ADVOCAT INC
LOAN AGREEMENT
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>10
<FILENAME>g71016ex10-8.txt
<DESCRIPTION>LOAN AGREEMENT
<TEXT>
<PAGE>   1
                                                                    EXHIBIT 10.8


                                 LOAN AGREEMENT

        THIS LOAN AGREEMENT (this "Agreement") is made as of the 29th day of
March, 2001, by and between DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited
liability company (together with its successors and assigns, the "Borrower"),
and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together
with its successors and assigns, the "Lender").

                                R E C I T A L S:

        1. Borrower has requested that the Lender make a loan to Borrower in the
principal sum of $4,709,000.00 (the "Loan").

        2. Lender has agreed to make the Loan on the terms and conditions
hereinafter set forth.


                               A G R E E M E N T:

        NOW, THEREFORE, it is hereby agreed as follows:

                                    ARTICLE I
                 DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.

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

            "Accounts" means any rights of Borrower arising from the operation
of the Facility to payment for goods sold or leased or for services rendered,
not evidenced by an Instrument, including, without limitation, (i) all accounts
arising from the operation of the Facility , (ii) all moneys and accounts held
by Lender pursuant to Section 4.12 of this Agreement, and (iii) all rights to
payment from Medicare or Medicaid programs, or similar state or federal
programs, boards, bureaus or agencies and rights to payment from patients,
residents, private insurers, and others arising from the operation of the
Facility, including rights to payment pursuant to Reimbursement Contracts.
Accounts shall include the proceeds thereof (whether cash or noncash, moveable
or immoveable, tangible or intangible) received from the sale, exchange,
transfer, collection or other disposition or substitution thereof.

            "Actual Management Fees" means actual management fees paid or
incurred in connection with operation of the Facility.



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            "Affiliate" means, with respect to any Person, (i) each Person that
controls, is controlled by or is under common control with such Person, (ii)
each Person that, directly or indirectly, owns or controls, whether beneficially
or as a trustee, guardian or other fiduciary, any of the Stock of such Person,
and (iii) each of such Person's officers, directors, members, joint venturers
and partners.

            "Assignment of Leases and Rents" means that certain Assignment of
Leases and Rents of even date herewith executed by Borrower in favor of Lender.

            "Assumed Management Fees" means assumed management fees of five
percent (5%) of net patient revenues of the Facility (after Medicare and
Medicaid contractual adjustments).

            "Business Day" means a day on which commercial banks are not
authorized or required by law to close in New York, New York.

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

            "Collateral" means, collectively, the Property, Improvements,
Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money,
Permits (to the full extent assignable), Reimbursement Contracts, and all
Proceeds, all whether now owned or hereafter acquired, and including
replacements, additions, accessions, substitutions, and products thereof and
thereto, and all other property which is or hereafter may become subject to a
Lien in favor of Lender as security for any of the Loan Obligations.

            "Combined Debt Service Coverage" shall mean the combined Debt
Service Coverage of Borrower and the Related Borrower.

            "Commitment Letter" means the commitment letter issued by Lender to
Borrower dated December 15, 2000.

            "Cross-Collateralization and Cross-Default Agreement" means that
certain Cross-Collateralization and Cross-Default Agreement of even date
herewith executed by and among Borrower, Related Borrower and Lender.

            "Debt Service Coverage" means a ratio in which the first number is
the sum of net pre-tax income of the Borrower from the operations of the
Facility as set forth in the quarterly statements provided to Lender (without
deduction for Actual Management Fees paid or incurred), calculated based upon
the preceding twelve (12) months (or such lesser period as shall have elapsed
following the closing of the Loan), plus interest expense, to the extent
deducted in determining net income, plus non-cash expenses or allowances for
depreciation and amortization of the Facility for said period, less either
Assumed Management Fees or Actual Management Fees, as applicable, and the second
number is the sum of the scheduled principal amounts due (even if not paid) on
the Loan (excluding the amount of any prepayment made during such period) for
the applicable period plus



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<PAGE>   3

the interest expense on such Loan for the applicable period. In calculating
"pre-tax income", Extraordinary Income and Extraordinary Expenses shall be
excluded.

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

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

            "Default Rate" shall have the meaning given to that term in the
Note.

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

            "Equipment" means all beds, linen, televisions, carpeting,
telephones, cash registers, computers, lamps, glassware, rehabilitation
equipment, restaurant and kitchen equipment, and other fixtures and equipment of
Borrower located on, attached to or used or useful in connection with any of the
Property or the Facility and all renewals and replacements thereof and
substitutions therefor; provided, however, that with respect to any items which
are leased for the benefit of the Facility and not owned by Borrower, the
Equipment shall include the leasehold interest only of Borrower together with
any options to purchase any of said items and any additional or greater rights
with respect to such items which Borrower may hereafter acquire, but the
foregoing shall not be construed to mean that such leasing shall be permitted
hereunder and under the other Loan Documents.

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

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

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

            "Facility" means the facility known as "Windsor House," presently a
134-bed licensed facility (117-bed licensed skilled nursing, 17-bed licensed
assisted living) located on the Property, as it may now or hereafter exist,
together with any other general or specialized care facilities, if any
(including any Alzheimer's care unit, subacute, and any facility), now or
hereafter operated on the Property.



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

            "General Intangibles" means all intangible personal property of
Borrower arising out of or connected with the Property or the Facility and all
renewals and replacements thereof and substitutions therefor (other than
Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement
Contracts), including, without limitation, things in action, contract rights and
other rights to payment of money.

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

            "Guarantor" means Advocat Inc., a Delaware corporation.

            "Guaranty Agreement" means that certain Guaranty Agreement of even
date herewith from Guarantor to Lender.

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

            "Hazardous Materials Laws" means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other governmental
requirements, administrative rulings and court judgments and decrees in effect
now or in the future and including all amendments, that relate to Hazardous
Materials and apply to Borrower or to the Property and/or the Improvements.
Hazardous Materials Laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601,
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the
Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, and their state analogs.

            "Improvements" means all buildings, structures and improvements of
every nature whatsoever now or hereafter situated on the Property, including,
but not limited to, all gas and electric fixtures, radiators, heaters, engines
and machinery, boilers, ranges, elevators and motors, plumbing and heating
fixtures, carpeting and other floor coverings, water heaters, awnings and



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storm sashes, and cleaning apparatus which are or shall be attached to the
Property or said buildings, structures or improvements.

            "Indebtedness" means any (i) obligations for borrowed money, (ii)
obligations, payment for which is being deferred by more than thirty (30) days,
representing the deferred purchase price of property other than accounts payable
arising in connection with the purchase of inventory customary in the trade and
in the ordinary course of Borrower's business, (iii) obligations, whether or not
assumed, secured by Liens or payable out of the proceeds or production from the
Accounts and/or property now or hereafter owned or acquired, and (iv) the amount
of any other obligation (including obligations under financing leases) which
would be shown as a liability on a balance sheet prepared in accordance with
GAAP.

            "Instruments" means all instruments, chattel paper, documents or
other writings obtained from or in connection with the operation of the Property
or the Facility (including, without limitation, all ledger sheets, computer
records and printouts, data bases, programs, books of account and files relating
thereto).

            "Intercreditor Agreement" shall mean that certain Amended and
Restated Intercreditor Agreement of even date herewith by and among Lender,
Borrower and AmSouth Bank.

            "Inventory" means all inventories of food, beverages and other
comestibles held by Borrower for sale or use at or from the Property or the
Facility, and soap, paper supplies, medical supplies, drugs and all other such
goods, wares and merchandise held by Borrower for sale to or for consumption by
guests, patients or residents of the Property or the Facility and all such other
goods returned to or repossessed by Borrower.

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

            "Loan" means the Loan in the principal sum of $4,709,000.00 made by
Lender to Borrower as of the date hereof.

            "Loan Documents" means, collectively, this Agreement, the Assignment
of Leases and Rents, the Note, the Debt Service Reserve Fund Agreement, the
Guaranty Agreement, the Mortgage, the Subordination Agreement, the
Cross-Collateralization and Cross-Default Agreement and the Intercreditor
Agreement, together with any and all other documents executed by Borrower or
others, evidencing, securing or otherwise relating to the Loan.

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



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            "Management Agreement" means that certain Management Agreement dated
December 1, 2000 by and between Manager and Borrower, obligating the Manager to
operate and manage the Facility.

            "Manager" means Diversicare Management Services, a Tennessee
corporation, and any successor manager of the Facility approved by Lender in
writing.

            "Maturity Date" means April 1, 2006.

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

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

            "Money" means all monies, cash, rights to deposit or savings
accounts or other items of legal tender obtained from or for use in connection
with the operation of the Facility.

