       27
<PAGE>

            rental value of the Leased Property for such period (including a
            reasonable time to relet the Leased Property), as determined
            pursuant to the provisions of Article 28 hereof, such difference to
            be discounted to present value at a rate equal to the Treasury Yield
            then in effect with maturity periods substantially equivalent to the
            balance of the Initial Terns or any Extended Term then in effect.

     The rights and remedies of Lessor hereunder are cumulative, and pursuit of
any of the above remedies shall not preclude pursuit of any other remedies
prescribed in other sections of this Lease and any other remedies provided by
law or equity. Forbearance by Lessor to enforce one or more of the remedies
herein provided upon an Event of Default shall not be deemed or construed to
constitute a waiver of such Event of Default. Exercise by Lessor of any one or
more remedies shall not constitute an acceptance of surrender of the Leased
Property by Lessee, it being understood that such surrender can be effected only
by the prior written agreement of Lessor and Lessee.

     15.3   Additional Expenses.  In addition to payments required pursuant to
            -------------------
subsections (a) and (b) of Section 15.2 above, Lessee shall compensate Lessor
for all reasonable expenses incurred by Lessor in repossessing the Leased
Property (including any increase in insurance premiums caused by the vacancy of
the Leased Property), all reasonable expenses incurred by Lessor in reletting
(including repairs, remodeling, replacements, advertisements and brokerage
fees), all reasonable concessions granted to a new tenant upon reletting
(including renewal options), all fees and expenses incurred by Lessor as a
direct or indirect result of any appropriate action by a Facility Mortgagee and
a reasonable allowance for Lessor's administrative efforts, salaries and
overhead attributable directly or indirectly to Lessee's default and Lessor's
pursuing the rights and remedies provided herein and under applicable law.

     15.4   Waiver.  If this Lease is terminated pursuant to law or the
            ------
provisions of this Article 15, Lessee waives, to the extent permitted by
applicable law, (a) any right of redemption, reentry or repossession and (b) the
benefit of any laws now or hereafter in force exempting property from liability
for rent or for debt.

     15.5   Application of Funds.  All payments otherwise payable to Lessee
            --------------------
which are received by Lessor under any of the provisions of this Lease during
the existence or continuance of any Event of Default shall be applied to
Lessee's obligations in the order which Lessor may reasonably determine or as
may be prescribed by the laws of the state in which the Facility is located.

     15.6   Notices by Lessor.  The provisions of this Article 15 concerning
            -----------------
notices shall be liberally construed insofar as the contents of such notices are
concerned, and any such notice shall be sufficient if it shall generally apprise
Lessee of the nature and approximate extent of any default in sufficient detail
so as to enable Lessee to undertake the necessary corrective action.

     15.7   Lessor's Security Interest.  Lessee hereby grants to Lessor, a valid
            --------------------------
and continuing security interest to secure payment of all rentals and other sums
of money becoming due hereunder from Lessee, and to secure payment of any
damages or loss which Lessor may suffer

                                       28
<PAGE>

by reason of the breach by Lessee of any covenant, agreement or condition
contained herein, upon all of the Personal Property owned by Lessee and
presently, or which may hereafter be, situated in or about and used in
connection with the operation of the Leased Property, and all proceeds therefrom
and accessions thereto and, except as a result of sales made in the ordinary
course of Lessee's business, such property shall not be removed without the
consent of Lessor until any arrearage in rent as well as any and all other sums
of money then due to Lessor or to become due to Lessor hereunder shall first
have been paid and discharged and all the covenants, agreements and conditions
hereof have been fully complied with and performed by Lessee. Upon the
occurrence of an Event of Default by Lessee, Lessor may, in addition to any
other remedies provided herein, enter upon the Leased Property and take
possession of any and all of the Personal Property, without liability for
trespass or conversion, and sell the same at public or private sale, with or
without having such property at the sale, after giving Lessee reasonable notice
of the time and place of any public sale or of the time after which any private
sale is to be made, at which sale Lessor or its assigns may purchase unless
otherwise prohibited by law or unless such removal would materially and
adversely affect the compliance of the operations at the Facility with law or
jeopardize resident health or welfare or give rise to a default under a Tenant
Lease. Unless otherwise provided by law, and without intending to exclude any
other manner of giving Lessee reasonable notice, the requirement of reasonable
notice shall be met, if such notice is given in the manner prescribed in this
Lease at least seven days prior to the time of sale. Any sale made pursuant to
the provision of this paragraph shall be deemed to have been a public sale
conducted in commercially reasonable manner if held in the above described
premises or where the property is located after the time, place and method of
sale and a general description of the types of property to be sold have been
advertised in a daily newspaper published in the county in which the property is
located, for five consecutive days before the date of the sale. The proceeds
from any such disposition, less any and all expenses connected with the taking
of possession, holding and selling of the property (including reasonable
attorneys' fees and legal expenses), shall be applied as a credit against the
indebtedness secured by the security interest granted in this paragraph. Any
surplus shall be paid to Lessee or as otherwise required by law; Lessee shall
pay any deficiencies forthwith. Upon request by Lessor, Lessee agrees to execute
and deliver to Lessor a financing statement in form sufficient to perfect the
security interest of Lessor in the aforementioned property and proceeds thereof
under the provision of the Uniform Commercial Code (or corresponding state
statute or statutes) in force in the state in which the Leased Property is
located, as well as any other state the laws of which Lessor may at any time
consider to be applicable. Notwithstanding anything to the contrary contained in
this Section, Lessor's security interest in the property of Lessee described
above shall be subject to and absolutely subordinate to any and all purchase
money security interests at any time given by Lessee to third parties.

                                  ARTICLE 16
                            LESSOR'S RIGHT TO CURE
                            ----------------------

     If Lessee, without the prior written consent of Lessor, shall fail to make
any payment, or to perform any act required to be made or performed under this
Lease and to cure the same within the relevant time periods provided in Section
15.1, Lessor, without waiving or releasing any obligation or Event of Default,
may (but shall be under no obligation to) make such payment

                                       29
<PAGE>

or perform such act for the account and at the expense of Lessee, and may, to
the extent permitted by law, enter upon the Leased Property for such purpose and
take all such action thereon as, in Lessor's opinion, may be necessary or
appropriate therefor. No such entry shall be deemed an eviction of Lessee. All
sums so paid by Lessor, together with a late charge thereon (to the extent
permitted by law) at the Overdue Rate from the date on which such sums or
expenses are paid or incurred by Lessor, and all costs and expenses (including
reasonable attorneys' fees and expenses, in each case, to the extent permitted
by law) so incurred shall be paid by Lessee to Lessor on demand. The obligations
of Lessee and rights of Lessor contained in this Article shall survive the
expiration or earlier termination of this Lease.

                                  ARTICLE 17
                        PURCHASE OF THE LEASED PROPERTY
                        -------------------------------

     In the event Lessee purchases the Leased Property from Lessor pursuant to
any of the terms of this Lease other than Section 29.2, Lessor shall, upon
receipt from Lessee of the applicable purchase price (after credit for the
balance of the Capital Replacement Account), together with full payment of any
unpaid Rent due and payable with respect to any period ending on or before the
date of the purchase and any other amounts owing to Lessor hereunder, deliver to
Lessee an appropriate special warranty deed and any other documents reasonably
requested by Lessee to convey the interest of Lessor in and to the Leased
Property to Lessee, and such other standard documents usually and customarily
prepared in connection with such transfers, free and clear of all encumbrances
other than (a) those that Lessee agrees to pay or discharge, (b) those mortgage
liens, if any, which Lessee agrees in writing to accept and to take title
subject to, (c) any other Encumbrances permitted to be imposed on the Leased
Property under the provisions of Article 32 which are assumable at no cost to
Lessee, and (d) any matters affecting the Leased Property on or as of the
Commencement Date as shown on Exhibit B attached hereto. The difference between
the applicable purchase price and the total of the encumbrances assigned or
taken subject to shall be paid in cash to Lessor, or as Lessor may direct, in
federal or other immediately available funds except as otherwise mutually agreed
by Lessor and Lessee.  The closing of any such sale shall be contingent upon and
subject to Lessee obtaining all required governmental consents or of Lessor to
get the legal opinion described in the last sentence of this Article 17 and
approvals for such transfer; provided, however, if Lessor cannot obtain the
legal opinion described herein, after receipt of Lessor's written notice that
Lessor cannot obtain the required legal opinion, Lessee shall have ninety (90)
days in which to elect to substitute a new property in accordance with the
provisions of Article 20 and upon failure to give written notice to Lessor
within said ninety (90) day period, Lessor may elect (i) not to consummate the
transfer whereupon this Lease shall continue in full force and effect or (ii) to
consummate the transfer whereupon this Lease shall terminate. If such sale shall
fail to be consummated by reason of the inability of Lessee to obtain all such
approvals and consents, any options to extend the Term which otherwise would
have expired during the period from the date when Lessee elected or became
obligated to purchase the Leased Property until Lessee's inability to obtain the
approvals and consents is confirmed shall be deemed to remain in effect for 30
days after the end of such period and any other options available to Lessee
under this Lease at the time the purchase option was exercised shall be
reinstated during such 30 days period. The closing with respect to any such sale
shall be appropriately timed to accommodate the determination of the Minimum

                                       30
<PAGE>

Purchase Price in accordance with Article 28. All expenses of such conveyance,
including the cost of title examination or standard coverage title insurance,
reasonable attorneys' fees incurred by Lessor in connection with such
conveyance, transfer taxes and recording fees shall be paid by Lessee.
Additionally, any sale to Lessee shall be subject to delivery of an opinion of
Lessor's counsel confirming that (i) the sale will not result in ordinary
recapture income to Lessor pursuant to Code Section 1245 or 1250 or any other
Code provision, (ii) the sale will result in income, if any, to Lessor of a type
described in Code Section 856(c)(2) or 856(c)(3) and will not result in income
of the types described in Code Section 856(c)(4) or result in the tax imposed
under Code Section 857(b)(6), and (iii) the sale, together with all other
substitutions and sales made or requested by Lessee pursuant to any other leases
with Lessor of properties hereto or any other transfers of the Leased Property
or the properties leased under other such operating leases, during the relevant
time period, will not jeopardize the qualification of Lessor as a real estate
investment trust under Code Sections 856-860.

                                  ARTICLE 18
                                 HOLDING OVER
                                 ------------

     If Lessee shall for any reason remain in possession of the Leased Property
after the expiration of the Term or any earlier termination of the Term hereof
without Lessor consent, such possession shall be as a tenancy at will during
which time Lessee shall pay as rental each month an amount equal to the sum of
(a) 150 % of the aggregate of 1/12 of the aggregate Minimum Rent payable with
respect to the last complete year prior to the expiration of the Term, plus (b)
all Additional Charges accruing during such month, plus (c) all other sums, if
any, payable pursuant to the provisions of this Lease with respect to the Leased
Property.  During such period of tenancy, Lessee and Lessor shall be obligated
to perform and observe all of the terms, covenants and conditions of this Lease
and to continue its occupancy and use of the Leased Property. Nothing contained
herein shall constitute the consent, express or implied, of Lessor to the
holding over of Lessee after the expiration or earlier termination of this
Lease.

                                  ARTICLE 19
                                  ABANDONMENT
                                  -----------

     19.1   Discontinuance of Operations on the Leased Property; Offer of
            -------------------------------------------------------------
Substitution.  If Lessee has discontinued use of the Leased Property for its
------------
Primary Intended Use for 90 consecutive days without Lessor's prior written
consent for alterations or remodeling pursuant to Article 9, repairs or
restoration pursuant to Article 13 or Article 14 or otherwise, then provided
Lessor has not terminated this Lease pursuant to Section 15.2, Lessee may offer
to substitute a new property or properties for the Leased Property pursuant to
and in accordance with the provisions of Article 20 (which offer to substitute
Lessor may in its reasonable discretion refuse).

     19.2   Obsolescence of the Leased Property; Offer to Purchase. If the
            ------------------------------------------------------
Leased Property becomes Unsuitable for its Primary Intended Use, all as set
forth in an Officer's Certificate delivered to Lessor. Lessee may (provided this
Lease is still in effect), purchase the Leased Property for the Minimum Purchase
Price on the first Payment Date occurring not less than 120 days after the date
of such Officer's Certificate.

                                       31
<PAGE>

     19.3   Conveyance of Leased Property. In the event Lessee elects to
            -----------------------------
purchase the Leased Property pursuant to Section 19.2, then on the first Payment
Date occurring not less than 120 days after the date of the Officer's
Certificate referred to in Section 19.2, Lessor shall, upon receipt from Lessee
of the Minimum Purchase Price as of the date of such purchase and all Rent and
or other sums then due and payable under this Lease (excluding any installment
of Minimum Rent due on such Payment Date), convey the Leased Property to Lessee
on such date in accordance with the provisions of Article 17 and this Lease
shall thereupon terminate as to the Leased Property.

                                   ARTICLE 20
                            SUBSTITUTION OF PROPERTY
                            ------------------------

     20.1   Substitution of Property for the Leased Property.
            ------------------------------------------------

            (a) In the event Lessor accepts an offer by Lessee to substitute
other property for the Leased Property under Article 13, Article 14 or Article
19, and provided that no Event of Default shall have occurred and be continuing,
Lessee shall have the right (subject to the conditions set forth below in this
Article 20, and upon notice to Lessor) to substitute one or more properties
(collectively referred to as "Substitute Properties" or individually as a
"Substitute Property") for the Leased Property on a monthly Payment Date
specified in such notice (the "Substitution Date") occurring not less than 90
days after receipt by Lessor of such notice. The notice shall be in the form of
an Officer's Certificate and shall specify the reason(s) for the proposed
substitution and the proposed Substitution Date. Notwithstanding anything
contained herein to the contrary, any other substitution for the Leased Property
shall require the prior written consent of Lessor which shall be within the sole
discretion of Lessor.

            (b) If Lessee gives the notice referred to in Section 20.1(a) above,
Lessee shall present to Lessor one or more properties (or groups of properties)
each of which property (or groups of properties) shall provide Lessor with a
yield (i.e., an annual return on its equity in such property) equal to or
greater than the Current Yield (and the yield reasonably expected to be received
thereafter throughout the remainder of the term) from the Leased Property at the
time of such proposed substitution (or in the case of a proposed substitution as
a result of damage, destruction or Condemnation, the Current Yield immediately
prior to such damage, destruction or Condemnation) and as reasonably projected
over the remaining Term of this Lease and shall have a Fair Market Value
substantially equivalent to the Fair Market Value of the Leased Property. Lessor
shall have a period of 90 days within which to review such information and
either to accept or to reject the Substitute Property or Substitute Properties
so presented; provided that if Lessee is required by a court order or
administrative action to divest or otherwise dispose of the Leased Property
within a shorter time period, the time period shall be shortened appropriately
to meet the reasonable needs of Lessee, but in no event shall said period be
less than 15 Business Days after Lessor's receipt of said notice (subject to
further extension for any period of time in which Lessor is not timely provided
with the information provided for in Section 20.2 and Section 20.3 below);
provided that if Lessor shall contend that the Substitute Properties fail to
meet all the conditions for substitution set forth in this Article 20, including
the

                                       32
<PAGE>

provisions of Sections 20.1(c), (d) and (e) below; Lessee shall withdraw its
offer to substitute property whereupon Lessee shall within thirty (30) days of
notice of its withdrawn offer of substitution give Lessor written notice that it
will either offer (i) to substitute additional property or (ii) purchase the
Leased Property for the Minimum Purchase Price with either such election to be
in accordance with the provisions of this Lease.

            (c) It shall be a condition to consummation of any substitution
hereunder that all of the conditions set forth in Section 20.2 below, shall have
been satisfied with respect to such substitution, and to the delivery of an
opinion of counsel for Lessor confirming that (i) the substitution of the
Substitute Property for the Leased Property will qualify as an exchange solely
of property of alike-kind under Section 1031 of the Code, in which, generally,
except for "boot" such as cash needed to equalize exchange values or discharge
indebtedness, no gain or loss is recognized to Lessor, (ii) the substitution
will not result in ordinary recapture income to Lessor pursuant to Code Section
1245 or 1250 or any other Code provision, (iii) the substitution will result in
income, if any, to Lessor of a type described in Code Section 856(c)(2) or
856(c)(3) and will not result in income of the types described in Code Section
856(c)(4) or result in the tax imposed under Code Section 857(b)(6), and (iv)
the substitution, together with all other substitutions and sales made or
requested by Lessee pursuant to any other leases with Lessor of properties
hereto or any other transfers of the Leased Property or the properties leased
under other such operating leases, during the relevant time period, will not
jeopardize the qualification of Lessor as a real estate investment trust under
Code Sections 856-860.

            (d) In the event that the equity value of the Substitute Property or
group of Substitute Properties (i.e., the Fair Market Value of the Substitute
Property or group of Substitute Properties minus the encumbrances subject to
which Lessor will take the Substitute Property or group of Substitute
Properties) as of the Substitution Date is greater than the equity value of the
Leased Property (i.e., the Fair Market Value of the Leased Property minus the
encumbrances subject to which Lessee will take the Leased Property) as of the
Substitution Date (or in the case of damage destruction or Condemnation, the
Fair Market Value immediately prior to such damage, destruction or
Condemnation), Lessor shall pay to Lessee an amount equal to the difference,
subject to the limitation set forth below. In the event that said equity value
of the Substitute Property or group of Substitute Properties is less than said
equity value of the Leased Property, Lessee shall pay to Lessor an amount equal
to the difference, subject to the limitation set forth below. Notwithstanding
the foregoing, neither Lessor nor Lessee shall be obligated to consummate any
substitution if such party would be required to make a payment to the other in
excess of an amount equal to ten percent of said Fair Market Value of the Leased
Property (the amount of cash paid by one party to the other being hereinafter
referred to as the "Cash Adjustment").

            (e) The Rent for such Substitute Property in all respects shall
provide Lessor with a yield at the time of such substitution (i.e., annual
return on its investment in such Substitute Property) not less than the Current
Yield (and the yield reasonably expected to be received thereafter throughout
the remainder of the Term) from the Leased Property prior to any damage,
destruction or Condemnation, taking into account the Cash Adjustment paid or
received by Lessor and any other relevant factors.

                                       33
<PAGE>

            (f) The Minimum Purchase Price of any Substitute Property or
Substitute Properties shall be an amount equal to the Minimum Purchase Price of
the Leased Property on the Substitution Date (i) increased by any Cash
Adjustment paid by Lessor pursuant to Section 20.1(d) above, or (ii) decreased
by any Cash Adjustment paid by Lessee pursuant to Section 20.1(d) above.

     20.2   Conditions to Substitution. On the Substitution Date, the Substitute
            --------------------------
Property will become the Leased Property hereunder upon delivery by Lessee to
Lessor of the following items in form and substance reasonably satisfactory to
Lessor:

            (a) an Officer's Certificate representing, warranting and certifying
that (i) the Substitute Property has been accepted by Lessee for all purposes of
this Lease and there has been no material damage to the improvements located on
the Substitute Property nor is any condemnation or eminent domain proceeding
pending with respect thereto; (ii) all permits, licenses and certificates
(including a permanent, unconditional certificate of occupancy and, to the
extent permitted by law, all certificates of need and licenses) which are
necessary to permit the use of the Substitute Property in accordance with the
provisions of this Lease have been obtained and are in full force and effect;
(iii) under applicable zoning and use laws, ordinances, rules and regulations
the Substitute Property may be used for the purposes contemplated by Lessee and
all necessary subdivision approvals have been obtained; (iv) there are no
mechanic's or materialmen's liens outstanding or threatened to the knowledge of
Lessee against the Substitute Property arising out of or in connection with the
construction of the improvements thereon, other than those being contested by
Lessee pursuant to Article 11; (v) any mechanic's or materialmen's liens being
contested by Lessee will be promptly paid by Lessee if such contest is resolved
in favor of the mechanic or materialman; (vi) to the best knowledge of Lessee,
there exists no Event of Default under this Lease, and no defense, offset or
claim exists with respect to any sums to be paid by Lessee hereunder; and (vii)
any exceptions to Lessor's title to the Substitute Property do not materially
interfere with the intended use of the Substitute Property by Lessee;

            (b) a special warranty deed with warranties against claims arising
under Lessee conveying to Lessor title to the Substitute Property free and clear
of any liens and encumbrances except those approved in writing or assumed by
Lessor;

            (c) a lease duly executed, acknowledged and delivered by Lessee,
containing the same terms and conditions as are contained herein, except that
(i) the legal description of the Land shall refer to the Substitute Property,
(ii) the Minimum Purchase Price, Rent and any Additional Charges for the
Substitute Property shall be consistent with the requirements of Section 20.1
and (iii) such other changes therein as may be necessary or appropriate under
the circumstances shall be made;

            (d) a standard owner's or lessee's (as applicable) policy of title
insurance covering the Substitute Property (or a valid, binding, unconditional
commitment therefor), dated the Substitution Date, in current form and including
mechanics' and materialmen's lien coverage,

                                       34
<PAGE>

if available in the State in which the Substitute Property is located issued to
Lessor by a title insurance company reasonably satisfactory to Lessor. Such
policy shall (i) insure (A) Lessor's fee title to the Substitute Property,
subject to no liens or encumbrances except those approved or assumed by Lessor,
and (B) that any restrictions affecting the Substitute Property have not been
violated and that a further violation thereof will not result in a forfeiture or
reversion of title, (ii) be in an amount at least equal to the Fair Market Value
of the Substitute Property, and (iii) contain such endorsements as may be
reasonably requested by Lessor if available in the State in which the Substitute
Property is located;

            (e) certificates of insurance with respect to the Substitute
Property fulfilling the requirements of Article 12;

            (f) current appraisals or other evidence satisfactory to Lessor, in
its sole discretion, as to the current Fair Market Values of such Substitute
Property;

            (g) all available revenue data relating to the Substitute Property
for the period from the date of opening for business of the Substitute Property
to the date of Lessee's most recent Fiscal-Year end, or for the most recent
three years or the period of Lessee's ownership or operation of the Substitute
Property, whichever is less; and

            (h) such other certificates, documents, opinions of counsel (which
may be in-house counsel), and other instruments as may be reasonably required by
Lessor.

     20.3   Conveyance to Lessee. On the Substitution Date Lessor will convey
            --------------------
the Leased Property to Lessee (and terminate the Lease as to the Leased Property
being replaced) in accordance with the provisions of Article 17 (except as to
payment of any expenses in connection therewith which shall be governed by
Section 20.4 below) upon either (a) payment in cash therefor or (b) conveyance
to Lessor of the Substitute Property, as appropriate.

     20.4   Expenses. Lessee shall pay or cause to be paid, on demand, all
            --------
reasonable costs and expenses paid or incurred by Lessor in connection with the
substitution and conveyance of the Leased Property and the Substitute Property,
including (a) fees and expenses of Lessor's counsel, (b) the amount of any
recording taxes and filing fees, (c) the cost of preparing and recording, if
appropriate, a release of the Leased Property from the lien of any mortgage, (d)
broker's fees and commissions for Lessee, if any, (e) documentary stamp and
transfer taxes, if any, (f) title insurance charges, and (g) escrow fees, if
any.

                                   ARTICLE 21
                                  RISK OF LOSS
                                  ------------

     Except as otherwise provided in this Lease, during the Term of this Lease,
the risk of loss or of decrease in the enjoyment and beneficial use of the
Leased Property in consequence of the damage or destruction thereof by fire, the
elements, casualties, thefts, riots, wars or otherwise, or in consequence of
foreclosures, attachments, levies or executions (other than by Lessor and those
claiming from, through or under Lessor) is assumed by Lessee and, Lessor shall
in no event be

                                       35
<PAGE>

answerable or accountable therefor nor shall any of the events mentioned in this
Section entitle Lessee to any abatement of the Rent except as specifically
provided in this Lease.

                                   ARTICLE 22
                                INDEMNIFICATION
                                ---------------

     Notwithstanding the existence of any insurance or self insurance provided
for in Article 12, and without regard to the policy limits of any such insurance
or self insurance, Lessee will protect, indemnify, save harmless and defend
Lessor from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses (including reasonable attorneys'
fees and expenses), to the extent permitted by law, imposed upon or incurred by
or asserted against Lessor by reason of: (a) any accident, injury to or death of
persons or loss to property occurring on or about the Leased Property, including
any claims of malpractice, (b) any use, misuse, no use, condition, maintenance
or repair by Lessee of the Leased Property, (c) any Impositions (which are the
obligations of Lessee to pay pursuant to the applicable provisions of this
Lease), (d) any failure on the part of Lessee to perform or comply with any of
the terms of this Lease when due or within any applicable cure period, (e) the
non-performance of any of the terms and provisions of any and all existing and
future subleases of the Leased Property to be performed by Lessee as landlord
thereunder when due or within any applicable cure period and (f) the violation
by Lessee of any Hazardous Materials Law. Any amounts which become payable by
Lessee under this Section shall be paid within ten days after liability therefor
on the part of Lessor is finally determined by litigation or otherwise
(including the expiration of any time for appeals) and, if not timely paid,
shall bear interest (to the extent permitted by law) at the Overdue Rate from
the date of such determination to the date of payment. Lessee, at its expense,
shall contest, resist and defend any such claim, action or proceeding asserted
or instituted against Lessor or may compromise or otherwise dispose of the same
as Lessee sees fit. Lessor shall cooperate with Lessee in a reasonable manner to
permit Lessee to satisfy Lessee's obligations hereunder, including the execution
of any instruments or documents reasonably requested by Lessee. Nothing herein
shall be construed as indemnifying Lessor or its agents for their own negligent
acts or omissions or willful misconduct. Lessee's liability for a breach of the
provisions of this Article shall survive any termination of this Lease.

                                   ARTICLE 23
                           SUBLETTING AND ASSIGNMENT
                           -------------------------

     23.1   Subletting and Assignment. Subject to the rights of (i) residents
            -------------------------
under existing resident agreements, (ii) Tenants under existing Tenant Leases,
(iii) the provisions of Section 23.3 below and (iv) any other express conditions
or limitations set forth herein, Lessee may, without the consent of Lessor,
sublet all or any part of the Leased Property consistently with the Primary
Intended Use. Lessor shall not unreasonably withhold its consent to any
subletting or assignment; provided that (a) in the case of a subletting, the
sublessee shall comply with the provisions of Section 23.2, (b) in the case of
an assignment, the assignee shall assume in writing and agree from and after the
effective date of such assignment to keep and perform all of the terms of this
Lease on the part of Lessee to be kept and performed and shall be and become
jointly and severally liable with Lessee for the performance thereof, (c) an
original counterpart of

                                       36
<PAGE>

each such sublease and assignment and assumption, duly executed by Lessee and
such sublessee or assignee, as the case may be, in form and substance reasonably
satisfactory to Lessor, shall be delivered promptly to Lessor, and (d) in case
of either an assignment or subletting, Lessee shall remain primarily liable, as
principal rather than as surety, for the prompt payment of the Rent and for the
performance and observance of all of the covenants and conditions to be
performed by Lessee hereunder. In addition to Lessee's rights to sublet and
assign as provided in this section above, Lessee shall also have the right (upon
Lessor's prior consent, which consent shall not unreasonably be withheld) to
enter into Tenant Leases which extend beyond the Term of this Lease. To the
extent that any such Tenant Leases extend beyond the Term of this Lease, Lessor
shall receive the rents from, and be responsible for any obligations on the part
of the landlord or lessor under such Tenant Leases. Any and all such Tenant
Leases shall, to the extent applicable, be subject to the provisions of this
Section and Section 23.2.