            "Mortgage" means that certain Mortgage and Security Agreement, of
even date herewith from the Borrower in favor of or for the benefit of Lender
and covering the Property.

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

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

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

            "Permitted Encumbrances" has the meaning given to that term in
Section 5.2 hereof.

            "Person" means any natural person, firm, trust, corporation,
partnership, limited liability company, trust and any other form of legal
entity.



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            "Proceeds" means all proceeds (including proceeds of insurance and
condemnation) from the sale, exchange, transfer, collection, loss, damage,
disposition, substitution or replacement of any of the Collateral.

            "Property" means the real estate located in Huntsville, Madison
County, Alabama, which is more particularly described in Exhibit "A" hereto,
upon which the Facility is located, and which, concurrent with the Closing Date,
will be owned by the Borrower.

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

            "Related Borrower" means Diversicare Pinedale, LLC, a Delaware
limited liability company.

            "Related Facility" means Pinedale Nursing Home located in Newport,
Arkansas.

            "Rents" means all rent and other payments of whatever nature from
time to time payable pursuant to leases of the Property or the Facility, or for
retail space or other space at the Property (including, without limitation,
rights to payment earned under leases for space in the Improvements for the
operation of ongoing retail businesses such as newsstands, barbershops, beauty
shops, physicians' offices, pharmacies and specialty shops).

            "Single-Purpose Entity" means a Person which owns no interest or
property other than the Collateral.

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

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

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

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



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

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

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

                                   ARTICLE II
                               TERMS OF THE LOAN

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

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

                                   ARTICLE III
                    BORROWER'S REPRESENTATIONS AND WARRANTIES

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

        3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized and
validly existing Delaware limited liability company, has the power to own its
properties and to carry on its business as is now being conducted, and is duly
qualified to do business and is in good standing in every jurisdiction in which
the character of the properties owned by it or in which the transaction of its
business makes its qualification necessary.

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

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



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organization/incorporation, partnership agreement or operating agreement, as
applicable, or any other agreement or instrument binding upon Borrower.

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

        3.5 PENDING MATTERS.

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

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

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

        3.7 COMPLIANCE WITH FACILITY LAWS. The Facility is duly licensed and is
currently operated as a 117-bed licensed skilled care nursing home and a 17-bed
licensed congregate assisted living facility under the applicable laws of the
state where the Property is located. Borrower is the lawful owner of all Permits
for the Facility, including, without limitation, the Certificate of Need issued
by the Alabama State Health Planning and Development Agency or the Nursing Home
License issued by the Alabama State Board of Health, if applicable, which (a)
are in full force and effect, (b) constitute all of the permits, licenses and
certificates required for the use, operation and occupancy thereof, (c) have not
been pledged as collateral for any other loan or Indebtedness, (d) are held free
from restrictions or any encumbrance which would materially adversely affect the
use



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<PAGE>   10

or operation of the Facility, and (e) are not provisional, probationary or
restricted in any way. The Borrower and Manager as well as the operation of the
Facility are in compliance in all material respects with the applicable
provisions of nursing home and/or assisted living facility laws, rules,
regulations and published interpretations to which the Facility is subject. No
waivers of any laws, rules, regulations, or requirements (including, but not
limited to, minimum foot requirements per bed) are required for the Facility to
operate at the current licensed bed capacity. All Reimbursement Contracts are in
full force and effect with respect to the Facility, and Borrower and Manager are
in good standing with all the respective agencies governing such applicable
nursing home licenses, program certification, and Reimbursement Contracts.
Borrower and Manager are current in the payment of all so-called provider
specific taxes or other assessments with respect to such Reimbursement
Contracts. Borrower will maintain or cause Manager to maintain (without allowing
to lapse) the Certificate of Need, if applicable, and any required Permits. In
the event Lender acquires the Facility through foreclosure or otherwise, neither
Lender nor a subsequent manager, a subsequent lessee or any subsequent purchaser
(through foreclosure or otherwise) must obtain a Certificate of Need prior to
applying for and receiving a license to operate the Facility and certification
to receive Medicare and Medicaid payments (and its successor programs) for
patients having coverage thereunder provided that no service or bed complement
is changed.

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

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

        3.10 THIRD-PARTY PAYORS. There is no threatened or pending revocation,
suspension, termination, probation, restriction, limitation, or nonrenewal
affecting Borrower, Manager or the Facility or any participation or provider
agreement with any third-party payor, including Medicare, Medicaid, Blue Cross
and/or Blue Shield, and any other private commercial insurance managed care and
employee assistance program (such programs, the "Third-Party Payors' Programs")
to which Borrower or Manager presently is subject. All Medicare, Medicaid and
private insurance cost reports and financial reports submitted by Borrower or
Manager are and will be materially accurate and complete and have not been and
will not be misleading in any material respects. No cost reports for the
Facility remain "open" or unsettled, except as otherwise disclosed.

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



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<PAGE>   11

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

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

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

        3.12 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge,
except as disclosed in the Condition of Property Survey prepared for Lender in
connection with the Loan the Facility and the use thereof complies in all
material respects with all applicable local, state and federal building codes,
fire codes, zoning codes, use restrictions, health care, health care facility
and other similar regulatory requirements (the "Physical Plant Standards"), and
no waivers of Physical Plant Standards exist at the Facility.

        3.13 PLEDGES OF RECEIVABLES. With the exception of the pledge of certain
Accounts more specifically described in the Intercreditor Agreement, the
Borrower has not pledged its Accounts as collateral security for any loan or
indebtedness other than the Loan.

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

        3.15 TITLE TO COLLATERAL. Borrower has good and marketable title to all
of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning
violation, or encumbrance, except Permitted Encumbrances, which Permitted
Encumbrances do not and will not materially interfere with the security intended
to be provided by the Mortgage or the current use or operation of the Property
and or the current ability of the Facility to generate net operating income
sufficient to service the Loan. Except as shown on the current as-built survey
for the Facility provided by the Borrower to Lender in connection with the Loan
(the "Survey"), all Improvements situated on the Property are situated wholly
within the boundaries of the Property.

        3.16 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien
against the real and personal property described therein, prior to all other
liens or encumbrances, including those which may hereafter accrue, excepting
only "Permitted Encumbrances", which Permitted Encumbrances do not and will not
materially and adversely affect (a) the ability of the Borrower to pay in full
the principal of and interest on the Note when due, (b) the security (and its
value)



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intended to be provided by the Mortgage or (c) the current use of the Property
and the Improvements.

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

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

        3.19 TRADE NAMES. The Facility, which operates under the trade name
Windsor House, has not changed its name, been known by any other name (except
Windsor House Assisted Living Facility), or been a party to a merger,
reorganization or similar transaction within the last two (2) years. Borrower
and Diversicare Leasing Corp., its sole member, have owned the Facility for the
last four (4) years.

        3.20 ERISA. Borrower is in compliance with all applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").

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

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

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

        3.24 OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness,
secured or unsecured, direct or contingent (including any guaranties), other
than (a) the Loan, and (b) indebtedness which represents trade payables or
accrued expenses incurred in the ordinary course of business of owning and
operating the Property; and (c) indebtedness more particularly described as the
Intercreditor Agreement; no other debt will be secured (senior, subordinate or
pari passu) by the Property.

        3.25 OTHER OBLIGATIONS. Borrower has no material financial obligation
under any indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which



                                       12
<PAGE>   13

Borrower is a party or by which Borrower or the Property is otherwise bound,
other than obligations incurred in the ordinary course of the operation of the
Property and other than obligations under the Mortgage, the Intercreditor
Agreement and the other Loan Documents.

        3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into this
Agreement or any of the other Loan Documents with the actual intent to hinder,
delay, or defraud any creditor and (2) has received reasonably equivalent value
in exchange for its obligations under the Loan Documents. Giving effect to the
transactions contemplated by the Loan Documents, to the best of Borrower's
knowledge the fair saleable value of Borrower's assets exceeds and will,
immediately following the execution and delivery of the Loan Documents, be
greater than Borrower's probable liabilities, including the maximum amount of
its contingent liabilities or its debts as such debts become absolute and
mature. Borrower's assets do not and, immediately following the execution and
delivery of the Loan Documents will not, constitute unreasonably small capital
to carry out its business as conducted or as proposed to be conducted. Borrower
does not intend to, and does not believe that it will, incur debts and
liabilities (including, without limitation, contingent liabilities and other
commitments) beyond its ability to pay such debts as they mature (taking into
account the timing and amounts to be payable on or in respect of obligations of
Borrower).

        3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full force and
effect and there are no defaults (either monetary or nonmonetary) by the Manager
or the Borrower thereunder.

        3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its
representations and warranties and covenants contained herein are true and
correct as of the date hereof and shall survive closing of the Loan.