     23.2   Non-Disturbance, Subordination and Attornment. Lessee shall insert
            ---------------------------------------------
in each sublease permitted under Section 23.1 provisions to the effect that (a)
such sublease is subject and subordinate to all of the terms and provisions of
this Lease and to the rights of Lessor hereunder, (b) in the event this Lease
shall terminate before the expiration of such sublease, the sublessee thereunder
will, at Lessor's option, attorn to Lessor and waive any right the sublessee may
have to terminate the sublease or to surrender possession thereunder as a result
of the termination of this Lease and (c) in the event the sublessee receives a
written notice from Lessor or Lessor's assignees, if any, stating that there is
an Event of Default under this Lease, the sublessee, shall thereafter be
obligated to pay all rentals accruing under said sublease directly to the party
giving such notice, or as such party may direct until advised that such Event of
Default is no longer outstanding. All rentals received from the sublessee by
Lessor or Lessor's assignees, if any, shall be credited against amounts owing by
Lessee under this Lease. Lessor agrees that notwithstanding any default,
termination, expiration, sale, entry or other act or omission of Lessee pursuant
to the terms of this Lease, or at law or in equity, Tenant's possession shall
not be disturbed unless such possession may otherwise be terminated pursuant to
the terms of the applicable Tenant Lease. Lessor hereby agrees, upon Lessee's
request, to execute a nondisturbance agreement in favor of any Tenant or in
favor of any sublessee under any sublease permitted under Section 23.1 above;
provided that the Tenant or any such sublessee has acknowledged all of the
foregoing provisions and executed all documents required by this Section 23.2.

     23.3   Sublease Limitation. Notwithstanding anything contained in this
            -------------------
Lease to the contrary, Lessee shall not sublet the Leased Property, including
any of the Resident Agreements and Tenant Leases, on any basis such that the
rental to be paid by the sublessee thereunder would be based, in whole or in
part, on either (a) the income or profits derived by the business activities of
the sublessee, or (b) any other formula such that any portion of the sublease
rental received by Lessor would fail to qualify as "rents from real property"
within the meaning of Section 856(d) of the Code, or any similar or successor
provision thereto.

     23.4   Sublease to Current Licensee.  Notwithstanding anything in this
            ----------------------------
Article 23 to the contrary, Lessee shall have the right to sublease the Leased
Property to the current holder of the necessary license for operation of the
Leased Property as an assisted living facility and to

                                       37
<PAGE>

simultaneously enter into an agreement with such licensee for the management of
the Leased Property. The sublease and the management agreement shall be subject
to the review and consent of Lessor. Lessee agrees that notwithstanding any
sublease pursuant to this Section 23.4, Lessee shall proceed to and diligently
pursue in conjunction and cooperation with Lessor to have all required licenses
for operation of the Leased Property transferred to Lessee and within thirty
(30) days of transfer of or issuance of the required license for operation of
the Leased Property to Lessee, the sublease and management agreement shall be
terminated.

                                   ARTICLE 24
                OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS
                -----------------------------------------------

     24.1   Estoppel Certificate.  At any time and from time to time within 20
            --------------------
days following written request by Lessor, Lessee will furnish to Lessor an
Officer's Certificate certifying that this Lease is unmodified and in full force
and effect (or that this Lease is in full force and effect as modified and
setting forth the modifications) and the dates to which the Rent has been paid.
Any such Officer's Certificate furnished pursuant to this Article may be relied
upon by Lessor, any prospective purchaser of the Leased Property and any third
parties who have an interest in the Leased Property, including any Lender or
professional advisor or Lessor.

     24.2   Financial Statements and Certificates. Lessee will furnish the
            -------------------------------------
following statements to Lessor; provided that Lessor shall keep confidential
items furnished by Lessee which are not generally available to the public:

                 (i)    within 120 days after the end of each Fiscal Years (A) a
            copy of the Consolidated Financial Statements for such Fiscal Year;
            (B) an Officer's Certificate stating (x) that no Event of Default,
            or event which, with the giving of notice or the passage of time, or
            both, would constitute an Event of Default, has occurred and is
            continuing and has not been waived, or, if there shall have occurred
            and be continuing such an Event of Default, specifying the nature
            thereof and the steps being taken to remedy the same, and (y) that
            to the best of the signer's knowledge and belief, Lessee is not in
            default in the performance or observance of any of the terms of any
            loans or credit facilities, with an outstanding balance equal to or
            greater than $10,000,000.00 in the aggregate, which default would
            permit the holder thereof to accelerate its stated maturity; (C) a
            current rent or lease roll for the Leased Property setting forth
            rental information in reasonable detail regarding all of the Tenants
            and Tenant Leases, including any space utilized by Lessee; (D) a
            statement of revenues and expenses of the Leased Property for the
            twelve-month period then ended in detail reasonably satisfactory to
            Lessor; and (E) a certificate in form satisfactory to Lessor setting
            forth the Coverage Ratio for the twelve-month period then ended;

                 (ii)   within 45 days after the end of each calendar quarter, a
            statement of all revenues and expenses relating to the operation of
            the Facility during such calendar quarter in each case certified by
            Lessee to Lessor in a certificate in substantially the form attached
            hereto as Exhibit E.
                      ---------

                                       38
<PAGE>

                 (iii)  within 15 days after request by Lessor, (A) a statement
            of the number of units available and the actual resident-days for
            the most recent month, quarter and year to date, (B) census
            information for the Facility in sufficient detail to show resident-
            mix on a daily average basis for the prior quarter and year, and (C)
            an aged accounts receivable report in sufficient detail to show
            amounts due from each class of resident-mix (such as private,
            Medicare, Medicaid and V.A.) by the account age classifications of
            30 days, 60 days, 90 days, 120 days, and over 120 days;

                 (iv)   if applicable, within 15 days after filing or receipt,
            as the case may be, (A) all cost reports filed with any regulatory
            or licensing agency (including any cost reports for Medicare or
            Medicaid) and any amendments thereto, together with all responses,
            audit reports or inquiries with respect to such cost reports, (B)
            copies of all licensure and certification survey reports and
            statements of deficiencies with respect to the Facility (with
            correction plans attached thereto), (C) copies of the Medicaid rate
            calculation worksheet (or equivalent thereof), if any, issued by the
            applicable Medicaid Agency, (D) copies of all notices (regardless of
            form) from any and all licensing and/or certifying agencies that the
            license or applicable reimbursement certification for the Facility
            is being downgraded to a substandard category, revoked or suspended
            or that action is pending or being considered to downgrade to a
            substandard category, revoke or suspend the Facility's license or
            certification, and (E) evidence of the payment of any bed taxes or
            similar taxes;

                 (v)    within ten days after receipt, copies of all licensure
            and certification surveys, reports and statements of deficiencies
            with respect to the Facility together with any plans of correction
            applicable thereto, if any, within the time prescribed by any
            applicable Legal Requirement;

                 (vi)   within 30 days after filing, copies of the 10-Q and 10-K
            Reports of Lessee filed with the United States Securities and
            Exchange Commission;

                 (vii)  within 45 days after the end of each quarter, a
            certificate in form acceptable to Lessor that the required Coverage
            Ratio for the quarter then ended has been achieved; and

                 (viii) with reasonable promptness, such other information
            respecting the financial condition, affairs and properties of Lessee
            as Lessor may reasonably request from time to time and as is
            generally prepared by Lessee for its own internal reporting
            purposes.

                                   ARTICLE 25
                                   INSPECTION
                                   ----------

                                       39
<PAGE>

     Lessee shall permit Lessor, any Facility Mortgagee and their authorized
representatives to inspect the Leased Property on reasonable advance notice and
during usual business hours subject to any security, health, safety or
confidentiality requirements of Lessee, the rights of the Residents, the rights
of the Tenants, any Insurance Requirements relating to the Leased Property, or
any other restrictions imposed by law or applicable regulations.

                                   ARTICLE 26
                                QUIET ENJOYMENT
                                ---------------

     So long as Lessee shall pay all Rent as the same becomes due and shall
fully comply with all of the terms of this Lease and fully perform its
obligations hereunder, Lessee shall peaceably and quietly have, hold and enjoy
the Leased Property for the Term hereof, free of any claim or other action by
Lessor or anyone claiming by, through or under Lessor, but subject to all liens
and encumbrances of record as of the date hereof as shown on Exhibit B attached
hereto or hereafter consented to by Lessee. No failure by Lessor to comply with
the foregoing covenant shall give Lessee any right to cancel or terminate this
Lease, or to fail to pay any other sum payable under this Lease, or to fail to
perform any other obligation of Lessee hereunder. Notwithstanding the foregoing,
Lessee shall have the right by separate and independent action to pursue any
claim or seek any damages it may have against Lessor as a result of a breach by
Lessor of the covenant of quiet enjoyment contained in this Article.

                                   ARTICLE 27
                                    NOTICES
                                    -------

     Any notices, demands, approvals and other communications provided for
herein shall be in writing and shall be delivered by telephonic facsimile,
overnight air courier, personal delivery or registered or certified U.S. Mail
with return receipt requested, postage paid, to the appropriate party at its
address as follows:

     If to Lessor:

     3310 West End Avenue
     Suite 700
     Nashville, Tennessee  37203
     Attention: J. D. Carter Steele
     Telephone: (615) 269-8175
     Telecopy: (615) 269-8122

     With a copy to:

     John A. Gupton, III
     Baker, Donelson, Bearman & Caldwell
     211 Union Street
     Suite 1000
     Nashville, Tennessee  37201

                                       40
<PAGE>

     Telephone: (615) 726-5600
     Telecopy: (615) 744-7351

     If to Lessee:

     Emeritus Corporation
     3131 Elliott Avenue, Suite 500
     Seattle, Washington 98121
     Telephone: 206/298-2909
     Telecopy: 206/301-4500
     Attn:  Raymond Brandstrom

     With a copy to:

     The Nathanson Group
     1411 Fourth Avenue
     Suite 905
     Seattle, Washington 98101
     Telephone: 206-623-6239
     Telecopy: 206-623-1738
     Attn:  Randi Nathanson

     Addresses for notice may be changed from time to time by written notice to
all other parties. Any communication given by mail will be effective (i) upon
the earlier of (a) three business days following deposit in a post office or
other official depository under the care and custody of the United States Postal
Service or (b) actual receipt, as indicated by the return receipt; (ii) if given
by telephone facsimile, when sent; and (iii) if given by personal delivery or by
overnight air courier, when delivered to the appropriate address set forth.


                                   ARTICLE 28
                                   APPRAISAL
                                   ---------

     In the event that it becomes necessary to determine the Fair Market Value,
Fair Market Value Purchase Price, the Fair Market Added Value, the Minimum
Purchase Price or the Fair Market Rental Value of the Leased Property or a
Substitute Property for any purpose of this Lease, the party required or
permitted to give notice of such required determination shall include in the
notice the name of a person selected to act as an appraiser on its behalf.
Within ten days after receipt of any such notice, Lessor (or Lessee, as the case
may be) shall by notice to Lessee (or Lessor, as the case may be) appoint a
second person as an appraiser on its behalf. The appraisers thus appointed (each
of whom must be a member of the American Institute of Real Estate Appraisers or
any successor organization thereto) shall, within 45 days after the date of the
notice appointing the first appraiser, proceed to appraise the Leased Property
or the Substitute Property, as the case may be, to determine any of the
foregoing values as of the relevant date (giving effect to the impact, if any,
of inflation from the date of their decision to the

                                       41
<PAGE>

relevant date); provided that if only one appraiser shall have been so
appointed, or if two appraisers shall have been so appointed but only one such
appraiser shall have made such determination within 50 days after the making of
Lessee's or Lessor's request, then the determination of such appraiser shall be
final and binding upon the parties. If two appraisers shall have been appointed
and shall have made their determinations within the respective requisite periods
set forth above and if the difference between the amounts so determined shall
not exceed ten percent of the lesser of such amounts, then the Fair Market Value
or Fair Market Added Value or the Fair Market Rental Value shall be an amount
equal to 50 of the sum of the amounts so determined. If the difference between
the amounts so determined shall exceed 10% of the lesser of such amounts, then
such two appraisers shall have 20 days to appoint a third appraiser, but if such
appraisers fail to do so, then either party may request the American Arbitration
Association or any successor organization thereto to appoint an appraiser within
20 days of such request, and both parties shall be bound by any appointment so
made within such 20-day period. If no such appraiser shall have been-appointed
within such 20 days or within 90 days of the original request for a
determination of Fair Market Value or Fair Market Added Value or the Fair Market
Rental Value, whichever is earlier, either Lessor or Lessee may apply to any
court having jurisdiction to have appointment made by such court. Any appraiser
appointed, by the American Arbitration Association or by such court, shall be
instructed to determine the Fair Market Value or Fair Market Added Value or the
Fair Market Rental Value within 30 days after appointment of such appraiser. The
determination of the appraiser which differs most in terms of dollar amount from
the determinations of the other two appraisers shall be excluded, and 50% of the
sum of the remaining two determinations shall be final and binding upon Lessor
and Lessee as the Fair Market Value or Fair Market Added Value or the Fair
Market Rental Value for such interest. However, in the event that following the
appraisal performed by said third appraiser, the dollar amount of two of such
appraisals are higher and lower, respectively, than the dollar amount of the
remaining appraisal in equal dollar amounts, the determinations of both the
highest and lowest appraisal, respectively, shall be rejected and the
determination of the remaining appraisal shall be final and binding upon Lessor
and Lessee as the Fair Market Value or Fair Market Added Value or the Fair
Market Rental Value for such interest. This provision for determination by
appraisal shall be specifically enforceable to the extent such remedy is
available under applicable law, and any determination hereunder shall be final
and binding upon the parties except as otherwise provided by applicable law.
Lessor and Lessee shall each pay the fees and expenses of the appraiser
appointed by it and each shall pay one-half of the fees and expenses of the
third appraiser and one-half of all other costs and expenses, incurred in
connection with each appraisal.

                                  ARTICLE 29
                                PURCHASE RIGHTS
                                ---------------

     29.1   Right of First Refusal. During the Term hereof (provided that no
            ----------------------
Event of Default has occurred and is continuing), Lessee shall have a first
refusal option to purchase the Leased Property upon the same terms and
conditions as Lessor, or its successors and assigns, shall propose to sell the
Leased Property, or shall have received an offer from a third party to purchase
the Leased Property, which Lessor intends to accept (or has accepted subject to
Lessee's right of first refusal granted herein). If, during the Term, Lessor
receives such an offer or reaches such

                                       42
<PAGE>

agreement with a third party or proposes to offer the Leased Property for sale,
Lessor shall promptly notify Lessee of the purchase price for the Leased
Property and all other material terms and conditions of such agreement or
proposed sale together with a copy of such offer, and Lessee shall have 30 days
after receipt of such notice from Lessor within which time to exercise Lessee's
option to purchase. If Lessee exercises its option, then such purchase shall be
consummated within the time set forth in the third-party offer and in accordance
with the provisions of Article 17 hereof to the extent not inconsistent
herewith. If Lessee shall not exercise Lessee's option to purchase within said
30-day period after receipt of said notice from Lessor, Lessor shall be free for
a period of 90 days after the expiration of said 30-day period to sell the
Leased Property to the third party at the price and terms set forth in such
offer. Whether or not such sale is consummated, Lessee shall be entitled to
exercise its right of first refusal as provided in this Article, as to any
subsequent sale of the Leased Property during the Term of this Lease.

     29.2 Option to Purchase.  Anytime subsequent to the Commencement Date each
          ------------------
year through June 1, 2001, Lessee shall have the option to purchase the Leased
Property in accordance with the terms of the Contract for Sale of Real Estate
attached hereto as Exhibit "E" upon written notice to Landlord for the purchase
price set forth in the Contract for Sale of Real Estate. Upon Lessee's exercise
of its option to purchase, Lessee, or its affiliate, and Lessor will execute the
Contract for Sale of Real Estate attached as Exhibit "E". If not exercised, the
option to purchase granted hereby will expire and be of no further force and
effect on or after June 1, 2001. If Lessee, or its affiliate, and Lessor execute
the Contract for Sale of Real Estate but do not consummate the sale as the
result of Lessor's default, the Minimum Rent shall be adjusted to $650,995.59.

                                  ARTICLE 30
                               DEFAULT BY LESSOR
                               -----------------

     30.1 Default by Lessor. Lessor shall be in default of its obligations
          -----------------
under this Lease if Lessor shall fail to observe or perform any term, covenant
or condition of this Lease on its part to be performed and such failure shall
continue for a period of 30 days after written notice thereof is received by
Lessor, unless such failure cannot with due diligence be cured within a period
of 30 days, in which case such failure shall not be deemed to continue if
Lessor, within said 30-day period, proceeds promptly and with due diligence to
cure the failure and diligently completes the curing thereof. The time within
which Lessor shall be obligated to cure any such failure shall also be subject
to extension of time due to the occurrence of any Unavoidable Delay. In the
event Lessor fails to cure any such default, Lessee, without waiving or
releasing any obligations hereunder, and in addition to all other remedies
available to Lessee hereunder or at law or in equity, may purchase the Leased
Property from Lessor for a purchase price equal to the greater of the Fair
Market Value Purchase Price or the Minimum Purchase Price of the Leased Property
minus an amount equal to any damage suffered by Lessee by reason of such
default. In the event Lessee elects to purchase the Leased Property, it shall
deliver a notice thereof to Lessor specifying a Payment Date occurring no less
than 90 days subsequent to the date of such notice on which it shall purchase
the Leased Property, and the same shall be thereupon conveyed in

                                       43
<PAGE>

accordance with the provisions of Article 17. Any sums owed Lessee by Lessor
hereunder shall bear interest at the Overdue Rate from the, date due and payable
until the date paid.

     30.2   Lessee's Right to Cure. Subject to the provisions of Section 30.1,
            ----------------------
if Lessor shall breach any covenant to be performed by it under this Lease,
Lessee, after giving notice to and demand upon Lessor in accordance with Section
30.1, without waiving or releasing any obligation of Lessor hereunder, and in
addition to all other remedies available to Lessee hereunder and at law or in
equity, Lessee may (but shall be under no obligation at any time thereafter to)
make such payment or perform such act for the account and at the expense of
Lessor. All sums so paid by Lessee and all costs and expenses (including
reasonable attorneys' fees) so incurred, together with interest thereon at the
Overdue Rate from the date on which such sums or expenses are paid or incurred
by Lessee, shall be paid by Lessor to Lessee on demand or set off against the
Rent. The rights of Lessee hereunder to cure and to secure payment from Lessor
in accordance with this Section 30.2 shall survive the termination of this
Lease.

                                  ARTICLE 31
                                  ARBITRATION
                                  -----------

     31.1   Controversies. Except with respect to the payment of Minimum Rent
            -------------
hereunder, in case any controversy shall arise between the parties hereto as to
any of the requirements of this Lease or the performance thereof which
controversy the parties shall be unable to settle by agreement or as otherwise
provided herein, such controversy shall be determined by arbitration to be
initiated and conducted as provided in this Article 31.

     31.2   Appointment of Arbitrators. The party or parties requesting
            --------------------------
arbitration shall serve upon the other a written demand therefor specifying the
matter to be submitted to arbitration, and nominating an arbitrator who is a
member in good standing of the American Arbitration Association ("AAA"). Within
20 days after receipt of such written demand and notification, the other party
shall, in writing, nominate a person who is a member in good standing with AAA
and the two arbitrators so designated shall, within ten days thereafter, select
a third arbitrator who is a person who is a member in good standing with AAA and
give immediate written notice of such selection to the parties and shall fix in
said notice a time and place for the first meeting of the arbitrators, which
meeting shall be held as soon as conveniently possible after the selection of
all arbitrators, at which time and place the parties to the controversy may
appear and be heard.

     31.3   Third Arbitrator. In case the notified party or parties shall fail
            ----------------
to make a selection upon notice, as aforesaid, or in case the first two
arbitrators selected shall fail to agree upon a third arbitrator within ten days
after their selection, then such arbitrator or arbitrators may, upon application
made by either of the parties to the controversy, after 20 days' written notice
thereof to the other party or parties, have a third arbitrator appointed by any
judge of any United States court of record having jurisdiction in the state in
which the Leased Property is located or, if such office shall not then exist, by
a judge holding an office most nearly corresponding thereto.

     31.4   Arbitration Procedure. Said arbitrators shall give each of the
            ---------------------
parties not less than ten days' written notice of the time and place of each
meeting at which the parties or any of them
                                       44
<PAGE>

may appear and be heard and after hearing the parties in regard to the matter in
dispute and taking such other testimony and making such other examinations and
investigations as justice shall require and as the arbitrators may deem
necessary, they shall decide the questions submitted to them in accordance with
the rules of AAA. The decision of said arbitrators in writing signed by a
majority of them shall be final and binding upon the parties to such
controversy. In rendering such decisions and award, the arbitrators shall not
add to, subtract from or otherwise modify the provisions of this Lease.

     31.5   Expenses. Unless otherwise specified in the decision of the
            --------
arbitrators, the prevailing party in any arbitration proceeding shall be
reimbursed its reasonable out-of-pocket expenses by the non-prevailing party,
including travel expenses and reasonable attorneys' fees and expenses, and the
non-prevailing party shall pay all other costs of such proceeding.

                                  ARTICLE 32
                       FINANCING OF THE LEASED PROPERTY
                       --------------------------------

     Lessor agrees that it will not grant or create any mortgage, deed of trust,
lien, encumbrance or other title retention agreement upon the Leased Property to
secure any indebtedness of Lessor (an "Encumbrance"), unless each holder of such
an Encumbrance agrees (a) to give Lessee the same notice, if any, given to
Lessor of any default or acceleration of any obligation underlying any such
Encumbrance or any sale in foreclosure of such Encumbrance, (b) to permit Lessee
to appear with its representatives and to bid at any public foreclosure sale
with respect to any such Encumbrance, (c) agrees to release the Leased Property
from the Encumbrance upon the exercise by Lessee of a right to purchase
contained in this Lease and the payment by Lessee of the applicable purchase
price, and (d) enters into an agreement with Lessee containing the provisions
described in Article 33 of this Lease. Lessee agrees to execute and deliver to
Lessor or the holder of an Encumbrance any written agreement required by this
Article within ten days of written request thereof by Lessor or such holder of
an Encumbrance. Lessee hereby consents to the assignment of and grant of a
security interest and lien in this Lease together with the other documents and
instruments delivered to Lessor by Lessee pursuant hereto and in connection
herewith (collectively, the "Assigned Documents"), including all rights of
Lessor in, to and under each Assigned Document, by Lessor to any Facility
Mortgagee requesting same. Lessee hereby further agrees to execute a Consent to
Assignment in substantially the form attached hereto as Exhibit F.  Lessor shall
                                                        ---------
pay any Encumbrance as and when due subject to any right granted Lessor in such
Encumbrance to contest any obligation of Lessor or to withhold any payment or
sum due under the Encumbrance.

                                  ARTICLE 33
                 SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE
                 ---------------------------------------------

     At the request from time to time by one or more holders of an Encumbrance
that may hereafter be placed upon the Leased Property or any part thereof, and
any and all renewals, replacements, modifications, consolidations, spreaders and
extensions thereof, Lessee will subordinate this Lease and all of Lessee's
rights and estate hereunder to each such Encumbrance and will attorn to and
recognize such holder (or the purchaser at any foreclosure sale or any sale

                                       45
<PAGE>

under a power of sale contained in any such Encumbrance or a holder by a deed in
lieu of foreclosure, as the case may be) as Lessor under this Lease for the
balance of the Term then remaining, subject to all of the terms and provisions
of this Lease; provided that each such institutional holder simultaneously with
or prior to recording any such Encumbrance executes and delivers a written
agreement in recordable form (a) consenting to this Lease and agreeing that,
notwithstanding any such other lease, mortgage, deed of trust, right, title or
interest, or any default, expiration, termination, foreclosure, sale, entry or
other act or omission under, pursuant to or affecting any of the foregoing,
Lessee shall not be disturbed in peaceful enjoyment of the Leased Property nor
shall this Lease be terminated or canceled at any time, except in the event
Lessor shall have the right to terminate this Lease under the terms and
provisions expressly set forth herein; (b) agreeing that it will be bound by all
the terms of this Lease, perform and observe all of Lessor's obligations set
forth herein; and (c) agreeing that all proceeds of the casualty insurance
described in Article 13 of this Lease and all Awards described in Article 14
will be made available to Lessor for restoration of the Leased Property as and
to the extent required by this Lease, subject only to reasonable regulation
regarding the manner of disbursement and application thereof. Lessee agrees to
execute and deliver to Lessor or the holder of an Encumbrance any written
agreement required by this Article within ten days of written request thereof by
Lessor or such holder of an Encumbrance. Lessee agrees to execute from time to
time, at the request of Lessor, an institutional investor of Lessor's or a
Facility Mortgagee, a certificate setting forth any defaults of Lessor hereunder
and the dates through which Rent has been paid and such other matters as may be
reasonably requested.

                                  ARTICLE 34
                                EXTENDED TERMS
                                --------------

     If no Event of Default shall have occurred and be continuing, Lessee is
hereby granted the right to extend the Term of this Lease for three additional,
consecutive five-year periods (each such period, an "Extended Term") for a
maximum possible Term of 25 years, by giving written notice to Lessor of each
such extension at least 180 days, but not more than 270 days, prior to the
expiration of the then-current Term; subject, however, to the provisions of
Section 13.7 hereof and any other provisions which provide a specific right to
renew this Lease after the expiration of the applicable renewal provision.
Lessee may not exercise its option for more than one Extended Term at a time and
may exercise the option to extend for an Extended Term if all of the Related
Leases are simultaneously extended by Lessee or its Affiliates, as the case may
be. During each Extended Term, all of the terms and conditions of this Lease
shall continue in full force and effect, except that the Minimum Rent for and
during each of the Extended Terms shall be the greater of (i) the Fair Market
Rental Value on the first day of such Extended Term or (ii) the Minimum Rent in
effect immediately prior to the first day of such Extended Term. In any event,
the Minimum Rent shall continue to be increased throughout the Extended Terms in
accordance with the provisions of Section 2.1(b) hereof.

                                       46
<PAGE>

                                  ARTICLE 35
                                 MISCELLANEOUS
                                 -------------

     35.1 No Waiver. No failure by Lessor or Lessee to insist upon the strict
          ---------
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of the Rent during the continuance of any such breach, shall constitute a waiver
of any such breach or any such term. To the extent permitted by law, no waiver
of any breach shall affect or alter this Lease, which shall continue in full
force and effect with respect to any other then existing or subsequent breach.