                                   ARTICLE IV
                        AFFIRMATIVE COVENANTS OF BORROWER

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

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

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

        4.3 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make accurate
provision for the payment of all current tax liabilities of all kinds
(including, without limitation, federal and



                                       13
<PAGE>   14

state income taxes, franchise taxes, payroll taxes, provider taxes (to the
extent necessary to participate in and receive maximum funding pursuant to
Reimbursement Contracts) and Taxes (as defined in the Mortgage)), all required
withholding of income taxes of employees, all required old age and unemployment
contributions, and all required payments to employee benefit plans, and pay the
same when they become due.

        4.4 INSURANCE. Maintain the following insurance coverages with respect
to the Property and the Facility:

            a. Insurance against loss or damage by fire, casualty and other
hazards as now are or subsequently may be covered by an "all risk" policy or a
policy covering "special" causes of loss, with such endorsements as Lender may
from time to time reasonably require and which are customarily required by
institutional lenders of similar properties similarly situated, including,
without limitation, building ordinance law, lightning, windstorm, civil
commotion, hail, riot, strike, water damage, sprinkler leakage, collapse,
malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling
objects and weight of snow, ice or sleet, and covering the Facility in an amount
equal to 100% of the full insurable replacement value of the Facility (exclusive
of footings and foundations below the lowest basement floor) without deduction
for depreciation. The determination of the replacement cost amount shall be
adjusted annually to comply with the requirements of the insurer issuing the
coverage or, at Lender's election, by reference to such indexes, appraisals or
information as Lender determines in its reasonable discretion, and, unless the
insurance required by this paragraph shall be effected by blanket and/or
umbrella policies in accordance with the requirements of this Agreement, the
policy shall include inflation guard coverage that ensures that the policy
limits will be increased over time to reflect the effect of inflation. Each
policy shall, subject to Lender's approval, contain (i) a replacement cost
endorsement, without deduction for depreciation, (ii) either an agreed amount
endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance
or law coverage or enforcement endorsement if the Improvements or the use of the
Property constitutes any legal nonconforming structures or uses, and shall
provide for deductibles in such amounts as Lender may permit in its sole
discretion.

            b. Commercial general liability insurance under a policy containing
"Comprehensive General Liability Form" of coverage (or a comparably worded form
of coverage) and the "Broad Form CGL" endorsement (or a policy which otherwise
incorporates the language of such endorsement), providing coverage on an
occurrence (not "claims made") basis, which policy shall include, without
limitation, coverage against claims for personal injury, bodily injury, death
and property damage liability with respect to the Facility and the operations
related thereto, whether on or off the Property, and the following coverages:
Employee as Additional Insured, Product Liability/Completed Operations; Broad
Form Contractual Liability, Independent Contractor, Personal Injury and
Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000
per person), Broad Form Cross Suits Liability Endorsement, where applicable,
hired and non- owned automobile coverage (including rented and leased vehicles),
and, if any alcoholic beverages shall be sold, manufactured or distributed in
the Facility, liquor liability coverage, all of



                                       14
<PAGE>   15

which shall be in such amounts as Lender may from time to time reasonably
require, but not less than One Million Dollars ($1,000,000) per occurrence, Two
Million Dollars ($2,000,000) in the aggregate and with umbrella coverage not
less than Three Million Dollars ($3,000,000). If such policy shall cover more
than one property, such limits shall apply on a "per location" basis. If any
elevators, health club facilities or swimming pools are located at the Facility,
the foregoing amounts shall be increased to Three Million Dollars ($3,000,000),
Six Million Dollars ($6,000,000) and Ten Million Dollars ($10,000,000),
respectively. Such liability policy shall delete the contractual exclusion under
the personal injury coverage, if possible, and if available, shall include the
following endorsements: Notice of Accident, Knowledge of Occurrence, and
Unintentional Error and Omission.

            c. Professional liability insurance coverage in an amount equal to
not less than One Million Dollars ($1,000,000) per occurrence and Three Million
Dollars ($3,000,000) in the aggregate and insuring Borrower for acts occurring
prior to the date of the Loan.

            d. Business interruption insurance, which may be in the form of
Blanket Earnings and Extra Expense Coverage, (i) covering the same perils of
loss as are required to be covered by the property insurance required under
Section 4.4(a) above, (ii) in an amount equal to the projected annual net income
from the Facility plus carrying costs and extraordinary expenses of the Property
for a period of twelve (12) months, based upon Borrower's reasonable estimate
thereof as approved by Lender, (iii) including either an agreed amount
endorsement or a waiver of any co- insurance provisions, so as to prevent
Borrower, Lender and any other insured thereunder from being a co-insurer, and
(iv) providing that any covered loss thereunder shall be payable to Lender.

            e. During any period of new construction on the Premises, a
so-called "Builder's All-Risk Completed Value" or "Course of Construction"
insurance policy in non-reporting form for any improvements under construction,
including, without limitation, for demolition and increased cost of construction
or renovation, in an amount equal to 100% of the estimated replacement cost
value on the date of completion, including "soft cost" coverage, and Workers'
Compensation Insurance covering all persons engaged in such construction, in an
amount at least equal to the minimum required by law. In addition, each
contractor and subcontractor shall be required to provide Lender with a
certificate of insurance for (i) workers' compensation insurance covering all
persons engaged by such contractor or subcontractor in such construction in an
amount at least equal to the minimum required by law, and (ii) general liability
insurance showing minimum limits of at least $5,000,000, including coverage for
products and completed operations. Each contractor and subcontractor also shall
cover Borrower and Lender as an additional insured under such liability policy
and shall indemnify and hold Borrower and Lender harmless from and against any
and all claims, damages, liabilities, costs and expenses arising out of,
relating to or otherwise in connection with its performance of such
construction.

            f. If the Facility contains steam boilers, steam pipes, steam
engines, steam turbines or other high pressure vessels, insurance covering the
major components of the central



                                       15
<PAGE>   16

heating, air conditioning and ventilating systems, boilers, other pressure
vessels, high pressure piping and machinery, elevators and escalators, if any,
and other similar equipment installed in the Improvements, in an amount equal to
one hundred percent (100%) of the full replacement cost of the Facility, which
policies shall insure against physical damage to and loss of occupancy and use
of the Improvements arising out of an accident or breakdown covered thereunder.

            g. Flood insurance with a deductible not to exceed Three Thousand
Dollars ($3,000), or such greater amount as may be satisfactory to Lender in its
sole discretion, and in an amount equal to the full insurable value of the
Facility or the maximum amount available, whichever is less, from the "flood
pool", if the Facility is located in an area designated by the Secretary of
Housing and Urban Development or the Federal Emergency Management Agency as
having special flood hazards.

            h. Workers' compensation insurance or other similar insurance which
may be required by governmental authorities or applicable legal requirements in
an amount at least equal to the minimum required by law, and employer's
liability insurance with a limit of Five Hundred Thousand Dollars ($500,000) per
accident and per disease per employee, and Five Hundred Thousand Dollars
($500,000) in the aggregate for disease arising in connection with the operation
of the Property.

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

            All insurance required under this Section 4.4 shall have a term of
not less than one year and shall be in the form and amount and with deductibles
as, from time to time, shall be reasonably acceptable to Lender, under valid and
enforceable policies issued by financially responsible insurers either licensed
to transact business in the State where the Facility is located, or obtained
through a duly authorized surplus lines insurance agent or otherwise in
conformity with the laws of such State, with (a) a rating of not less than the
third (3rd) highest rating category by either Standard & Poor's Ratings Group,
Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch
Investors Service, Inc. or any successors thereto, or (b) an A:V rating in
Best's Key Rating Guide; provided, however, that if the initial principal
balance of the Loan is greater than Seven Million Five Hundred Thousand Dollars
($7,500,000.00), such insurer must, in lieu of such Best's rating, have a long
term senior debt rating of at least "A" by Standard & Poor's Ratings Group.
Originals or certified copies of all insurance policies shall be delivered to
and held by Lender. All such policies shall name Lender as an additional
insured, shall provide for loss payable solely to Lender and shall contain: (i)
standard "non-contributory mortgagee" endorsement or its equivalent relating,
inter alia, to recovery by Lender notwithstanding the negligent or willful acts
or omissions of Borrower and notwithstanding (a) occupancy or use of the
Facility for purposes more hazardous than those permitted by the terms of such
policy, (b) any foreclosure or other action



                                       16
<PAGE>   17

taken by Lender pursuant to the Mortgage upon the occurrence of an Event of
Default, or (c) any change in title or ownership of the Facility; and (ii) a
provision that such policies shall not be canceled or amended, including,
without limitation, any amendment reducing the scope or limits of coverage, or
failed to be renewed, without at least thirty (30) days prior written notice to
Lender in each instance. With respect to insurance policies which require
payment of premiums annually, not less than thirty (30) days prior to the
expiration dates of the insurance policies obtained pursuant to this Agreement,
Borrower shall pay such amount, except to the extent Lender is escrowing sums
therefor pursuant to the Loan Documents. Not less than thirty (30) days prior to
the expiration dates of the insurance policies obtained pursuant to this
Agreement, originals or certified copies of renewals of such policies (or
certificates evidencing such renewals) bearing notations evidencing the payment
of premiums or accompanied by other evidence satisfactory to Lender of such
payment, which premiums shall not be paid by Borrower through or by any
financing arrangement, shall be delivered by Borrower to Lender. Borrower shall
not carry separate insurance, concurrent in kind or form or contributing in the
event of loss, with any insurance required under this Section 4.4. If the limits
of any policy required hereunder are reduced or eliminated due to a covered
loss, Borrower shall pay the additional premium, if any, in order to have the
original limits of insurance reinstated, or Borrower shall purchase new
insurance in the same type and amount that existed immediately prior to the
loss.