     35.2 Remedies Cumulative.  To the extent permitted by law, each legal,
          -------------------
equitable or contractual right, power and remedy of Lessor or Lessee now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy and the exercise or beginning of the exercise by Lessor or Lessee of
any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by Lessor or Lessee of any or all of such
other rights, powers and remedies.

     35.3 Surrender.  No surrender to Lessor of this Lease or of the Leased
          ---------
Property or any part thereof, or of any interest therein, shall be valid or
effective unless agreed to and accepted in writing by Lessor and no act by
Lessor or any representative or agent of Lessor, other than such a written
acceptance by Lessor, shall constitute an acceptance of any such surrender.

     35.4 No Merger of Title.  There shall be no merger of this Lease or of
          ------------------
the leasehold estate created hereby by reason of the fact that the same person,
firm, corporation or other entity may acquire, own or hold, directly or
indirectly, (a) this Lease or the leasehold estate created hereby or any
interest in this Lease or (b) such leasehold estate and the fee estate in the
Leased Property.

     35.5 Transfers by Lessor.  If Lessor or any successor owner of the Leased
          -------------------
Property shall convey the Leased Property in accordance with the terms hereof,
other than as security for a debt, the grantee or transferee of the Leased
Property shall expressly assume all obligations of Lessor hereunder arising or
accruing from and after the date of such conveyance or transfer, and shall be
reasonably capable of performing the obligations of Lessor hereunder and Lessor
or such successor owner, as the case may be, shall thereupon be released from
all future liabilities and obligations of Lessor under this Lease arising or
accruing from and after the date of such conveyance or other transfer and all
such future liabilities and obligations shall thereupon be binding upon the new
owner.

     35.6 General. Anything contained in this Lease to the contrary
          -------
notwithstanding, all claims against, and liabilities of, Lessee and Lessor
against the other arising out of or relating to this Lease and arising prior to
any date of termination of this Lease shall survive such termination. If any
term or provision of this Lease or any application thereof shall be invalid or
unenforceable, the remainder of this Lease and any other application of such
term or provision shall not be affected thereby. If any late charges provided
for in any provision of this Lease are based upon a rate in excess of the
maximum rate permitted by applicable law, the parties agree that such charges
shall be fixed at the maximum permissible rate. Neither this Lease nor any
provision hereof may be changed, waived, discharged or terminated except by an
instrument in

                                       47
<PAGE>

writing signed by Lessor and Lessee. All the terms and provisions of this Lease
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. The headings in this Lease are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Lease shall be governed by and construed in accordance with
the laws of the state where the Land is located, but not including its conflict
of laws rules. This Lease may be executed in one or more counterparts, each of
which shall be an original but, when taken together, shall constitute but one
document.

     35.7   Memorandum of Lease.  Lessor and Lessee shall, promptly upon the
            -------------------
request of either, enter into a short form memorandum of this Lease in form
suitable for recording under the laws of the state in which the Leased Property
is located in which reference to this Lease, and all options contained herein,
shall be made.

     35.8   Transfer of Licenses.  Upon the expiration or earlier termination of
            --------------------
the Term, Lessee shall take all action necessary or appropriate to effect (or
useful in effecting) the transfer, to the extent permitted by any Legal
Requirement, to Lessor or Lessor's nominee of all licenses, operating permits
and other governmental authorizations and all service contracts to the extent
permitted by the terms thereof which may be necessary or useful in the operation
of the Facility and which relate exclusively to the Facility which have not
previously been transferred or assigned to Lessor.

                                  ARTICLE 36
                               GLOSSARY OF TERMS
                               -----------------

     For purposes of this Lease, except as otherwise expressly provided or
unless the context otherwise requires, (a) the terms defined in this Article 36
have the meanings assigned to them in this Article 36 and include the plural as
well as the singular, (b) all accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with generally accepted accounting
principles as at the time applicable, (c) all references in this Lease to
designated "Articles", "Sections" and other subdivisions are to the designated
Articles, Sections and other subdivisions of this Lease, and (d) the words
"herein", "hereof" and "hereunder" and other words of similar import refer to
this Lease as a whole and not to any particular Article, Section or other
subdivision, (e) the word "including" shall mean "including without limitation,"
and (f) all consents required of Lessor hereunder shall be in Lessor's sole and
absolute discretion, unless otherwise specifically set forth herein. For
purposes of this Lease, the following terms shall have the meanings indicated:

     "AAA" means the American Arbitration Association.

     "Additional Charges" has the meaning set forth in Section 2.3 hereof
together with all other items specifically included as "Additional Charges" in
this Lease.

     "Adjustment Date" has the meaning set forth in Section 2.1(b) hereof.

                                       48
<PAGE>

     "Affiliate", when used with respect to Lessee, means any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with Lessee. For the purposes of this definition, "control", as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, through the ownership of voting securities, partnership interests or
other equity interests.  Specifically excluded from the term Affiliate is any
entity in which Dan Baty has an interest as an officer, director, shareholder,
member, partner, beneficiary or employee.

     "Agent" has the meaning set forth in Article 32 hereof.

     "Applicable Period" has the meaning set forth in Section 7.3.

     "Assigned Documents" has the meaning set forth in Article 32 hereof.

     "Award" means all compensation, sums or anything of value awarded, paid or
received on a total or partial Condemnation.

     "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which national banks in the City of Nashville, Tennessee
are closed.

     "Capital Additions" means one or more new buildings or one or more
additional structures annexed to any portion of any of the Leased Improvements,
which are constructed on any parcel or portion of the Land including any
additions thereto during the Term, including the construction of a new wing or
new story, or the rebuilding of the existing Leased Improvements or any portion
thereof not normal, ordinary or recurring to maintain the Leased Property,
excluding, however, any construction governed by the provisions of Article 13.

     "Capital Addition Cost" means the cost of any Capital Additions proposed to
be made by Lessee whether paid for by Lessee or Lessor. Such cost shall include
and be limited to (a) the cost of construction of the Capital Additions,
including site preparation and improvement, materials, labor, supervision and
certain related design, engineering and architectural services and the cost of
any fixtures, construction financing and miscellaneous items approved in writing
by Lessor, (b) if agreed to by Lessor in writing in advance, the cost of any
land contiguous to the Leased Property purchased for the purpose of placing
thereon the Capital Additions or any portion thereof or for providing means of
access thereto, or parking facilities therefor, including the cost of surveying
the same, (c) the cost of insurance, real estate taxes, water and sewage charges
and other carrying charges for such Capital Additions during construction, (d)
the cost of title insurance, (e) reasonable fees and expenses of legal counsel
and accountants, (f) filing, registration and recording taxes and fees, (g)
documentary stamp taxes, if any, (h) environmental assessments and boundary
surveys and (i) all reasonable costs and expenses of Lessor and any Lending
Institution which has committed to finance the Capital Additions, including, (A)
the reasonable fees and expenses of their respective legal counsel, (B) all
printing expenses, (C) the amount of any filing, registration and recording
taxes and fees, (D) documentary stamp taxes, if any, (E) title insurance
charges, appraisal fees, if any, (F) rating agency fees, if any, and (G)

                                       49
<PAGE>

commitment fees, if any, charged by any Lending Institution advancing or
offering to advance any portion of the financing for such Capital Additions.

     "Capital Replacement Account" has the meaning set forth in Section 2.1(c).

     "Cash Adjustment" has the meaning set forth in Section 20.1(d).

     "Charge" has the meaning set forth in Article 11 hereof.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Commencement Date" has the meaning set forth in Article 1.

     "Condemnation" means the transfer of all or any part of the Leased Property
as a result of (i) the exercise of any governmental power, whether by legal
proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer by
Lessor to any Condemnor, either under threat of condemnation or while legal
proceedings for condemnation are pending.

     "Condemnor" means any public or quasi-public authority, or private
corporation or individual, having the power of Condemnation.

     "Consolidated Financial Statements" means for any fiscal year or other
accounting period for Lessee and its respective consolidated Affiliates, audited
statements of earnings and retained earnings and of changes in financial
position for such period and for the period from the beginning of the respective
fiscal year of Lessee to the end of such period and the related balance sheet as
at the end of such period, together with the notes thereto, all in reasonable
detail and setting forth in comparative form the corresponding figures for the
corresponding period in the preceding fiscal year of Lessee, and prepared in
accordance with generally accepted accounting principles consistently applied,
except as noted.

     "Consumer Price Index" or "CPI" means the Consumer Price Index for All
Urban Consumers for the U. S. City Average for all Items (1982-1984=100) as
published by the United States Department of Labor, Bureau of Labor Statistics.
If the manner in which the Consumer Price Index is determined by the Bureau of
Labor Statistics shall be substantially revised (including a change in the base
index year), an adjustment shall be made by Lessor in such revised index which
would produce results equivalent, as nearly as possible, to those which would
have been obtained if the Consumer Price Index had not been so revised. If the
Consumer Price Index shall become unavailable to the public because publication
is discontinued or otherwise, or if equivalent data is not readily available to
enable Lessor to make the adjustment referred to in the preceding sentence,
Lessor will substitute therefor a comparable index based upon changes in the
cost of living or purchasing power of the consumer dollar published by any other
governmental agency, or if no such index shall be available, then a comparable
index published by a major bank or other financial institution or by a
university or a recognized financial publication.

                                       50
<PAGE>

     "Coverage Ratio" has the meaning set forth in Section 7.3

     "Credit Enhancements" means all cash collateral, security deposits,
security interests, letters of credit, pledges, prepaid rent or other sums,
deposits or interests held by Lessee, if any, to secure obligations with respect
to the Leased Property, the Resident Agreements, the Residents, the Tenant
Leases or the Tenants.

     "Current Yield" means as of any date the annual Minimum Rent, as adjusted
from time-to-time pursuant to the terms of this Lease, divided by the sum of (i)
the Project Amount plus (ii) all Capital Additions Costs paid for or financed by
Lessor which have not been repaid by Lessee.

     "Date of Taking" means the date the Condemnor has the right to possession
of the property being condemned.

     "EBITDAR" has the meaning set forth in Section 7.3.

     "Encumbrance" has the meaning set forth in Article 32.

     "Event of Default" has the meaning set forth in Section 15.1.

     "Extended Term" has the meaning set forth in Article 34.

     "Facility" has the meaning set forth in Article 1.

     "Facility Mortgage" has the meaning set forth in Section 12.1.

     "Facility Mortgagee" has the meaning set forth in Section 12.1.

     "Fair Market Added Value" means the Fair Market Value (as hereinafter
defined) of the Leased Property (including all Capital Additions) less the Fair
Market Value of the Leased Property determined as if no Capital Additions paid
for by Lessee without financing by Lessor had been constructed.

     "Fair Market Rental Value" means the fair market rental value of the Leased
Property or any Substitute Property, (a) assuming the same is unencumbered by
this Lease, (b) determined in accordance with the appraisal procedures set forth
in Article 28 or in such other manner as shall be mutually acceptable to Lessor
and Lessee, and (c) not taking into account any reduction in value resulting
from an indebtedness to which the Leased Property or Substitute Property may be
subject.

     "Fair Market Value" means the fair market value of the Leased Property or
any Substitute Property, including all Capital Additions, (a) assuming the same
is unencumbered by this Lease, (b) determined in accordance with the appraisal
procedures set forth in Article 28 or in such other manner as shall be mutually
acceptable to Lessor and Lessee, and (c) not taking into

                                       51
<PAGE>

account any reduction in value resulting from any indebtedness to which the
Leased Property or such Substitute Property is subject or which encumbrance
Lessee or Lessor is otherwise required to remove pursuant to any provision of
this Lease or agrees to remove at or prior to the closing of the transaction as
to which such Fair Market Value determination is being made. The positive or
negative effect on the value of the Leased Property or Substitute Property
attributable to the interest rate, amortization schedule, maturity date,
prepayment penalty and other terms and conditions of any Encumbrance on the
Leased Property or any Substitute Property, as the case may be, which is not so
required or agreed to be removed shall be taken into account in determining such
Fair Market Value.

     "Fair Market Value Purchase Price" means the Fair Market Value less the
Fair Market Added Value.

     "Fiscal Year" means the 12-month period from January 1 to December 31.

     "Fixtures" has the meaning set forth in Article 1.

     "Full Replacement Cost" has the meaning set forth in Section 12.2.

     "Hazardous Materials" means any substance, including asbestos or any
substance containing asbestos, the group of organic compounds known as
polychlorinated biphenyls, flammable explosives, radioactive materials, medical
waste, chemicals, pollutants, effluents, contaminants, emissions or any other
related materials and items included in the definition of hazardous or toxic
wastes, materials or substances under any Hazardous Materials Law.

     "Hazardous Materials Law" means any law, regulation or ordinance relating
to environmental conditions, medical waste and industrial hygiene, including the
Resource Conservation and Recovery Act of 1976 ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as
amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"),
the Hazardous Materials Transportation Act, the Federal Water Pollution Control
Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act,
the Safe Drinking Water Act, the Atomic Energy Act and all similar federal,
state and local environmental statutes and ordinances, whether heretofore or
hereafter enacted or effective and all regulations, orders, or decrees
heretofore or hereafter promulgated thereunder.