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

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

            Neither Lender nor its agents or employees shall be liable for any
loss or damage insured by the insurance policies required to be maintained under
this Agreement; it being understood that (i) Borrower shall look solely to its
insurance company for the recovery of such loss or damage, (ii) such insurance
company shall have no rights of subrogation against Lender, its agents or
employees, and (iii) Borrower shall use its best efforts to procure from such
insurance company a waiver of subrogation rights against Lender. If, however,
such insurance policies do not provide for a waiver of subrogation rights
against Lender (whether because such a waiver is



                                       17
<PAGE>   18

unavailable or otherwise), then Borrower hereby agrees, to the extent permitted
by law and to the extent not prohibited by such insurance policies, to waive its
rights of recovery, if any, against Lender, its agents and employees, whether
resulting from any damage to the Facility, any liability claim in connection
with the Facility or otherwise. If any such insurance policy shall prohibit
Borrower from waiving such claims, then Borrower must obtain from such insurance
company a waiver of subrogation rights against Lender.

            If loss or damage to the Facility is equal to or less than $25,000
and there shall exist no Default or Event of Default at the time, the insurance
proceeds shall be made available to the Borrower for the sole purpose of the
repair and restoration of the Facility, to the same quality and condition as
existed prior to such loss or damage.

            If the loss or damage insured by the casualty insurance required to
be maintained under this Agreement exceeds $25,000, Lender may make the net
proceeds of insurance or condemnation (after payment of Lender's reasonable
costs and expenses) available to Borrower for Borrower's repair, restoration and
replacement of the Improvements, Equipment and Inventory damaged or taken on the
following terms and subject to Borrower's satisfaction of the following
conditions:

            a. The aggregate amount of all such proceeds shall not exceed the
aggregate amount of all such Loan Obligations.

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

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

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

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

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



                                       18
<PAGE>   19

                (ii)     if loss or damage exceeds $100,000, fixed-price or
                         guaranteed maximum cost bonded construction contracts
                         for completion of the repair and restoration work in
                         accordance with such plans and specifications,

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

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

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

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

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

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

            i. The Facility continues to achieve the Debt Service Coverage
requirements set forth in Section 4.12 below;

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

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



                                       19
<PAGE>   20

            l. In the event and to the extent such proceeds are not required or
used for the repair, restoration and replacement of the Improvements, Equipment
and Inventory for which a loss or damage has occurred, or in the event Borrower
fails to timely make the election to have insurance proceeds applied to the
restoration of the Improvements, Equipment, or Inventory, or, having made such
election, fails to timely comply with the terms and conditions set forth herein,
or, if the conditions set forth herein for such application are otherwise not
satisfied, then Lender shall be entitled without notice to or consent from
Borrower to apply such proceeds, or the balance thereof, at Lender's option
either (i) to the full or partial payment or prepayment of the Loan Obligations
(without premium) in the manner aforesaid, or (ii) to the repair, restoration
and/or replacement of all or any part of such Improvements, Equipment and
Inventory for which a loss or damage has occurred.

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

        4.5 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause the
Manager to provide to Lender, at its address set forth in Section 8.7 and at
GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite 305,
Birmingham, Alabama 35209, the following financial statements and information on
a continuing basis during the term of the Loan:

            a. Within one hundred twenty (120) days after the end of each fiscal
year of the Facility and the Borrower (if different from the Facility) and the
Guarantor, respectively, unaudited financial statements of the operations of the
Facility, unaudited and consolidating financial statements of the Borrower and
audited financial statements of the Guarantor, respectively, prepared by a
nationally recognized accounting firm or independent certified public accountant
acceptable to Lender, which statements shall be prepared in accordance with
GAAP, and shall include a balance sheet and a statement of income and expenses
for the year then ended, certified by a financial officer of Borrower and the
Guarantor, to be true and correct.

            b. Within one hundred twenty (120) days after the end of each fiscal
year of the Manager, unaudited and consolidating financial statements of the
Manager prepared by a nationally recognized accounting firm or independent
certified public accountant acceptable to Lender, which statements shall be
prepared in accordance with GAAP, and shall include a balance sheet and a
statement of income and expenses for the year then ended, and, shall be
certified as true and correct in all material respects by a financial officer of
the Manager.

            c. Within forty-five (45) days after the end of each fiscal quarter
of the Facility and Borrower (if different from the Facility), unaudited
financial statements of the operations of the Facility and Borrower prepared in
accordance with GAAP, which statements shall include a balance



                                       20
<PAGE>   21

sheet and statement of income and expenses for the quarter then ended, and shall
be certified as true and correct in all material respects by a financial officer
of Borrower to be true and correct.

            d. Within forty-five (45) days after the end of each fiscal quarter
of the Manager, unaudited interim financial statements of the Manager, prepared
in accordance with GAAP, which shall include a balance sheet and statement of
income and expenses for the quarter then ended, and shall be certified as true
and correct in all material respects by a financial officer of the Manager to be
true and correct.

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

            f. Within forty-five (45) days after the end of each fiscal quarter
of the Facility, unaudited monthly financial statements of the operations of the
Facility, prepared in accordance with GAAP, which statements shall include a
balance sheet and statement of income and expenses for the month then ended,
certified by a financial officer of the Borrower or Manager to be true and
correct.

            g. Upon request by Lender, as soon as available, but in no event
more than thirty (30) days after the filing deadline, as may be extended from
time to time, copies of all federal, state and local tax returns of Borrower and
Guarantor, together with all supporting documentation and required schedules.

            h. Within twenty (20) days of filing or receipt, all Medicare and/or
Medicaid cost reports and any amendments thereto filed with respect to the
Facility, and all responses, audit reports, or other inquiries with respect to
such cost reports.

            i. Within ten (10) days of receipt, a copy of the Medicaid Rate
Calculation Worksheet (or the equivalent thereof) issued by the appropriate
Medicaid Agency for the Facility.

            j. Within ten (10) business days of receipt, any and all notices
(regardless of form) from any and all licensing and/or certifying agencies that
the Facility license and/or the Medicare and/or Medicaid certification of the
Facility is being downgraded to a substandard category, revoked, or suspended or
that any such action is pending or being considered.

            k. Upon Lender's request, evidence of payment by Borrower or Manager
of any applicable provider bed taxes or similar taxes, which taxes Borrower
agrees to pay.



                                       21
<PAGE>   22

            l. Within one hundred twenty (120) days of the Borrower's fiscal
year end, and more frequently if reasonably requested by Lender, an aged
accounts receivable report of the Facility in sufficient detail to show amounts
due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.)
by the account age classifications of 30 days, 60 days, 90 days, 120 days, and
over 120 days.

            m. Within forty-five (45) days after the end of each calendar
quarter, a statement of the number of patient days, if any, for which the
Facility has received the Medicare default rate for any applicable period. For
purposes herein, "default rate" shall have the meaning ascribed to it in that
certain applicable Medicare rate notification letter prepared in connection with
any review or survey of the Facility.

            The Lender reserves the right to require that the annual financial
statements of the Borrower and the Manager be audited and prepared by a
nationally recognized accounting firm or independent certified public accountant
acceptable to Lender if (i) an Event of Default exists, (ii) if required by
internal policy or by any investor in any securities backed in whole or in part
by the Loan or any rating agency rating such securities, or (iii) if Lender has
reasonable grounds to believe that the unaudited financial statements do not
accurately represent the financial condition of the Borrower, Guarantor or the
Manager, as the case may be.

            The Lender further reserves the right to require such other
financial information of Borrower, Guarantor, Manager and/or the Facility, in
such form and at such other times (including monthly or more frequently but not
more frequently than reasonable) as Lender shall deem reasonably necessary, and
Borrower agrees promptly to provide or to cause to be provided, such information
to Lender. All financial statements must be in the form and detail as Lender may
from time to time reasonably request.

            n. Within forty-five (45) days of the end of each calendar quarter,
a certificate of a financial officer of the Borrower confirming compliance with
the covenants and requirements set forth above.

        4.6 COMPLIANCE CERTIFICATE. (a) At the time of furnishing the quarterly
operating statements required under the foregoing Section, furnish to Lender a
compliance certificate in the form attached hereto as Exhibit "E" executed by
the chief financial officer, of the Borrower;

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



                                       22
<PAGE>   23

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

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

        4.9 RECORDS OF ACCOUNTS. Maintain all records, including records
pertaining to the Accounts of Borrower, at the chief executive office of
Borrower as set forth in this Agreement.

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

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

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



                                       23
<PAGE>   24

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

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

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

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

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

        4.12 DEBT SERVICE COVERAGE REQUIREMENTS.

            a. Achieve (commencing with the closing of the Loan), and, within
forty-five (45) days after the end of each fiscal quarter of Borrower, provide
evidence satisfactory to the Lender of the achievement of, the following Debt
Service Coverage and Combined Debt Service Coverage ratios:

                (i)      a Debt Service Coverage, after deduction of Actual
                         Management Fees, of not less than 1.0 to 1.0, based on
                         a rolling twelve (12) month period, tested quarterly;

                (ii)     a Debt Service Coverage, after deduction of Assumed
                         Management Fees, of not less than 1.0 to 1.0, based on
                         a rolling twelve (12) month period, tested quarterly;



                                       24
<PAGE>   25

                (iii)    a Combined Debt Service Coverage after deduction of
                         Assumed Management Fees, of not less than 1.3 to 1.0,
                         based on a rolling twelve (12) month period, tested
                         quarterly.

            b. If Borrower fails to achieve or provide evidence of achievement
of the Debt Service Coverage for the Facility or the Combined Debt Service
Coverage, upon fifteen (15) days written notice to Borrower, Borrower will
deposit with Lender additional cash or other liquid collateral in an amount
which, when added to the first number of the Debt Service Coverage calculation,
would have resulted in the noncomplying Debt Service Coverage requirement having
been satisfied. If such failure continues for two (2) consecutive quarters, on
the third consecutive quarter, if Borrower again fails to achieve or provide
evidence of the achievement of the Debt Service Coverages required above, upon
fifteen (15) days written notice to Borrower, Borrower will deposit with Lender
additional cash or other liquid collateral (with credit for amounts currently
being held by Lender pursuant to the foregoing sentence), in an amount which, if
the same had been applied on the first day of the first quarter for which such
noncompliance of the Debt Service Coverage requirement occurred to reduce the
outstanding principal indebtedness of the Loan Obligations, would have resulted
in the noncomplying Debt Service Coverage requirement having been satisfied, and
Borrower agrees promptly to provide such additional cash or other liquid
collateral, which increased amount will be held by Lender for an additional two
(2) consecutive calendar quarters. Such additional Collateral will be held by
the Lender in a standard custodial account, and shall constitute additional
collateral for the Loan Obligations and an "Account" as defined in this
Agreement, and, upon the occurrence of an Event of Default, may be applied by
the Lender, in such order and manner as the Lender may elect, to the reduction
of the Loan Obligations. Borrower shall not be entitled to any interest earned
on such additional Collateral. Provided that there is no outstanding Default or
Event of Default, such additional Collateral which has not been applied to the
Loan Obligations will be released by the Lender at such time as Borrower
provides the Lender with evidence that the required Debt Service Coverage
requirements outlined above have been achieved and maintained (without regard to
any cash deposited pursuant to this Section 4.12) as of the end of each of two
(2) consecutive quarters.

        4.13 OCCUPANCY. Maintain or cause to be maintained at all times a daily
average annual occupancy for the Facility of seventy-five percent (75%) or
higher (based on the number of beds available at the Facility, with the minimum
number of beds available at the Facility remaining at or in excess of the number
of beds set forth in the Facility description at page 3, herein).

        4.14 CAPITAL EXPENDITURES. Maintain the Facility in good condition and
make minimum capital expenditures for the Facility in each fiscal year in the
amount of $300 per bed (which capital expenditures may include those necessary
for ordinary repairs and routine maintenance), and, within forty-five (45) days
of the end of such fiscal year, provide evidence thereof satisfactory to Lender.
In the event that Borrower shall fail to do so, Borrower shall, upon Lender's
written request, immediately establish and maintain a capital expenditures
reserve fund with Lender equal to the difference between the required amount per
bed and the amount per bed actually spent by the Borrower. Borrower grants to
Lender a right of setoff against all moneys in the capital expenditures



                                       25
<PAGE>   26

reserve fund, and Borrower shall not permit any other Lien to exist upon such
fund. The proceeds of such capital expenditures reserve fund will be disbursed
monthly upon Lender's receipt of satisfactory evidence that Borrower has made
the required capital expenditures. Upon Borrower's failure to adequately
maintain the Facility in good condition, Lender may, but shall not be obligated
to, make such capital expenditures and may apply the moneys in the capital
expenditures reserve fund for such purpose. To the extent there are insufficient
moneys in the capital expenditures reserve fund for such purposes, all funds
advanced by Lender to make such capital expenditures shall constitute a portion
of the Loan Obligations, shall be secured by the Mortgage and shall accrue
interest at the Default Rate until paid. Upon an Event of Default, Lender may
apply any moneys in the capital expenditures reserve fund to the Loan
Obligations, in such order and manner as Lender may elect. For any partial
fiscal year during which the Loan is outstanding, the required expenditure
amount shall be prorated by multiplying the total of the required amount per bed
[unit] by a fraction, the numerator of which is the number of days during such
year for which all or part of the Loan is outstanding and the denominator of
which is the number of days in such year.

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

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

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



                                       26
<PAGE>   27

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

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

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

        4.21 DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service Reserve
Fund Agreement, establish and maintain a debt service reserve fund with Lender
equal to approximately three (3) months of debt service payments with respect to
the Note as reasonably estimated by Lender, rounded upward to the nearest
$1,000.00.

        4.22 RADON TESTING. Pursuant to that certain Phase I Environmental Site
Assessment dated March 9, 2001, prepared by ESA1, the Facility is located in an
area of high radon risk. The Lender shall conduct annual radon testing of the
Property and the Facility. Pursuant to Section 6.7 herein, the Borrower shall
promptly pay to the Lender all costs related to the radon testing. Additionally,
should the result of the annual testing necessitate remediation of radon present
at the Property, the Borrower shall complete all necessary Remedial Work, as
defined in Section 6.8 herein.

        4.23   INTENTIONALLY DELETED.

        4.24 LOAN CLOSING CERTIFICATION. Immediately notify Lender, in writing,
in the event any representation, warranty or covenant contained herein or in
that certain Loan Closing Certification, executed by Borrower for the benefit of
Lender of even date herewith, becomes untrue or there shall have been any
material adverse change in any such representation, warranty or covenant.

                                    ARTICLE V
                         NEGATIVE COVENANTS OF BORROWER

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

        5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its
interest in the Permits, or Reimbursement Contracts (including rights to payment
thereunder) pertaining to the



                                       27
<PAGE>   28

Facility, or assign, transfer, or remove or permit any other person to assign,
transfer, or remove any records pertaining to the Facility including, without
limitation, patient records, medical and clinical records (except for removal of
such patient records as directed by the patients owning such records or by
governmental or judicial order or direction), without Lender's prior written
consent, which consent may be granted or refused in Lender's sole discretion.

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

            a. Liens at any time existing in favor of the Lender;

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

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

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

            e. Liens for current year's taxes, assessments or governmental
charges or levies not yet due and payable;

            f. Liens in favor of AmSouth Bank as described and set forth in the
Intercreditor Agreement, as amended;

            g. Liens securing purchase money loans not to exceed $300,000 in the
aggregate at any one time outstanding; and

            h. Intra-Borrower Loans more particularly described in the Cross-
Collateralization and Cross-Default Agreement.

        5.3 MERGER, CONSOLIDATION, ETC. Except as otherwise provided in the
Mortgage, consummate any merger, consolidation or similar transaction, or sell,
assign, lease or otherwise dispose of (whether in one transaction or in a series
of transactions), all or substantially all of its



                                       28
<PAGE>   29

assets (whether now or hereafter acquired), without the prior written consent of
the Lender, which consent may be granted or refused in Lender's sole discretion.