     "Impositions" means, collectively, all taxes relating to the Leased
Property, including all ad valorem, sales and use, gross receipts, action,
privilege, rent (with respect to the Resident Agreements and the Tenant Leases)
or similar taxes, assessments (including all assessments for public improvements
or benefits, whether or not commenced or completed prior to the date hereof and
whether or not to be completed within the Term), water, sewer or other rents and
charges, excises, tax levies, fees (including license, permit, inspection,
authorization and similar fees), and all other governmental charges, in each
case whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Leased Property and/or the Rent
(including all interest and penalties thereon due to any failure in payment by

                                       52
<PAGE>

Lessee), which at any time during or in respect of the Term hereof may be
assessed or imposed on or in respect of or be a lien upon (a) Lessor or Lessor's
interest in the Leased Property, (b) the Rent, the Leased Property or any part
thereof or any rent therefrom or any estate, right, title or interest therein,
or (c) any occupancy, operation, use or possession of, sales from, or activity
conducted on, or in connection with, the Leased Property, the Resident
Agreements or the Tenant Leases or use of the Leased Property or any part
thereof; provided that nothing contained in this Lease shall be construed to
require Lessee to pay (1) any tax based on net income (whether denominated as a
franchise or capital stock or other tax) imposed on Lessor, (2) any transfer or
net revenue tax of Lessor, (3) any tax imposed with respect to the sale,
exchange or other disposition by Lessor of any portion of the Leased Property or
the proceeds thereof, (4) any principal or interest on any Encumbrance on the
Leased Property, or (5) any judgment lien against Lessor which does not relate
to or arise out of any amount or obligation that Lessee is required to pay or
perform pursuant to the terms of this Lease, except to the extent that any tax,
assessment, tax levy or charge which Lessee is obligated to pay pursuant to this
definition and which is in effect at any time during the Term hereof is totally
or partially repealed, and a tax, assessment, tax levy or charge set forth in
clause (1), (2) or (3) is levied, assessed or imposed expressly in lieu thereof.

     "Initial Term" has the meaning set forth in Article 1.

     "Insurance Requirements" means all terms of any insurance policy required
by this Lease and all requirements of the issuer of any such policy.

     "Land" has the meaning set forth in Article 1.

     "Lease" means this Lease.

     "Lease Amendment" has the meaning set forth in Section 9.3(b)(iv).

     "Lease Assignment" means that certain Assignment of Rents and Leases,
substantially in the form attached hereto as Exhibit D, to be dated on or about
the date hereof executed by Lessee to the Lessor, pursuant to the terms of which
Lessee assigns to the Lessor each of the Tenant Leases and Credit Enhancements,
if any, as security for the obligations of Lessee under this Lease, and any
other obligations of Lessee, or any Affiliate of Lessee to Lessor.

     "Leased Improvements" and "Leased Property" have the meanings set forth in
Article 1.

     "Legal Requirements" means all federal, state, county, municipal and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting the Leased Property or the construction, use
or alteration thereof, whether now or hereafter enacted and in force, including
any which may (a) require repairs, modifications or alterations of or to the
Leased Property, or (b) in any way adversely affect the use and enjoyment
thereof, and all permits, licenses, authorizations and regulations relating
thereto, and all covenants, agreements, actions and encumbrances contained in
any instruments, either of record or known

                                       53
<PAGE>

to Lessee (other than encumbrances created by Lessor without the consent of
Lessee), at any time in force affecting the Leased Property.

     "Lending Institution" means any insurance company, federally insured
commercial or savings bank, national banking association, savings and loan
association, employees' welfare, pension or retirement fund or system, corporate
profit-sharing or pension plan, college or university, or real estate investment
company including any corporation qualified to be treated for federal tax
purposes as a real estate investment trust having a net worth of at least
$50,000,000.

     "Lessee" means EMERITUS CORPORATION, a Washington corporation, its
successors and assigns.

     "Lessor" means HR Acquisition I Corporation, a Maryland corporation, and
its successors and assigns.

     "Minimum Rent" has the meaning set forth in Section 2.1(a).

     "Minimum Purchase Price" means the greater of (i) the Fair Market Value of
the Leased Property at the time of purchase hereunder by Lessee and (ii) the
Project Amount (and in the case of a substitution pursuant to Article 20, as
adjusted pursuant to Section 20.1(f)) as such amount is increased at the rate of
three percent compounded annually for each year (to be prorated for partial
years) between the Commencement Date and the date of repurchase by Lessee, plus
the sum of all Capital Addition Costs relating to the Leased Property paid for
or financed by Lessor which as of the date of repurchase of the Leased Property
have not been repaid by Lessee, less the net amount (after deduction of all
reasonable legal fees and other costs and expenses, including expert witness
fees, incurred by Lessor in connection with obtaining any such award or
proceeds) of all Awards received by Lessor from Condemnation of the Leased
Property and all insurance proceeds received by Lessor from any damage or
destruction of the Leased Property.

     "Officer's Certificate" means a certificate of Lessee signed by the
Chairman of the Board of Directors, the President, any Vice President or another
officer authorized to so sign by the Board of Directors or By-Laws of Lessee, or
any other person whose power and authority to act has been authorized by
delegation in writing by any of the persons holding the foregoing offices.

     "Ordinary Course of Business" means the ordinary course of business for
Lessee consistent with past custom and practice (including quantity and
frequency).

     "Overdue Rate" means as of any date, a rate per annum equal to the Prime
Rate as of such date, plus two percent, but in no event greater than the maximum
rate then permitted under applicable law.

     "Payment Date" means any due date for the payment of the installments of
Minimum Rent under this Lease.

                                       54
<PAGE>

     "Permitted Exceptions" has the meaning set forth in Article 1 hereof.

     "Permitted Liens" means (i) the Permitted Exceptions, (ii) pledges or
deposits made to secure payments of worker's compensation insurance (or to
participate in any fund in connection with worker's compensation insurance),
unemployment insurance, pensions or social security programs, (iii) liens
imposed by mandatory provisions of law such as for materialmen, mechanics,
warehousemen and other like liens arising in the Ordinary Course of Business,
securing indebtedness whose payment is not yet due and payable, (iv) liens for
taxes, assessments and governmental charges or levies if the same are not yet
due and payable or if the same are being contested in good faith and as to which
adequate cash reserves have been provided, (v) liens arising from good faith
deposits in connection with leases, real estate bids or contracts (other than
contracts involving the borrowing of money), pledges or deposits to secure
public or statutory obligations and deposits to secure (or in lieu of) surety,
stay, appeal or custom bonds and deposits to secure the payment of taxes,
assessments, duties or other similar charges, (vi) liens to secure purchase
money indebtedness, so long as the indebtedness incurred to purchase the new
asset is secured only by such asset, or (vii) encumbrances consisting of zoning
restrictions, easements or other restrictions on the use of real property;
provided that such items do not impair the use of such property for the purposes
intended, none of which is violated by existing or proposed structures or land
use.

     "Person" means a natural person, corporation, partnership, trust,
association, limited liability company or other entity.

     "Personal Property" means all machinery, equipment, furniture, furnishings,
computers, signage, trade fixtures or other personal property and consumable
inventory and supplies used in the operation of the Leased Property for its
Primary Intended Use, together with all replacements and substitutions therefor.

     "Primary Intended, Use" has the meaning set forth in Section 6.2(a).

     "Prime Rate" means the annual rate reported by The Wall Street Journal,
Eastern Edition (or, if The Wall Street Journal shall no longer be published or
shall cease to report such rates, then a publication or journal generally
acceptable in the financial industry as authoritative evidence of prevailing
commercial lending rates) from time to time as being the prevailing prime rate
(or, if more than one such rate shall be published in any given edition, the
arithmetic mean of such rates). The prime rate is an index rate used by The Wall
Street Journal to report prevailing lending rates and may not necessarily be its
most favorable lending rate available. Any change in the Prime Rate hereunder
shall take effect on the effective date of such change in the prime rate as
reported by The Wall Street Journal, without notice to Lessee or any other
action by Lessor. Interest shall be computed on the basis that each year
contains 360 days, by multiplying the principal amount by the per annum rate set
forth above, dividing the product so obtained by 360, and multiplying the
quotient thereof by the actual number of days elapsed.

                                       55
<PAGE>

     "Project Amount" means Lessor's investment in the Leased Property deemed to
be $6,199,958.00.

     "Related Leases" has the meaning set forth in Section 15.1(a).

     "Rent" means, collectively, the Minimum Rent, Additional Charges and the
Impositions.

     "Rent Reserve Deposit" has the meaning set forth in Section 2.5.

     "Request" has the meaning set forth in Section 9.3(a).

     "Substitution Date" has the meaning set forth in Section 20.1.

     "Substitute Properties" has the meaning set forth in Section 20.1.

     "Taking" means a taking or voluntary conveyance during the Term hereof of
all or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of any Condemnation
or other eminent domain proceeding affecting the Leased Property whether or not
the same shall have actually been commenced.

     "Tenant" means the lessees or tenants under the Tenant Leases, if any.

     "Tenant Leases" means all leases, subleases and other rental agreements and
resident agreements with assisted living residents and guaranties thereof
(written or verbal, now or hereafter in effect) that grant a possessory interest
in and to occupy and enjoy all or any portion of the Property (save and except
any and all leases, subleases or other agreements pursuant to which Assignor is
granted a possessory interest in the Land, Credit Enhancements, Engineering
Documents and Warranties), together with all the rights, power and authority of
Lessee to execute, deliver, perform, enforce, alter, modify or supplement the
terms of such leases and agreements or to surrender, cancel or terminate such
leases and agreements without the prior written consent of Lessor and Assignee,
and together with any and all guarantees of any of the tenant's obligations
under any of such leases. Any of the Tenant Leases are hereinafter referred to
individually as a "Tenant Lease" and collectively as the "Tenant Leases".

     "Term" means the Initial Term and any Extended Term as to which Lessee has
exercised its options to extend contained in Article 34 hereof unless earlier
terminated pursuant to the provisions hereof.

     "Unavoidable Delays" means delays due to strikes, lockouts, inability to
procure materials after the exercise of reasonable efforts, power failure, acts
of God, governmental restrictions, enemy action, civil commotion, fire,
unavoidable casualty or other causes beyond the control of the party responsible
for performing an obligation hereunder, provided that lack of funds shall not be
deemed a cause beyond the control of either party hereto unless such lack of
funds is caused by the failure of the other party hereto to perform any
obligations of such other party under this Lease.

                                       56
<PAGE>

     "Unsuitable for Its Primary Intended Use" as used anywhere in this Lease,
shall mean that, by reason of damage or destruction, or a partial Taking, (i)
the Facility is required to be demolished pursuant to any Legal Requirement,
(ii) Lessee is unable within 12 months to obtain any governmental approval
pursuant to any Legal Requirement, or (iii) in the good faith judgment of
Lessee, reasonably exercised, the Facility cannot be profitably operated for its
Primary Intended Use, taking into account, among other relevant factors, the
number of usable suites and number and diversity of the Residents and the
Tenants affected by such damage or destruction or partial Taking.

     IN WITNESS WHEREOF, the parties have caused this Lease to be executed and
their respective corporate seals to be hereunto affixed and attested by their
respective officers thereunto duly authorized as of the date first written
above.

                                    LESSOR:

                                    HR ACQUISITION I CORPORATION


                                    By:___________________________



                                    LESSEE:

                                    EMERITUS CORPORATION


                                    By:___________________________

                                    Its:__________________________

                                       57
<PAGE>

                                   EXHIBIT A

                             PROPERTY DESCRIPTION

LOT 7, GULF COMMERCIAL SUBDIVISION, City of Biloxi, Second Judicial District of
Harrison County, Mississippi, as shown on the map or plat thereof on file and of
record in Plat Book 14, Pages 3-6 in the office of the Chancery Clerk of the
Second Judicial District of Harrison County, Mississippi.

                                      A-1
<PAGE>

                                   EXHIBIT B

                         LIST OF PERMITTED EXCEPTIONS

THE AFOREMENTIONED PROPERTY IS CONVEYED SUBJECT TO THE FOLLOWING:

1.   State, county and municipal ad valorem taxes for the year 2000, which are
     not yet due and payable, and taxes for subsequent years not yet due or
     payable. (NOTE: Ad valorem taxes for the year 2000 which are due January 1,
     2001 are estimated to be the amount of $63,175.87 for Tax Parcel No. 1210E-
     01-004.004).

2.   The prior reservation and/or conveyance of all oil, gas and other minerals
     in, on or under the property described in Exhibit "A" hereto by
     predecessors in title.

3.   Any and all matters or state of facts which would be revealed by an
accurate, current survey and inspection of the premises.

                                      B-1
<PAGE>

                                   EXHIBIT C

                      SCHEDULE OF CONTRIBUTIONS BY LESSEE
                        TO CAPITAL REPLACEMENT ACCOUNT


     Lessee shall fund the Capital Replacement Account on annual basis as
follows: (i) during the first twelve months of the Term no funding required;
(ii) commencing the second twelve months of the Term funding at the rate of
$150.00 per unit per year less the difference between the required deposit and
the actual expenditure made by Lessee pursuant to Section 2.1(c) and (iii)
commencing the third twelve months of the Term funding at the rate of $300.00
per unit per year less the difference between the required deposit and the
actual expenditure made by Lessee pursuant to Section 2.1(c) of the Lease, such
payment to increase by $25.00 per unit per year but not to exceed $500.00 per
unit per year, commencing with the first payment on the second anniversary of
the Commencement Date and continuing on each anniversary of the Commencement
Date thereafter.

                                      C-1
<PAGE>

                                   EXHIBIT D

                        ASSIGNMENT OF RENTS AND LEASES


STATE OF ________________)
                            KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF _______________)


     THIS ASSIGNMENT OF RENTS AND LEASES (this "Assignment") is entered into as
of the _____ day of ___________, 2000, by and between EMERITUS CORPORATION, a
Washington corporation ("Assignor"), whose address for notice hereunder is 3131
Elliott Avenue, Suite 500, Seattle, Washington 98121, and HR Acquisition I
Corporation, a Maryland corporation ("Assignee"), whose address for notice
hereunder is 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203.