        5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS; INDEBTEDNESS.

            a. Dissolve or terminate or materially amend the terms of its
certificate of incorporation, articles of organization, operating agreement or
partnership agreement, as applicable, the terms of which require Borrower to be
a Single-Purpose Entity;

            b. enter into any transaction of merger or consolidation, or
liquidate or dissolve itself (or suffer any liquidation or dissolution), or
acquire by purchase or otherwise all or substantially all the business or assets
of, or any Stock or other evidence of beneficial ownership of, any Person;

            c. guarantee or otherwise become liable on or in connection with any
obligation of any other Person, except for indebtedness to AmSouth Bank
described in the Intercreditor Agreement, as amended;

            d. at any time own any encumbered asset other than (i) the
Collateral, and (ii) incidental personal property necessary for the operation of
the Property;

            e. at any time be engaged directly or indirectly, in any business
other than the ownership, management and operation of the Collateral;

            f. enter into any contract or agreement with any general partner,
principal, member or Affiliate of Borrower or any Affiliate of any general
partner, principal or member of Borrower (other than the Management Agreement)
except upon terms and conditions that are intrinsically fair and substantially
similar to those that would be available on an arm's-length basis with third
parties other than an Affiliate;

            g. incur, create or assume any indebtedness, secured or unsecured,
direct or contingent (including guaranteeing any obligation), other than (i) the
Loan, (ii) indebtedness which represents trade payables or accrued expenses
incurred in the ordinary course of business of owning and operating the Property
and (iii) the indebtedness to AmSouth Bank described and set forth in the
Intercreditor Agreement, as amended; no other debt will be secured (senior,
subordinate or pari passu) by the Property;

            h. make any loans or advances to any third party (including any
Affiliate);

            i. become insolvent or fail to pay its debts from its assets as the
same shall become due;

            j. fail to do all things necessary to preserve its existence as a
Single-Purpose Entity, and will not, nor will any partner, limited or general,
member or shareholder thereof, amend,



                                       29
<PAGE>   30

modify or otherwise change its partnership certificate, partnership agreement,
articles of organization, operating agreement, articles of incorporation or
by-laws in a manner which adversely affects Borrower's existence as a
Single-Purpose Entity;

            k. fail to conduct and operate its business as presently conducted
and operated;

            l. fail to maintain books and records and bank accounts separate
from those of its Affiliates, including its members, general partners or
shareholders, as applicable;

            m. fail to at all times hold itself out to the public as a legal
entity separate and distinct from any other entity (including any Affiliate
thereof, including the general partner or any member or shareholder of Borrower
or any Affiliate of the general partner or any member or shareholder of
Borrower, as applicable);

            n. Intentionally Deleted;

            o. fail to maintain adequate capital for the normal obligations
reasonably foreseeable in a business of its size and character and in light of
its contemplated business operations;

            p. seek the dissolution or winding up, in whole or in part, of
Borrower;

            q. commingle the funds and other assets of Borrower with those of
any general partner, any member, any shareholder, any Affiliate or any other
Person, except for daily sweeps to a master account for Borrower and its
Affiliates from which necessary operating funds will be disbursed to a control
account in the name of Borrower;

            r. fail to maintain its assets in such a manner that it is not
costly or difficult to segregate, ascertain or identify its individual assets
from those of any Affiliate or any other Person; and

            s. hold itself out to be responsible for the debts or obligations of
any other Person, other than with respect to the indebtedness to AmSouth
described and set forth in the Intercreditor Agreement, as amended.

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

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



                                       30
<PAGE>   31

        5.7 ERISA FUNDING AND TERMINATION. Permit (a) the funding requirements
of ERISA with respect to any employee plan to be less than the minimum required
by ERISA at any time, or (b) any employee plan to be subject to involuntary
termination proceedings at any time.

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

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

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

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

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

        5.13 INTENTIONALLY DELETED.

                                   ARTICLE VI
                              ENVIRONMENTAL HAZARDS

        6.1 PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters covered by
a written program of operations and maintenance approved in writing by Lender
(an "O&M Program") or matters described in Section 6.2, Borrower shall not cause
or permit any of the following:

            a. The presence, use, generation, release, treatment, processing,
storage, handling, or disposal-of any Hazardous Materials in, on or under the
Property or any Improvements;



                                       31
<PAGE>   32

            b. The transportation of any Hazardous Materials to, from, or across
the Property;

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

            d. Any violation of or noncompliance with the terms of any
Environmental Permit with respect to the Property, the Improvements or any
property of Borrower that is adjacent to the Property.

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

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

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

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

        6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to Lender that, except as previously disclosed by
Borrower to Lender in writing or in the Phase I Environmental Report prepared
for Lender by ESA1 in connection with the Loan (the "Environmental Report"):



                                       32
<PAGE>   33

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

            b. No Prohibited Activities and Conditions exist or, to best
knowledge of Borrower, have existed.

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

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

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

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

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

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

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



                                       33
<PAGE>   34

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

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

        6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of any
environmental inspections, tests or audits required by Lender in connection with
any foreclosure or deed in lieu of foreclosure, or, if required by Lender, as a
condition of Lender's consent to any "Transfer" (as defined in the Mortgage), or
required by Lender following a reasonable determination by Lender that
Prohibited Activities and Conditions may exist. Any such costs incurred by
Lender (including the fees and out-of-pocket costs of attorneys and technical
consultants whether incurred in connection with any judicial or administrative
process or otherwise) which Borrower fails to pay promptly shall become an
additional part of the Loan Obligations.

        6.8 REMEDIAL WORK. If any investigation, site monitoring, containment,
clean-up, restoration or other remedial work ("Remedial Work") is necessary to
comply with any Hazardous Materials Laws or order of any Governmental Authority
that has or acquires jurisdiction over the Property, the Improvements or the
use, operation or improvement of the Property under any Hazardous Materials
Laws, Borrower shall, by the earlier of (1) the applicable deadline required by
Hazardous Materials Laws or (2) 30 days after notice from Lender demanding such
action, begin performing the Remedial Work, and thereafter diligently prosecute
it to completion, and shall in any event complete such work by the time required
by applicable Hazardous Materials Laws. If Borrower fails to begin on a timely
basis or diligently prosecute any required Remedial Work, Lender may, at its
option, cause the Remedial Work to be completed, in which case Borrower shall
reimburse Lender on demand for the cost of doing so. Any reimbursement due from
Borrower to Lender shall become part of the Loan Obligations.

        6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall cooperate
with any inquiry by any Governmental Authority and shall comply with any
governmental or judicial order which arises from any alleged Prohibited Activity
and Condition.

        6.10 INDEMNITY.

            a. Borrower shall hold harmless, defend and indemnify (i) Lender,
(ii) any successor owner or holder of the Note, (iii) the officers, directors,
partners, agents, shareholders, employees and trustees of any of the foregoing,
and (iv) the heirs, legal representatives, successors and assigns of each of the
foregoing (together, the "Indemnitees") against all proceedings, claims,
damages, losses, expenses, penalties and costs (whether initiated or sought by
any Governmental Authority or private parties), including fees and out of pocket
expenses of attorneys and expert witnesses, investigatory fees, and remediation
costs, whether incurred in connection with any judicial or administrative
process or otherwise, arising directly or indirectly from any of the following,
except to the extent the same relate solely to Hazardous Materials first
introduced to the Property or any part thereof by anyone other than Borrower
following foreclosure of the Mortgage



                                       34
<PAGE>   35

(or the delivery and acceptance of a deed in lieu of such foreclosure) of the
sale or transfer of the Property or any part thereof by Borrower (with Lender's
consent subject to the Mortgage):

               1. Any breach of any representation or warranty of Borrower in
this Article VI.

               2. Any failure by Borrower to perform any of its obligations
under this Article VI.

               3. The existence or alleged existence of any Prohibited Activity
and Condition.

               4. The presence or alleged presence of Hazardous Materials in,
on, or around under the Property, the Improvements or any property of Borrower
that is adjacent to the Property, or

               5. Actual or alleged violation of any Hazardous Materials Laws.

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

            c. Borrower shall not, without the prior written consent of those
Indemnitees who are named as parties to a claim or legal or administrative
proceeding (a "Claim") settle or compromise the Claim if the settlement (1)
results in the entry of any judgment that does not include as an unconditional
term the delivery by the claimant or plaintiff to Lender of a written release of
those Indemnitees, satisfactory in form and substance to Lender or (2) may
materially and adversely affect any Indemnitee, as determined by such Indemnitee
in its sole discretion.

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

               1. Any amendment or modification of any Loan Document.

               2. Any extensions of time for performance required by any of the
Loan Documents.



                                       35
<PAGE>   36

               3. The accuracy or inaccuracy of any representations and
warranties made by Borrower under this Agreement or any other Loan Document.

               4. The release of Borrower or any other person, by Lender or by
operation of law, from performance of any obligation under any of the Loan
Documents.

               5. The release or substitution in whole or in part of any
security for the Loan Obligations.

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

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

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

               2. Reimburse Indemnitees for any expenses paid or incurred in
connection with any matters against which Indemnitees are entitled to be
indemnified under this Article VI.

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

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

            g. The provisions of this Article VI shall be in addition to any and
all other obligations and liabilities that Borrower may have under the
applicable law or under the other Loan Documents, and each Indemnitee shall be
entitled to indemnification under this Article VI without regard to whether
Lender or that Indemnitee has exercised any rights against the Property and/or
the Improvements or any other security, pursued any rights against any
guarantor, or pursued any other rights available under the Loan Documents or
applicable law. If Borrower consists of more than one person or entity, the
obligation of those persons or entities to indemnify the Indemnitees under this
Article VI shall be joint and several. The obligations of Borrower to indemnify
the Indemnitees under this Article VI shall survive any repayment or discharge
of the Loan Obligations, any



                                       36
<PAGE>   37

foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu
of foreclosure, and any release of record of the lien of the Mortgage.

                                   ARTICLE VII
                         EVENTS OF DEFAULT AND REMEDIES

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

            a. The failure by Borrower to pay any installment of principal,
interest, or other payments required under the Note, within ten (10) days after
the same becomes due; or

            b. Borrower's violation of any covenant set forth in Article V
hereof; or

            c. Borrower's failure to deliver or cause to be delivered the
financial statements and information set forth in Section 4.5 above within the
times required and such failure is not cured within thirty (30) days following
Lender's written notice to Borrower thereof; or

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

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

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



                                       37
<PAGE>   38

of all or any substantial part of its properties or of any or all of the rents,
revenues, issues, earnings, profits or income thereof, which appointment shall
remain unvacated and unstayed for an aggregate of sixty (60) days (whether or
not consecutive); or

            g. Unless otherwise permitted hereunder or under any other Loan
Documents, the sale, transfer, lease, assignment, or other disposition,
voluntarily or involuntarily, of the Collateral, or any part thereof, or, except
for Permitted Encumbrances as described in Section 5.2 above, any further
encumbrance of the Collateral, unless the prior written consent of Lender is
obtained; or

            h. The failure of Borrower to take the corrective measures required
in this Agreement within the time periods specified following Lender's demand
because the Debt Service Coverage for the Facility has not been met; or

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

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

               1. a termination of any Reimbursement Contract or any Permit; or

               2. a ban on new admissions generally or on admission of patients
otherwise qualifying for Medicare or Medicaid coverage; or

            k. The Borrower, Manager or the Facility should be assessed fines or
penalties by any state or any Medicare, Medicaid, health or licensing agency
having jurisdiction over such Persons or the Facility in excess of $50,000; or


            l. A final judgment shall be rendered by a court of law or equity
against Borrower or Manager or Guarantor in excess of $100,000, and the same
shall remain undischarged for a period of thirty (30) days, unless such judgment
is either (i) fully covered by collectible insurance and such insurer has within
such period acknowledged such coverage in writing, or (ii) although not fully
covered by insurance, enforcement of such judgment has been effectively stayed,
such judgment is being contested or appealed by appropriate proceedings and
Borrower or



                                       38
<PAGE>   39

Guarantor or Manager, as the case may be, has established reserves adequate for
payment in the event such Person is ultimately unsuccessful in such contest or
appeal and evidence thereof is provided to Lender; or

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

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

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

            a. Intentionally Deleted.

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

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

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

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

            f. Exercise its rights and remedies pursuant to any other Loan
Documents.



                                       39
<PAGE>   40

                                  ARTICLE VIII
                                  MISCELLANEOUS

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

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

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



                                       40
<PAGE>   41

secured by the Mortgage and shall bear interest at the Default Rate from the
date advanced until repaid.

        8.4 INDEMNIFICATION. Except to the extent caused solely by the gross
negligence or willful misconduct or illegal activity of the Indemnified Parties,
Borrower shall, at its sole cost and expense, protect, defend, indemnify and
hold harmless the Indemnified Parties from and against any and all claims,
suits, liabilities (including, without limitation, strict liabilities), actions,
proceedings, obligations, debts, damages, losses, costs, expenses, diminutions
in value, fines, penalties, charges, fees, judgments, awards, amounts paid in
settlement, punitive damages, foreseeable and unforeseeable consequential
damages, of whatever kind or nature (including but not limited to reasonable
attorneys' fees and other costs of defense) imposed upon or incurred by or
asserted against Lender by reason of (a) ownership of the Note, the Mortgage,
the Property or any interest therein or receipt of any Rents; (b) any amendment
to, or restructuring of, the Loan Obligations and/or any of the Loan Documents;
(c) any and all lawful action that may be taken by Lender in connection with the
enforcement of the provisions of the Mortgage or the Note or any of the other
Loan Documents, whether or not suit is filed in connection with same, or in
connection with Borrower, any guarantor and/or any partner, joint venturer,
member or shareholder thereof becoming a party to a voluntary or involuntary
federal or state bankruptcy, insolvency or similar proceeding; (d) any accident,
injury to or death of persons or loss of or damage to property occurring in, on
or about the Property, the Improvements or any part thereof or on the adjoining
sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways;
(e) any use, nonuse or condition in, on or about the Property, the Improvements
or any part thereof or on the adjoining sidewalks, curbs, adjacent property or
adjacent parking areas, streets or ways; (f) any failure on the part of
Borrower, or any guarantor to perform or comply with any of the terms of this
Agreement or any of the other Loan Documents; (g) any claims by any broker,
person or entity claiming to have participated in arranging the making of the
Loan evidenced by the Note; (h) any failure of the Property to be in compliance
with any applicable laws; (i) performance of any labor or services or the
furnishing of any materials or other property with respect to the Property, the
Improvements or any part thereof; (j) the failure of any person to file timely
with the Internal Revenue Service an accurate Form 1099-b, statement for
recipients of proceeds from real estate, broker and barter exchange
transactions, which may be required in connection with the Mortgage, or to
supply a copy thereof in a timely fashion to the recipient of the proceeds of
the transaction in connection with which the Loan is made; (k) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents; (l) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (m) the violation of any requirements of the
Employee Retirement Income Security Act of 1974, as amended; (n) any fines or
penalties assessed or any corrective costs incurred by Lender if the Facility or
any part of the Property is determined to be in violation of any covenants,
restrictions of record, or any applicable laws, ordinances, rules or
regulations; or (o) the enforcement by any of the Indemnified Parties of the
provisions of this Section 8.4. Any amounts payable to Lender by reason of the
application of this Section 8.4 shall become immediately due and payable and
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall accrue interest at the Default Rate. The obligations and
liabilities of Borrower under this Section 8.4 shall survive any termination,
satisfaction, assignment, entry of a judgment of foreclosure or exercise of a
power of sale or delivery of a deed in lieu of



                                       41
<PAGE>   42

foreclosure of the Mortgage except to the extent such obligations and
liabilities arise solely out of events or circumstances first occurring after
any termination, satisfaction, foreclosure or delivery of a deed in lieu of
foreclosure of the Mortgage or the transfer or sale of the Property by the
Borrower with Lender's consent subject to the Mortgage. For purposes of this
Section 8.4, the term "Indemnified Parties" means Lender and any Person who is
or will have been involved in the origination of the Loan, any Person who is or
will have been involved in the servicing of the Loan, any Person in whose name
the encumbrance created by the Mortgage is or will have been recorded, any
Person who may hold or acquire or will have held a full or partial interest in
the Loan (including, without limitation, any investor in any securities backed
in whole or in part by the Loan) as well as the respective directors, officers,
shareholder, partners, members, employees, agents, servants, representatives,
contractors, subcontractors, affiliates, subsidiaries, participants, successors
and assigns of any and all of the foregoing (including, without limitation, any
other Person who holds or acquires or will have held a participation or other
full or partial interest in the Loan or the Property, whether during the term of
the Mortgage or as a part of or following a foreclosure of the Loan and
including, without limitation, any successors by merger, consolidation or
acquisition of all or a substantial portion of Lender's assets and business).