                                  WITNESSETH

                                   ARTICLE 1
                                  DEFINITIONS

     As used herein, the following capitalized terms used herein shall have the
following meanings:

     "Credit Enhancements" means all security deposits, security interests,
letters of credit, pledges, prepaid rent or other sums, deposits or interests,
if any, held by Lessee with respect to the Property, the Tenant Leases or the
tenants under the Tenant Leases.

     "Engineering Documents" means all site plans, surveys, soil and substrata
studies, architectural drawings, plans and specifications, engineering plans and
studies, floor plans, landscape plans, and other plans and studies that relate
to the Land, the Improvements or the Fixtures and are in Lessee's possession or
control.

     "Fixtures" means all permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all components
thereof, now and hereafter located in, on or used in connection with, and
permanently affixed to or incorporated into the Improvements, including, without
limitation, all furnaces, boilers, heaters, electrical equipment, heating,
plumbing, lighting, ventilating, refrigerating, incineration, air and water
pollution control, waste disposal, air-cooling and air-conditioning systems and
apparatus, sprinkler systems and fire and theft protection equipment, and built-
in vacuum, cable transmission, oxygen and similar systems, all of which, to the
greatest extent permitted by law, are hereby deemed by the parties hereto to
constitute real estate, together with all replacements, modifications,
alterations and additions thereto, but specifically excluding any of Tenant's
trade fixtures or other fixtures that a Tenant is permitted to remove pursuant
to the applicable Tenant Lease.

                                      D-1
<PAGE>

     "Improvements" means all buildings, improvements, structures and Fixtures
now or on the Commencement Date located on the Land, including, without
limitation, landscaping, parking lots and structures, roads, drainage and all
above ground and underground utility structures, equipment systems and other so-
called "infrastructure" improvements.

     "Land" means the real property more particularly described on Exhibit A
attached hereto and made a part hereof, together with all covenants, licenses,
privileges and benefits thereto belonging, and any easements, rights-of-way,
rights of ingress or egress or other interests of Lessee in, on, or to any land,
highway, street, road or avenue, open or proposed, in, on, across, in front of,
abutting or adjoining such real property including, without limitation, any
strips and gores adjacent to or lying between such real property and any
adjacent real property.

     "Lease" means that certain lease agreement of even date herewith between
Assignee and Assignor.

     "License" has the meaning set forth in Section 3.1 hereof.

     "Obligations" means any and all of the indebtedness, liabilities, and other
obligations made or undertaken by Assignor to Assignee as set forth in the
Security Documents (hereinafter defined), the Lease and any lease, sublease or
other form of conveyance or any other agreement pursuant to which Assignor is
granted a possessory interest in the Property.

     "Obligation Documents" means any and all agreements, assignments and
instruments (including any renewals, extensions, modifications or amendments
thereof) evidencing, securing or pertaining to the Lease.

     "Property" means, collectively, the Improvements, the Credit Enhancements,
the Engineering Documents and the Warranties.

     "Rents" means the immediate, absolute and continuing right to collect and
receive all of the rents, income, receipts, revenues, proceeds, security and
other types of deposits, issues and profits now due or which may become due or
to which Assignor may now or shall hereafter (whether upon any applicable
redemption period or otherwise) become entitled or may demand or claim, arising
or issuing from or out of the Tenant Leases, or from or out of the Property or
any part thereof (subject only to the limited license granted herein by Assignee
to Lessee to so collect and receive the Rents), including, without limiting the
generality of the foregoing, minimum rents, additional rents, parking
maintenance charges or fees, tax and insurance contributions, proceeds of sale
of electricity, gas, chilled and heated water and other utilities and services,
deficiency rents and liquidated damages following default, premiums payable by
any tenant upon the exercise of a cancellation privilege provided for in a
Tenant Lease and all proceeds payable under any policy of insurance covering
loss of rents resulting from untenantability caused by destruction or damage to
the Property.

     "Security Documents" means this Assignment, and any and all other documents
now or hereafter executed by Assignor, or any other person or party, to evidence
or secure the payment or performance and discharge of the Obligations,
including, without limitation, the Lease.

                                      D-2
<PAGE>

     "Tenant Leases" means all leases, subleases and other rental agreements and
resident agreements with assisted living residents and guaranties thereof
(written or verbal, now or hereafter in effect) that grant a possessory interest
in and to occupy and enjoy all or any portion of the Property (save and except
any and all leases, subleases or other agreements pursuant to which Assignor is
granted a possessory interest in the Land, Credit Enhancements, Engineering
Documents and Warranties), together with all the rights, power and authority of
Lessee to execute, deliver, perform, enforce, alter, modify or supplement the
terms of such leases and agreements or to surrender, cancel or terminate such
leases and agreements without the prior written consent of Lessor and Assignee,
and together with any and all guarantees of any of the tenant's obligations
under any of such leases. Any of the Tenant Leases are hereinafter referred to
individually as a "Tenant Lease" and collectively as the "Tenant Leases".

     "Warranties" means all transferable warranties, representations and
guaranties with respect to the Property, whether express or implied, which
Lessee now holds or under which Lessee is the beneficiary, including, without
limitation, all of the representations, warranties and guaranties given and/or
assigned to Lessee under the Tenant Leases.

                                   ARTICLE 2
                                  ASSIGNMENT

     Assignor, in consideration of the sum of $10.00, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, does hereby grant, sell, convey, assign, transfer, set over and
deliver the Tenant Leases and the Rents unto the Assignee, to have and to hold
the Tenant Leases and the Rents unto Assignee, and Assignor does hereby bind
itself, its successors and assigns to warrant and defend the title to the Tenant
Leases and the Rents unto Assignee against every person whomsoever lawfully
claiming or to claim the name or any part thereof, by, through or under Lessee
but not otherwise.

                                   ARTICLE 3
                         LIMITED LICENSE, CONTINUATION
                         AND TERMINATION OF AGREEMENT

     3.1  Limited License. Lessee shall have the right under a limited license
          ---------------
(the "License") which may be revoked by Assignee pursuant to the terms of
Section 7.1, to collect upon, but not prior to accrual, all of the Rents and
Lessee shall receive the Rents and hold the same, as well as the right and
license to receive the Rents, as a trust fund to be applied, and Lessee hereby
covenants to apply the Rents, to the payment, satisfaction and discharge of the
Obligations then due, including specifically, but without limitation, to the
payment of taxes and assessments upon the Property before payment of penalty or
interest are due thereon, to the cost of such insurance then due, maintenance
and repairs as may be required by the terms of the Security Documents and in
satisfaction of all obligations of Assignor under the Tenant Leases then due;
all prior to the application by Assignor of the Rents for any other purposes.
The License shall also include the right of Assignor to execute, deliver,
perform, enforce, alter, modify, change or supplement the terms of the Tenant
Leases and to surrender, cancel or terminate such Tenant Leases without the
prior written consent of Assignee except for any of the

                                      D-3
<PAGE>

Tenant Leases executed, modified or supplemented after the date hereof whose
term (including any possible extensions on the part of the applicable Tenant)
extends beyond the Term of the Lease. Thereafter, so long as there exists no
Event of Default hereunder or under any of the Security Documents, Assignor may
use the Rents in any manner not inconsistent with the Security Documents. Upon
the sale and conveyance by Assignee or its successors or assigns of the title to
the Property, all right, title, interest and power granted under the License
granted herein shall be automatically continued subject to the terms and
conditions of the Lease and any of the other Security Documents.

     3.2  Continuation and Termination of Assignment.  Upon final payment,
          ------------------------------------------
performance and discharge in full of the Obligations, this Assignment shall
become and be void and of no force or effect. Written demand by Assignor or
Assignee delivered to any Tenant for payment of the Rents by reason of the
occurrence of any Event of Default claimed by Assignor or Assignee, and the then
existence thereof, shall be sufficient evidence of each such Tenant's obligation
and authority to make all future payments of the Rents to Assignor or Assignee,
as the case may be, without the necessity for further consent by Assignor.

                                   ARTICLE 4
                        WARRANTIES AND REPRESENTATIONS

     Assignor hereby unconditionally warrants and represents to Assignee with
respect to the Tenant Leases, if any, in effect as of the date hereof, as
follows:

     4.1  Ownership of Tenant Leases and the Rents. Subject to the terms of the
          ----------------------------------------
Lease, Assignor has good title to the Tenant Leases not previously transferred
or assigned to Assignee and the Rents and has all requisite right, power and
authority to assign such Tenant Leases and the Rents to Assignee, and no other
person, firm or corporation has any right, title or interest therein.

     4.2  No Default. Assignor has duly and punctually performed, all and
          ----------
singular, the terms, covenants, conditions and warranties of the Tenant Leases
on Assignor's part to be kept, observed and performed; and, to the best of
Assignor's knowledge, the Tenants thereunder are not in material default of any
of the terms or provisions of the respective Tenant Leases.

     4.3  No Modification of the Tenant Leases or Anticipation or Hypothecation
          ---------------------------------------------------------------------
of the Rents.  The Tenant Leases are valid and unmodified, except as indicated
------------
herein, and remain in full force and effect; Assignor has not previously sold.
assigned, transferred, or pledged the Tenant Leases or the Rents, or any part
thereof, whether now due or hereafter to become due; the Rents now due, or to
become due, for any periods subsequent to the date hereof have not been
collected and that payment thereof has not been anticipated, waived or released,
discounted, set off or otherwise discharged or compromised; and Assignor has not
received any funds or deposits from any Tenant for which credit has not already
been made on account of the accrued Rents.

                                      D-4
<PAGE>

                                   ARTICLE 5
                             AFFIRMATIVE COVENANTS

     Assignor hereby unconditionally covenants and agrees with Assignee as
follows:

     5.1  Performance. Assignor shall observe, perform and discharge, duly and
          -----------
punctually, all and singular, the obligations, terms, covenants, conditions and
warranties of the Tenant Leases to be observed, performed or discharged by
landlord thereunder; and Assignor shall promptly deliver to Assignee any notices
received with respect to the Tenant Leases alleging any failure on the part of
the Assignor to observe, perform and discharge the same.

     5.2  Notification to Tenants. Upon written request by Assignee, Assignor
          -----------------------
shall notify and direct, in writing, such and every present or future Tenant
that any Credit Enhancement delivered to Assignor by such Tenant shall be
retained by Assignor but assigned to Assignee.

     5.3  Enforcement.  Assignor shall enforce or secure in the name of Assignor
          ------------
the performance of each and every obligation, term, covenant, condition and
agreement in the Tenant Leases by any Tenant to be performed, and Assignor shall
appear in and defend any action or proceeding arising under, occurring out of or
in any manner connected with the Tenant Leases or the obligations, duties or
liabilities of Assignor and any Tenant thereunder, and upon request by Assignee,
Assignor will do so in the name and on behalf of Assignee, but at the expense of
Assignor, and Assignor shall pay all costs and expenses of Assignee, including
reasonable attorneys' fees and disbursements, in any action or proceeding in
which Assignee may appear.

     5.4  Anticipation or Hypothecation of the Rents. Assignor hereby covenants
          ------------------------------------------
and agrees (a) upon and after an Event of Default hereunder or under any of the
Security Documents and while the same shall continue, to give to Assignee
duplicate notice of each default by each Tenant and copies of any and all
notices and communications received from any Tenant promptly upon delivery or
receipt thereof; (b) to comply with the terms and provisions of each Tenant
Lease; (c) not to assign, transfer, pledge, mortgage or otherwise encumber any
Tenant Lease; (d) not to assign, transfer, pledge, mortgage or otherwise
encumber any Rents; (e) not to collect, accept from any Tenant, or permit any
Tenant to pay any Rents for more than one month in advance (whether in cash or
by evidence of indebtedness) excepting, however, the collection of security
deposits; (f) except in the ordinary course of business and in accordance with
past practice and custom, not to waive, excuse, condone, discount, set-off,
compromise or in any manner release or discharge any Tenant of and from any
obligations, covenants, conditions or agreements to be kept, observed or
performed by such Tenant, under and in accordance with the terms of the
respective Tenant Lease; and (g) not to enter into any Tenant Lease or amend,
modify, extend or renew any Tenant Lease for a time period extending beyond the
term of the Lease, without prior written approval of Assignee, which approval
shall not be unreasonably withheld.

     5.5  Delivery of the Tenant Leases; Further Acts and Assurance. Until the
          ---------------------------------------------------------
Obligations secured hereby have been paid in full, performed and discharged,
Assignor shall enter into only leases of the Property in a form approved in
writing by Assignee and shall upon the written

                                      D-5
<PAGE>

request of Assignee deliver executed copies of all existing and all other and
future Tenant Leases when executed upon all or any part of the Property and will
transfer and assign such other and future Tenant Leases upon the same terms and
conditions as herein contained, and Assignor hereby covenants and agrees to
make, execute and deliver to Assignee, upon demand and at any time or times, any
and all assignments and other documents and instruments which Assignee may deem
advisable to carry out the true purpose and intent of this Assignment.

                                   ARTICLE 6
                               EVENTS OF DEFAULT

     The term "Event of Default", as used herein, shall mean the occurrence or
happening, at any time and from time to time, of any one or more of the
following:

     6.1  Performance of Obligations. If Assignor shall fail, refuse or neglect
          --------------------------
to perform and discharge fully and timely any of its obligations hereunder and
such failure is not cured by Assignor within a period of 30 days after receipt
by Lessee of written notice thereof from Assignee, unless such failure cannot
with due diligence be cured within a period of 30 days, in which case such
failure shall not be deemed to continue if Assignor proceeds promptly and with
due diligence to cure the failure and diligently completes the curing thereof
(as soon as reasonably possible).

     6.2  Security Documents. The occurrence of any Event of Default under and
          ------------------
as defined in the Lease or any other of the Security Documents.