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

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

        8.7 NOTICES, ETC. Any notice or other communication required or
permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below) with receipt acknowledged by the recipient thereof, (b) three
(3) Business Days following the date deposited in the U.S. mail, certified or
registered, with return receipt requested, or (c) one (1) Business Day following
the date deposited with Federal Express or other national overnight carrier, and
in each case addressed as follows:

        If to Borrower:

               Diversicare Windsor House, LLC
               c/o Advocat Inc.
               277 Mallory Station Road, Suite 130
               Franklin, Tennessee 37067
               Attn: CFO



                                       42
<PAGE>   43

        If to Lender:

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

        with a copy to:

               Kay K. Bains, Esq.
               Walston, Wells, Anderson & Bains, LLP
               505 20th Street North, Suite 500
               Birmingham, Alabama 35203

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

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

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

        8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the
instruments referred to herein supersede and incorporate all representations,
promises, and statements, oral or



                                       43
<PAGE>   44

written, made by Lender in connection with the Loan. This Agreement may not be
varied, altered, or amended except by a written instrument executed by an
authorized officer of the Lender. This Agreement may be executed in any number
of counterparts, each of which, when executed and delivered, shall be an
original, but such counterparts shall together constitute one and the same
instrument.

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

        8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY,
INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ALABAMA AND THE
PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL
JURISDICTION IN THE STATE OF ALABAMA, FOR THE ENFORCEMENT OF ANY AND ALL
OBLIGATIONS UNDER THE LOAN DOCUMENTS, EXCEPT THAT IF ANY SUCH ACTION OR
PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES
OF AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES
THERETO, SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL
BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
ALABAMA OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION.

        8.13 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT
THAT THEY MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO
THIS AGREEMENT OR THE LOAN OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR
RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT
TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF
EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE
CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES
WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT
OR OTHERWISE. BORROWER AND LENDER AGREE THAT EITHER PARTY MAY FILE A COPY OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND
BARGAINED AGREEMENT OF EITHER PARTY



                                       44
<PAGE>   45

HERETO TO IRREVOCABLY WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF
LENDER TO MAKE THE LOAN AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY
DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN
BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION
BY A JUDGE SITTING WITHOUT A JURY.

        8.14 ASSUMPTIONS. The Loan will be assumable one time only during the
term of the Loan subject to Lender's prior written approval and the payment of
an assumption fee of one percent (1%) of the outstanding principal balance of
the Loan. Lender's approval shall be based, among other things, upon the
transferee's financial strength and experience in owning and operating
properties similar to the Facility (but in no event may a transferee be a
non-United States entity). Lender may condition the consent required to the
transfer and assumption upon (i) the modification of the Loan Documents, (ii)
the assumption of the Loan Documents as modified, by the proposed transferee,
(iii) the payment of the transfer fee referred to above, (iv) the payment by
Borrower of all of Lender's out-of-pocket expenses, including, without
limitation, all of Lender's attorneys' fees, (v) the approval by a Rating Agency
of the proposed transferee, (vi) the proposed transferee's continued compliance
with the Single-Purpose Entity requirements set forth above, and (vii) such
other conditions as Lender may reasonably require at the time of such consent is
sought.

        8.15 INTEREST LIMITATION. Notwithstanding anything to the contrary
contained herein or in the Mortgage or in any other of the Loan Documents, the
effective rate of interest on the obligation evidenced by the Note shall not
exceed the lawful maximum rate of interest permitted to be paid. Without
limiting the generality of the foregoing, in the event that the interest charged
under the Note results in an effective rate of interest higher than that
lawfully permitted to be paid, then such charges shall be reduced by the sum
sufficient to result in an effective rate of interest permitted and any amount
which would exceed the highest lawful rate already received and held by the
Lender shall be applied to a reduction of principal and not to the payment of
interest. Borrower agrees that for the purpose of determining highest rate
permitted by law, any non principal payment (including, without limitation, late
fees and other fees) shall be deemed, to the extent permitted by law, to be an
expense, fee or premium rather than interest. This provision shall control every
other provision of the Note and the other Loan Documents with respect to the
charging, collecting and payment of interest on the indebtedness evidenced by
the Note.



              [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]



                                       45
<PAGE>   46

        IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be properly executed, by their respective duly authorized
representatives, as of the date first above written.

WITNESS:                            BORROWER:

                                    DIVERSICARE WINDSOR HOUSE, LLC, a Delaware
                                    limited liability company


------------------------------
                                    By: Diversicare Leasing Corp., a Tennessee
                                        corporation, its sole member

------------------------------
[Print Name]                            By:
                                            ------------------------------------
                                            James F. Mills, Jr., Senior Vice
                                            President



WITNESS:                            LENDER:

                                    GMAC COMMERCIAL MORTGAGE CORPORATION,
                                    a California corporation

------------------------------


------------------------------      --------------------------------------------
[Print Name]                        James C. Thompson, Senior Vice President




<PAGE>   47



                                   EXHIBIT "A"

                               [LEGAL DESCRIPTION]



<PAGE>   48



                                   EXHIBIT "B"

                        BORROWER'S CHIEF EXECUTIVE OFFICE

                         Diversicare Windsor House, LLC
                         c/o Advocat Inc.
                         277 Mallory Station Road, Suite 130
                         Franklin, Tennessee 37067
                         Attn: CFO

                         BORROWER'S PRINCIPAL PLACES OF BUSINESS

                         Diversicare Windsor House, LLC
                         c/o Advocat Inc.
                         4411 McAllister Drive
                         Huntsville, Alabama
                         Attn: CFO



<PAGE>   49



                                   EXHIBIT "C"

                               OWNERSHIP INTERESTS

              Diversicare Leasing Corp.-- 100% membership interest



<PAGE>   50



                                   EXHIBIT "D"

                         SUMMARY OF FINANCIAL STATEMENTS
                                 AND CENSUS DATA

Facility Name: Windsor House of Huntsville
Report Date:  ___________________________________________________

<TABLE>
<CAPTION>
                             QUARTER        QUARTER            QUARTER         12 MONTH
                             ENDING         ENDING             ENDING           ENDING
                             (DATE)         (DATE)             (DATE)           (DATE)
CENSUS DATA

<S>                          <C>            <C>                <C>              <C>
Total Number
of Beds [UNITS]:             _______        _______            _______          _______

Number of Days in
  Period:                    _______        _______            _______          _______

Total Patient Days
  Available:                 _______        _______            _______          _______

Patient Utilization
  Days:
    Medicaid                 _______        _______            _______          _______
    Private                  _______        _______            _______          _______
    Medicare                 _______        _______            _______          _______
    Other                    _______        _______            _______          _______

Total Utilization
  Days:                      _______        _______            _______          _______

CASH FLOW ANALYSIS

Total Routine Patient
Revenue:                     _______        _______            _______          _______

Total Net
Revenues:                    _______        _______            _______          _______

Total
Expenses:                    _______        _______            _______          _______

Pre-Tax
Income:                      _______        _______            _______          _______
ADD BACK
</TABLE>


<PAGE>   51

<TABLE>
<S>                          <C>            <C>                <C>              <C>

Depreciation and
  Amortization:              _______        _______            _______          _______

Interest on
  Mortgage:                  _______        _______            _______          _______

Facility Lease
Expense (if
applicable):                 _______        _______            _______          _______

Management
Fees:                        _______        _______            _______          _______

Extraordinary
Items:                       _______        _______            _______          _______

Net Operating
Income:                      _______        _______            _______          _______
</TABLE>


    I hereby certify the above to be true and correct. Dated this ____ day of
________________, 200_.


                                          By: _______________________________

                                          Its: ______________________________




<PAGE>   52

                                   EXHIBIT "E"

                             COMPLIANCE CERTIFICATE

GMAC Commercial Mortgage Corporation
2200 Woodcrest Place, Suite 305
Birmingham, Alabama  35209


        RE:     Loan Agreement dated __________, 2001 (together with amendments,
                if any, the "Loan Agreement") by and between GMAC Commercial
                Mortgage Corporation, as Lender, and Diversicare Windsor House,
                LLC, as Borrower

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

1.  1. No Default or Event of Default has occurred or exists except __________
    __________________.

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

    Required: _____ to 1.0
    Actual:   _____ to 1.0

    The manner of calculation is attached.

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

    Required: _____ to 1.0
    Actual:   _____ to 1.0

    The manner of calculation is attached.

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

    Required: 1.30 to 1.0
    Actual:   ____ to 1.0




<PAGE>   53
    The manner of this calculation is attached.

5.  The fiscal year to date average daily occupant for the Facility:

    Required: Not less than ___0%
    Actual: __________

6.  The capital expenditures per bed was:

    Required: $___ per bed.
    Actual:   $___ per bed.


    Evidence of such capital expenditures is attached.

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

8.  All information provided herein is true and correct.

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




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


Dated this the _____ day of _____________________________.




<PAGE>   54


                                   EXHIBIT "F"

                             PERMITTED ENCUMBRANCES

            [Insert Schedule B exceptions in Title Insurance Policy]




</TEXT>
</DOCUMENT>