                                   ARTICLE 7
                                   REMEDIES

     7.1  Remedies. Upon or any time after the occurrence, and during the
          --------
continuance thereof, of an Event of Default hereunder, Assignee, at its option,
shall have the complete right, power and authority hereunder, then or thereafter
until the Event of Default is cured, to exercise and enforce any or all of the
following rights and remedies set out in this Article 7:

          (a) To terminate the License and then and thereafter without taking
possession of the Property, to the extent permitted by law, in Assignor's own
name, to demand, collect, receive, sue for, attach and levy the Rents and give
proper receipts, releases and acquittances therefor, and after deducting all
necessary and proper costs and expenses of operation and collection, as
determined by Assignee, including reasonable attorneys' fees, and apply the net
proceeds thereof, together with any funds of Assignor deposited with Assignee,
in reduction or repayment of the Obligations in such order of priority as
Assignee may, in its sole discretion, determine in accordance with applicable
law;

          (b) To declare the Lease in default and, at its option, exercise all
of the rights and remedies contained in the Lease or any other of the Security
Documents;

          (c) Without regard to the adequacy of the security, with or without
any action or proceeding through any person or by any agent, or by a receiver to
be appointed by a court of

                                      D-6
<PAGE>

competent jurisdiction, and irrespective of Assignor's possession, then or
thereafter to enter upon, take possession of, manage and operate the Property or
any part thereof; make, modify, enforce, cancel or accept surrender of a Tenant
Lease now in effect or hereafter in effect on the Property or any part thereof;
remove and evict any Tenant that is in default of the applicable Tenant Lease;
increase or decrease the Rents under a Tenant Lease; decorate, clean and repair,
and otherwise do any act or incur any cost or expense which Assignee may deem
reasonably necessary to protect the status and value of the Property as fully
and to the same extent as Assignor could do if in possession thereof; and in
such event, to apply the Rents so collected to the operation and management of
the Property, but in such order or priority as Assignee shall deem proper, and
including the payment of reasonable management, brokerage and attorneys' fees
and disbursements, and payment of the Obligations and to the establishment and
maintenance, without interest, of a reserve for replacements; and

          (d) Any other remedy available to Assignee at law or in equity.

     7.2  Exculpation of Assignee. The acceptance by Assignee of this
          -----------------------
Assignment, with all of the rights, powers, privileges and authority created
hereby, shall not, prior to entry upon and taking possession of the Property by
Assignee, nor thereafter or at any time or in any event obligate Assignee to
take any action hereunder or to expend any money or incur any expenses or
perform or discharge any obligation, duty or liability under a Tenant Lease or
to assume any obligation or responsibility for any security deposits or other
deposits delivered to Lessee by a Tenant and not assigned and delivered to
Assignee, nor shall Assignee be liable in any way for any injury or damage to
persons or property sustained by any person, firm or corporation in or about the
Property not attributable to the negligence or fault of Assignee, its agents or
affiliates.

     7.3  No Waiver or Election of Remedies.
          ---------------------------------

          (a) Waiver. Neither the collection of the Rents and application as
              ------
provided for in this Assignment nor the entry upon and taking possession of the
Property by Assignee shall be deemed to cure or waive any Event of Default or
waive, modify or affect any notice of default under any Security Document or
invalidate any act done pursuant to any such notice. If Assignee shall
thereafter elect to discontinue the exercise of any such right or remedy
hereunder, such right or remedy may be reasserted at any time and from time to
time following any subsequent Event of Default.

          (b) Election of Remedies. The failure of Assignee to assert any of the
              --------------------
terms, covenants or conditions of this Assignment for any period of time or at
any time or times shall not be construed or deemed to be a waiver of any such
right, and nothing herein contained nor anything done or omitted to be done by
Assignee pursuant to this Assignment shall be deemed to be an election of
remedies or a waiver by Assignee of any of its rights and remedies under any
other Security Document or under the law. The right of the Assignee to collect
and enforce the payment and performance of the Obligations and to enforce any
security therefor may be exercised by the Assignee either prior to or
simultaneously with or subsequent to any action taken hereunder.

                                      D-7
<PAGE>

     7.4  Appointment of Attorney-in-Fact. Upon and following the occurrence of
          -------------------------------
an Event of Default remaining uncured, Assignor hereby constitutes and appoints
Assignee the true and lawful attorney-in-fact, coupled with an interest, of
Assignor and in the name, place and stead of Assignor to demand, sue for,
attach, levy, recover and receive any premium or penalty payable upon the
exercise by a Tenant under a Tenant Lease of a privilege of cancellation
originally provided in such Tenant Lease and to give proper receipts, releases
and acquittances therefor and, after deducting expenses of collection, to apply
the net proceeds as a credit upon any portion of the Obligations selected by
Assignee, notwithstanding the fact that such portion of the Obligations may not
then be due and payable or that such portion of the Obligations is otherwise
adequately secured; and Lessee does hereby authorize and direct any such Tenant
to deliver such payment to Assignee in accordance with this Assignment, and
Assignor hereby ratifies and confirms that Assignee, as attorney-in-fact, shall
do or cause to be done by virtue of the powers granted hereby. Under the
circumstances referred to in this Section 7.4, the foregoing appointment is
irrevocable and continuing, and such rights, powers and privileges shall be
exclusive in Assignee, its successors and assigns, so long as any part of the
Obligations secured hereby remain unpaid and undischarged.

                                   ARTICLE 8
                                 MISCELLANEOUS

     8.1  Performance at Assignor's Expense. The cost and expense of performing
          ---------------------------------
or complying with any and all of the Obligations shall be borne solely by
Assignor, and no portion of such cost and expense shall be, in any way and to
any extent credited against any installment on or portion of the Obligations.

     8.2  Survival of Obligations. Each and all of the Obligations shall survive
          -----------------------
the execution and delivery of the Security Documents and the consummation of the
transaction called for therein, and shall continue in full force and effect
until the Obligations shall have been paid and performed in full.

     8.3  Further Assurances. Assignor, upon the request of Assignee, will
          ------------------
execute, acknowledge, deliver and record and/or file such further instruments
and do such further acts as may be necessary, desirable or proper to carry out
more effectively the purpose of the Security Documents and to subject to the
liens and security interests thereof any property intended by the terms thereof
to be covered thereby, including specifically, but without limitation, any
renewals, substitutions, replacements, modifications or amendments to the Tenant
Leases.

     8.4  Recording and Filing. Assignor will cause the Security Documents and
          ---------------------
all amendments and supplements thereto and substitutions therefor to be
recorded, filed, re-recorded and refiled in such manner and in such places as
Assignee shall reasonably request, and will pay all such recording, filing, re-
recording and refiling taxes, fees and other charges.

     8.5  Notices. Any notices, demands, approvals and other communications
          -------
provided for in this Assignment shall be in writing and shall be delivered by
telephonic facsimile, overnight air courier, personal delivery or registered or
certified U.S. Mail with return receipt requested, postage paid, to the
appropriate party at its address as follows:

                                      D-8
<PAGE>

     If to Assignee:


     3310 West End Avenue
     Suite 700
     Nashville, Tennessee 37203
     Attention: J. D. Carter Steele
     Telephone: 615-269-8175
     Telecopy:  615-269-8122

     With a copy to:

     John A. Gupton, III
     Baker, Donelson, Bearman & Caldwell
     211 Commerce Street, Suite 1000
     Nashville, Tennessee  37201
     Telephone: 615-726-7351
     Telecopy:  615-744-7351

     If to Assignor:

     Emeritus Corporation
     3131 Elliott Avenue, Suite 500
     Seattle, Washington 98121
     Telephone: 206/298-2909
     Telecopy: 206/301-4500
     Attn: Raymond Brandstrom

     With a copy to:

     The Nathanson Group PLLC
     1411 Fourth Avenue Suite 905
     Seattle, Washington 98101
     Telephone: 206-623-6239
     Telecopy: 206-623-1738
     Attn: Randi Nathanson

     Addresses for notice may be changed from time to time by written notice to
all other parties. Any communication given by mail will be effective upon the
earlier of (i) actual receipt or refusal of receipt, as indicated by the return
receipt; (ii) if given by telephone facsimile, when sent and confirmed; and
(iii) if given by personal delivery or by overnight air courier, when delivered
to the appropriate address set forth.

                                      D-9
<PAGE>

     8.6  Successors and Assigns.  All of the terms of the Security Documents
          ----------------------
shall apply to, be binding upon and inure to the benefit of the parties hereto,
their successors, assigns, heirs and legal representatives, and all other
persons claiming by, through or under them.

     8.7  No Waiver; Severability.  Any failure by Assignee to insist, or any
          -----------------------
election by Assignee not to insist, upon strict performance by Assignor of any
of the terms, provisions or conditions of the Security Documents shall not be
deemed to be a waiver of same or any other terms, provisions or conditions
thereof, and Assignee shall have the right at any time or times thereafter to
insist upon strict performance by Assignor of any and all such terms, provisions
and conditions. The Security Documents are intended to be performed in
accordance with, and only to the extent permitted by, all applicable legal
requirements. If any provision of any of the Security Documents or the
application thereof to any person or circumstance shall, for any reason and to
any extent, be invalid or unenforceable, then neither the remainder of the
instrument in which such provision to other persons or circumstances nor the
other instruments referred to herein shall be affected thereby, but rather,
shall be enforced to the greatest extent permitted by law.

     8.8  Entire Agreement and Modification. This Assignment contains the entire
          ---------------------------------
agreement between the parties relating to the subject matter hereof, and all
prior agreements relative thereto which are not contained herein are terminated.
This Assignment may not be amended, revised, waived, discharged, released or
terminated orally, but only by a written instrument or instruments executed by
the party against which enforcement of the amendment, revision, waiver,
discharge, release or termination is asserted. Any alleged amendment, revision,
waiver, discharge, release or termination which is not so documented shall not
be effective as to any party.

     8.9  Counterparts. This Assignment may be executed in any number of
          ------------
counterparts, each of which shall be an original, but all of which together
shall constitute but one instrument.

     8.10 Applicable Law. The Security Documents shall be governed by and
          --------------
construed according to the laws of the State of Tennessee from time to time in
effect except to the extent preempted by United States federal law. It is
expressly stipulated and agreed to be the intent of Lessee and Assignee at all
times to comply with applicable law now or hereafter governing any interest
payable under the Lease, including any notes evidencing the Obligations or any
part thereof. If the applicable law is ever revised, repealed or judicially
interpreted so as to render usurious any amount called for under any of the
Security Documents, or if Assignee exercise of the opinion to accelerate the
maturity of the Obligations or if any prepayment by Assignor results in Assignor
having paid any interest in excess of that permitted by law, then it is
Assignor's and Assignee's express intent that all excess amounts therefore
collected by Assignee be credited on the principal balance of he Obligations
(or, if the Obligations have been paid in full, refunded to Assignor, and the
provisions of the Security Documents immediately be deemed reformed and the
amounts thereafter collectible hereunder and thereunder reduced, so as to comply
with the then applicable law, but so as to permit the recovery of the fullest
amount otherwise called for hereunder or thereunder). All sums paid or agreed to
be paid to Assignee for the use, forbearance or detention of the Obligations
shall to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of the Obligations until payment
in full so

                                     D-10
<PAGE>

that the rate or amount of interest on account of such obligations does not
exceed the usury ceiling from time to time in effect and applicable to the
Obligations so long as debt is outstanding thereunder.

     8.11 Headings. The Article, Paragraph and Subparagraph headings hereof are
          --------
inserted for convenience of reference only and shall in no way alter, modify or
define, or be used in construing, the text of such Articles, Paragraphs or
Subparagraphs.

     EXECUTED as of the date first above written, to be effective as of the date
first above written.

                                           ASSIGNOR:


                                           EMERITUS CORPORATION


                                           By:__________________________________

                                           Its:_________________________________



                                           ASSIGNEE:

                                           HR ACQUISITION I CORPORATION


                                           By:__________________________________

                                           Its:_________________________________

                                     D-11
<PAGE>

STATE OF ___________)
                    :
JEFFERSON __________)

     I, the undersigned authority, a Notary Public in and for said county in
said state, hereby certify that _____________, whose name as __________
of________, a __________ corporation, is signed to the foregoing instrument and
who is known to me, acknowledged before me on this day that, being informed of
the contents of the said instrument, he, as such officer and with frill
authority, executed the same voluntarily for and as the act of said corporation.

     GIVEN under my hand and seal, this ____  day of __________, 2000.


[ NOTARIAL SEAL ]                   ________________________________________
                                    Notary Public

                                    My Commission Expires___________________


STATE OF____________)
                    :
______________COUNTY)

     I, the undersigned authority, a Notary Public in and for said County in
said State, hereby certify that ________________________, whose name as
_______________________, of Emeritus Corporation, a Washington corporation, is
signed to the foregoing instrument and who is known to me, acknowledged before
me on this day that, being informed of the contents of said instrument, he/she,
as such officer and with full authority, executed the same voluntarily for and
as the act of said corporation.

     GIVEN under my hand and seal, this  __ day of ____________, 2000.

[ NOTARIAL SEAL ]                   ________________________________________
                                    Notary Public

                                    My Commission Expires___________________

                                     D-12
<PAGE>

                                   Exhibit A



     LOT 7, GULF COMMERCIAL SUBDIVISION, City of Biloxi, Second Judicial
     District of Harrison County, Mississippi, as shown on the map or plat
     thereof on file and of record in Plat Book 14, Pages 4-6 in the office of
     the Chancery Clerk of the Second Judicial District of Harrison County,
     Mississippi.

                                     D-13
<PAGE>

                                   EXHIBIT E

                       CONTRACT FOR SALE OF REAL ESTATE

                                      E-1

</TEXT>
</DOCUMENT>
